First-time Homebuyer Credit:
The Treasury Inspector General for Tax Administration (TIGTA) released a report on the IRS's efforts to identify and prevent fraudulent Section 36 First-Time Homebuyer Credits claimed on 2008 Form 1040's and 1040X's—for the full report, go to www.treas.gov/tigta/auditreports/2010reports/201041069fr.pdf . TIGTA found that 10,282 taxpayers received credits for homes used by other taxpayers to claim the credit (in one case, 67 taxpayers used the same home), while $9.1 million went to 1,295 prisoners who were incarcerated when they reportedly purchased their home (including 241 prisoners serving life sentences). While admitting there were questionable claims, the IRS responded that it blocked or denied nearly 400,000 questionable credit claims, saving taxpayers more than $1 billion.
Zero Rate Interest Netting:
There is a net interest rate of zero under IRC Sec. 6621(d) for the period of time that interest is payable and allowable on equivalent underpayments and overpayments of tax by the same taxpayer. To qualify, interest must be payable under Subchapter A of Chapter 67 of the Code (interest on underpayments) and allowable under Subchapter B of Chapter 67 of the Code (interest on overpayments) by the same taxpayer. An IRS legal memo concluded that interest on an underpayment of tax paid through a Chapter 11 bankruptcy plan could not be netted against allowable overpayment interest because the interest paid through the Chapter 11 plan is not interest payable under the Internal Revenue Code, as required by IRC Sec. 6621(d) . ILM 201024040 .
Health Care Reform:
An extensive set of regulations (found in TD 9491 ) implement Public Health Service Act (PHS Act) sections 2704 (preexisting condition exclusions), 2711 (lifetime and annual dollar limits on benefits), 2712 (rescissions), and 2719A (patient protections). PHS Act section 2704 generally is effective for plan years (in the individual market, policy years) beginning on or after 1/1/14 (on or after 9/23/10 for enrollees, including applicants for enrollment, who are under 19 years of age), while the rest of the provisions generally are effective for plan years (or policy years) beginning on or after 9/23/10. The regulations are part of a multiphase rule project affecting healthcare insurance plans, and were issued in conjunction with regulations issued by the Departments of Labor, and Health and Human Services. [ Editor's Note: PPC's Guide to Health Care Reform (HCR) , which will be available by 9/1/10 and updated quarterly, will have detailed coverage of these and other health care reform provisions.]
Copyright © 2010 Thomson Reuters/PPC. All rights reserved.
Sunday, June 27, 2010
Saturday, June 26, 2010
IRS APPROVES EXTENDED CARRYBACK OF NET OPERATING LOSS’ FOR CONSOLIDATED GROUPS
IRS has issued temporary regulations that provide consolidated group may elect to carry back a consolidated Net Operating Loss arising in consolidated return year ending after 2007, or beginning before 2010.
The regulations are seen as necessary to provide taxpayers with immediate elective relief for the carryback of net operating losses within a consolidated group to the Extended Carryback Period. In addition, these regulations provide that a group may revoke a prior NOL election and waive the standard carryback period or Extended Carryback Period.
Please call us if you have any questions or need assistance.
Here is the entire text of the temporary regulations.
§1.1502-21T Net operating losses (temporary)
(a) through (b)(3)(ii)(B) [Reserved]. For further guidance, see §1.1502-21(a) through (b)(3)(ii)(B).
(C) Partial waiver of carryback period for an applicable consolidated net operating loss—(1) Application. The acquiring group may make an election described in paragraph (b)(3)(ii)(C)(2) or (b)(3)(ii)(C)(3) of this section with respect to an acquired member or members only if it did not file a valid election described in §1.1502-21(b)(3)(ii)(B) with respect to such acquired member or members on or before [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER].
(2) Partial waiver of entire pre-acquisition carryback period. If one or more members of a consolidated group become members of another consolidated group, then, with respect to the consolidated net operating loss arising in a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (Applicable CNOL) for which the group has made an election pursuant to section 172(b)(1)(H), the acquiring group may make an irrevocable election to relinquish, for the part of the Applicable CNOL attributable to such member, the portion of the carryback period during which the corporation was a member of another group. This election could thus operate to relinquish carryback for up to five taxable years, including the Extended Carryback Period (as defined in paragraph (b)(3)(v) of this section).
However, any other corporation joining the acquiring group that was affiliated with the member immediately before it joined the acquiring group must also be included in the waiver, and the conditions of this paragraph (b)(3)(ii)(C)(2) must be satisfied. The acquiring group cannot make the election described in this paragraph (b)(3)(ii)(C)(2) with respect to any particular portion of an Applicable CNOL if any carryback is claimed, as provided in paragraph (b)(3)(ii)(C)(4) of this section, with respect to any such loss on a return or other filing by a group of which the acquired member was previously a member and such claim is filed on or before the date the election described in this paragraph (b)(3)(ii)(C)(2) is filed. The election must be made in a separate statement entitled “THIS IS AN ELECTION PURSUANT TO §1.1502-21T(b)(3)(ii)(C)(2) TO WAIVE THE PRE-[insert the first day of the first taxable year for which the member (or members) was a member of the acquiring group] CARRYBACK PERIOD FOR THE CNOL ATTRIBUTABLE TO THE [insert taxable year of loss] TAXABLE YEAR OF [insert names and employer identification numbers of members].” Such statement must be filed as provided in paragraph (b)(3)(ii)(C)(5) of this section.
(3) Partial waiver of pre-acquisition Extended Carryback Period. If one or more members of a consolidated group become members of another consolidated group, then, with respect to the Applicable CNOL for which the acquiring group has made an election pursuant to section 172(b)(1)(H), the acquiring group may make an irrevocable election to relinquish, for the part of the Applicable CNOL attributable to such member, the portion of the Extended Carryback Period (as defined in paragraph (b)(3)(v) of this section) during which the corporation was a member of another group. This election could thus operate to relinquish carryback for up to three taxable years.
However, any other corporation joining the acquiring group that was affiliated with the member immediately before it joined the acquiring group must also be included in the waiver, and the conditions of this paragraph (b)(3)(ii)(C)(3) must be satisfied. The acquiring group cannot make the election described in this paragraph (b)(3)(ii)(C)(3) with respect to any particular portion of an Applicable CNOL if a carryback to one or more taxable years that are prior to the taxable year that is two taxable years preceding the taxable year of the Applicable CNOL is claimed, as provided in paragraph (b)(3)(ii)(C)(4) of this section, with respect to any such loss on a return or other filing by a group of which the acquired member was previously a member, and such claim is filed on or before the date the election described in this paragraph (b)(3)(ii)(C)(3) is filed. The election must be made in a separate statement entitled “THIS IS AN ELECTION PURSUANT TO §1.1502-21T(b)(3)(ii)(C)(3) TO WAIVE THE PRE-[insert the first day of the first taxable year for which the member (or members) was a member of the acquiring group] EXTENDED CARRYBACK PERIOD FOR THE CNOL ATTRIBUTABLE TO THE [insert taxable year of losses] TAXABLE YEAR OF [insert names and employer identification numbers of members].” Such statement must be filed as provided in paragraph (b)(3)(ii)(C)(5) of this section.
(4) Claim for a carryback. For purposes of paragraphs (b)(3)(ii)(C)(2) and (b)(3)(ii)(C)(3) of this section, a carryback is claimed with respect to a net operating loss if there is a claim for refund, an amended return, an application for a tentative carryback adjustment, or any other filing that claims the benefit of the NOL or CNOL in a taxable year prior to the taxable year of the loss, whether or not subsequently revoked in favor of a claim based on an Extended Carryback Period provided under section 172(b)(1)(H).
(5) Time and manner for filing statement. A statement described in paragraph (b)(3)(ii)(C)(2) or (b)(3)(ii)(C)(3) of this section that relates to an Applicable CNOL shall be made by the due date (including extension of time) for filing the return for the taxpayer's last taxable year beginning in 2009.
(6) Example:
(i) Waiver in case of pre-consolidation separate return years. T was a separate corporation that was not part of a consolidated group, until December 31, 2004, when it was acquired by the X Group. On December 31, 2007, the X Group sold all of the stock of T to the P Group. P did not make the election described in §1.1502-21(b)(3)
(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. In 2008, the P Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). P elected a Five-Year Carryback (as defined in paragraph (b)(3)(v) of this section) pursuant to section 172(b)(1)(H) with regard to the P Group's 2008 CNOL, and the P Group elected, pursuant to paragraph (b)(3)(ii)(C)(2) of this section, to waive the portion of the carryback period during which T was included in any other consolidated group. T's fifth and fourth taxable years preceding the year of the loss were its 2003 and 2004 separate return years. Due to the P Group's election pursuant to paragraph (b)(3)(ii)(C)(2) of this section, T's allocable portion of the P Group's 2008 CNOL will not be carried back to the years for which it was a member of the X Group. However, T's allocable portion of the P Group's 2008 CNOL will be carried back to T's non-consolidated taxable years (2003 and 2004), subject to the limitation provided in section 172(b)(1)(H)(iv).
(ii) Split-waiver election made. The facts are the same as in paragraph (i) except that the group made the election described in §1.1502-21(b)(3)(ii)(B) with regard to its acquisition of T in 2007. Due to the P Group's election pursuant to §1.1502-21(b)(3)(ii)(B), T's allocable portion of the P Group's 2008 CNOL will not be carried back to the years for which T was a member of the X Group. However, T's allocable portion of the P Group's 2008 CNOL will be carried back to T's non-consolidated taxable years (2003 and 2004), subject to the limitation provided in section 172(b)(1)(H)(iv). (b)(3)(iii) and (b)(3)(iv) [Reserved]. For further guidance, see §1.1502-21(b)(3)(iii) and (b)(3)(iv).
(v) Extended Carryback Period under section 172(b)(1)(H). Section 172(b)(1)(H) allows a taxpayer to elect to carry back a single net operating loss arising in a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (Applicable NOL) to its third, fourth, or fifth taxable year preceding the taxable year of the loss (Extended Carryback Period). As contemplated by section 172(b)(1)(H), the designated taxable year within the Extended Carryback Period may be the fifth taxable year preceding the year of the loss (Five-Year Carryback), and section 172(b)(1)(H)(iv) limits the amount of the Applicable NOL that may be carried back to 50 percent of the taxpayer's taxable income (computed without regard to any NOL deduction attributable to the loss year or any taxable year thereafter) for such fifth preceding taxable year. This paragraph (b)(3)(v) provides rules for computing the 50 percent limitation under section 172(b)(1)(H)(iv) where a Five-Year Carryback is made to a consolidated return year from any consolidated return year or separate return year.
(A) Election—(1) In general. Except as otherwise provided in this section, a consolidated group may elect an Extended Carryback Period pursuant to section 172(b)(1)(H) with regard to a consolidated net operating loss arising in a taxable year ending after December 31, 2007 and beginning before January 1, 2010 (Applicable CNOL). However, no election may be made under this paragraph for a taxpayer described in section 13(f) of the Worker, Homeownership, and Business Assistance Act of 2009, Public Law 111-92, 123 Stat. 2984 (November 6, 2009). The election pursuant to section 172(b)(1)(H) applies to the entire Applicable CNOL, except as otherwise provided in paragraph (b)(3)(ii)(C) of this section or in this paragraph (b)(3)(v).
See also paragraph (c) of this section (SRLY limitation).
(2) Revoking a previous carryback waiver. A consolidated group may revoke a prior election pursuant to §1.1502-21(b)(3)(i) to relinquish the entire carryback period with respect to an Applicable CNOL, but only if the group makes the election pursuant to section 172(b)(1)(H) with regard to such Applicable CNOL.
(3) Pre-acquisition electing member. If a member (Electing Member) of a consolidated group makes an Extended Carryback Period election pursuant to section 172(b)(1)(H) with regard to a loss from a separate return year ending before the Electing Member's inclusion in a consolidated group, the election will not disqualify the acquiring group from making an otherwise available election pursuant to section 172(b)(1)(H) with regard to an Applicable CNOL incurred in a consolidated return year that includes the Electing Member.
(B) Taxpayer's taxable income. For purposes of computing the limitation under section 172(b)(1)(H)(iv) on a Five-Year Carryback to any consolidated return year from any consolidated return year or separate return year, taxpayer's taxable income as used in section 172(b)(1)(H)(iv)(I) means consolidated taxable income (CTI) (computed without regard to any CNOL deduction attributable to Five-Year Carrybacks to such year or any NOL from any member's equivalent taxable year as defined in §1.1502-21(b)(2)(iii), or any taxable year thereafter) in the consolidated return year that is the fifth taxable year preceding the year of the loss.
(C) Limitation on Five-Year Carrybacks to a consolidated group.—(1)
Annual Limitation. The aggregate amount of Five-Year Carrybacks to any consolidated return year may not exceed 50 percent of the CTI for that year (computed without regard to any CNOL deduction attributable to Five-Year Carrybacks to such year or any NOL from any member's equivalent taxable year as defined in §1.1502-21(b)(2)(iii), or attributable to any taxable year thereafter) (Annual Limitation).
(2) Pro rata absorption of limited and non-limited losses. All Five-Year Carrybacks and other net operating losses from years ending on the same date that are available to offset CTI in the same year are absorbed on a pro rata basis. See §1.1502-21(b)(1).
(D) Election by small business. This paragraph (b)(3)(v) does not apply to any loss of an eligible small business as defined in section 172(b)(1)(H)(v)(II) with respect to any election made pursuant to section 172(b)(1)(H) as in effect on the day before the date of the enactment of the Worker, Homeownership, and Business Assistance Act of 2009.
(E) Examples. The rules of this paragraph (b)(3)(v) are illustrated by the following examples. For purposes of the examples, all affiliated groups file consolidated returns, all corporations are includible corporations that have calendar taxable years, the facts set forth the only relevant corporate activity, and all transactions are with unrelated parties.
Example 1. Computation and Absorption of Five-Year Carrybacks. (i) Facts. P is the common parent of the P Group. On June 30, 2006, P acquired all of the stock of T from X, the common parent of the X Group. The X Group has been in existence since 1996. P did not make the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. In 2008, the P Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). P elected a Five-Year Carryback pursuant to section 172(b)(1)(H) with regard to the P Group's 2008 CNOL. P did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which T was included in the X Group. T's fifth taxable year preceding the year of the loss was the X Group's 2004 consolidated return year. For 2004, T's separate return limitation year (SRLY) limitation for losses carried into the X Group was $400. The X Group's CTI for 2004 is $200. The X Group did not make a Five-Year Carryback election for a CNOL from its 2008 or 2009 taxable year. There are no other NOL carrybacks into the X Group's 2003 or 2004 consolidated taxable year.
(ii) Five-Year Carryback from separate return year. Pursuant to paragraph (b)(3)(v)(C)(1) of this section, the amount of T's apportioned loss that is eligible for Five-Year Carryback is limited to 50 percent of the X Group's CTI for 2004, or $100 ($200 x 50 percent). Therefore, $100 of T's apportioned loss will be carried into the X Group's 2004 consolidated return year. In addition, T's 2008 loss is subject to the SRLY limitation of $400 with respect to the X Group. Thus, the amount of T's portion of the P Group's 2008 CNOL that may offset the X Group's 2004 CTI is $100 (the lesser of $400 (T's SRLY limitation) or $100 (the amount of T's Five-Year Carryback)).
(iii) Pro rata absorption of limited and non-limited losses within a single consolidated return year. The facts are the same as in paragraph (i), except that the X Group sustained a $750 CNOL in 2008, which X elected to carry back four years to its 2004 consolidated return year (no Five-Year Carryback). Further, the X Group had CTI of $500 in 2004. Therefore, the X Group and the P Group both carry back CNOLs from years ending December 31, 2008, although only the P Group's CNOL (including the portion allocable to T) constitutes a Five-Year Carryback. The Annual Limitation on Five-Year Carrybacks will be $250 [$500 x 50 percent]. The $750 CNOL carryback within the X Group is subject to no limitation. Under §1.1502-21(b)(1), because the 2008 CNOL of the X Group and the 2008 SRLY loss of T are losses from years ending on the same date and are available to offset CTI in the same year, the two losses offset the X Group's $500 CTI on a pro rata basis. Accordingly, $375 of the X's Group's 2008 CNOL [$500 x $750/($750 + $250)] and $125 of T's portion of the P Group's 2008 CNOL [$500 x $250/($750 + $250)] offset the X Group's 2004 CTI.
Example 2. Multiple carryback years. (i) Facts. On January 1, 2004, Individual A formed X, which formed corporations S and T, and X elected to file a consolidated Federal income tax return. For its 2004 consolidated taxable year, the X Group's CTI was $1,100. For its 2005 consolidated taxable year, the X Group's CTI was $1,000. On June 30, 2007, the X Group sold all of the S stock to the Y Group and sold all of the T stock to the Z Group. The X Group terminated in 2007. Neither Y nor Z made the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to S and T, respectively, the portion of the carryback period for which S and T were members of the X Group. In 2008, the Y Group sustained an $800 CNOL, $400 of which was attributable to S under §1.1502-21(b)(2)(iv)(A). Y elected a Five-Year Carryback with regard to the Y Group's 2008 CNOL pursuant to section 172(b)(1)(H). Y did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which S was included in the X Group. In 2009, the Z Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). Z elected a Five-Year Carryback with regard to the Z Group's 2009 CNOL pursuant to section 172(b)(1)(H). Z did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the Extended Carryback Period during which T was included in the X Group.
(ii) Analysis. The $400 of Y Group's 2008 CNOL that is apportioned to S is carried back as a separate return year Five-Year Carryback to the X Group's 2004 consolidated return year. The $600 of Z Group's 2009 CNOL that is apportioned to T is also a separate return year Five-Year Carryback to the X Group's 2005 consolidated return year. The Annual Limitation on Five-Year Carryback to the X Group's 2004 consolidated return year computed under paragraph (b)(3)(v)(C)(1) of this section equals $550 ($1,100 of CTI x 50 percent). Because S is making the sole Five-Year Carryback to the X Group's 2004 consolidated return year, S will make a Five-Year Carryback of the full $550. Similarly, the Annual Limitation for Five-Year Carryback to the X Group's 2005 consolidated return year computed under paragraph (b)(3)(v)(C)(1) of this section equals $500 ($1,000 of CTI x 50 percent).
Because T is making the sole Five-Year Carryback to the X Group's 2005 consolidated return year, T will make a Five-Year Carryback of the full $500.
The SRLY limitations for S and T, respectively, may limit the absorption of the Five-Year Carrybacks within the X Group.
Example 3. Pre-acquisition election by T. P is the common parent of the P Group. On December 31, 2008, P acquired all of the stock of T from X, the common parent of the X Group. T had been a member of the X Group since 1999. P did not make the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. Pursuant to section 172(b)(1)(H), the X Group elected to make a Five-Year Carryback of its 2008 CNOL back to 2003. A portion of this CNOL is attributable to T pursuant to §1.1502-21(b)(2)(iv)(A). In 2009, the P Group incurred a CNOL of $1,000, $600 of which is attributable to T pursuant to §1.1502-21(b)(2)(iv)(A). Pursuant to section 172(b)(1)(H), the P Group elected a Five Year Carryback with regard to its 2009 CNOL. P did not make the election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which T was included in the X Group. The Five-Year Carryback election by the X Group with respect to its 2008 CNOL (which includes the portion of the CNOL attributable to T) does not disqualify the P Group from electing a Five-Year Carryback with regard to its 2009 CNOL. Therefore, the P Group may carry back its CNOL, including the portion attributable to T, in accordance with §1.1502-21 and the rules of this section. (c) through (h)(8) [Reserved]. For further guidance, see §1.1502-21(c) through (h)(8).
(9) Section 172(b)(1)(H)—(i) Applicability date. This section applies to any consolidated Federal income tax return due (without extensions) after
[INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER], if such return was not filed on or before such date.
However, a consolidated group may apply this section to any consolidated Federal income tax return that is not described in the preceding sentence.
(ii) Expiration date. The applicability of this section will expire on June 21, 2013 .
*****
Steven T. Miller
Deputy Commissioner for Services and Enforcement.
Approved: June 16, 2010
Michael F. Mundaca
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-15087 Filed 06/22/2010 at 8:45 am; Publication Date: 06/23/2010]
© 2010 Thomson Reuters/RIA. All rights reserved.
The regulations are seen as necessary to provide taxpayers with immediate elective relief for the carryback of net operating losses within a consolidated group to the Extended Carryback Period. In addition, these regulations provide that a group may revoke a prior NOL election and waive the standard carryback period or Extended Carryback Period.
Please call us if you have any questions or need assistance.
Here is the entire text of the temporary regulations.
§1.1502-21T Net operating losses (temporary)
(a) through (b)(3)(ii)(B) [Reserved]. For further guidance, see §1.1502-21(a) through (b)(3)(ii)(B).
(C) Partial waiver of carryback period for an applicable consolidated net operating loss—(1) Application. The acquiring group may make an election described in paragraph (b)(3)(ii)(C)(2) or (b)(3)(ii)(C)(3) of this section with respect to an acquired member or members only if it did not file a valid election described in §1.1502-21(b)(3)(ii)(B) with respect to such acquired member or members on or before [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER].
(2) Partial waiver of entire pre-acquisition carryback period. If one or more members of a consolidated group become members of another consolidated group, then, with respect to the consolidated net operating loss arising in a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (Applicable CNOL) for which the group has made an election pursuant to section 172(b)(1)(H), the acquiring group may make an irrevocable election to relinquish, for the part of the Applicable CNOL attributable to such member, the portion of the carryback period during which the corporation was a member of another group. This election could thus operate to relinquish carryback for up to five taxable years, including the Extended Carryback Period (as defined in paragraph (b)(3)(v) of this section).
However, any other corporation joining the acquiring group that was affiliated with the member immediately before it joined the acquiring group must also be included in the waiver, and the conditions of this paragraph (b)(3)(ii)(C)(2) must be satisfied. The acquiring group cannot make the election described in this paragraph (b)(3)(ii)(C)(2) with respect to any particular portion of an Applicable CNOL if any carryback is claimed, as provided in paragraph (b)(3)(ii)(C)(4) of this section, with respect to any such loss on a return or other filing by a group of which the acquired member was previously a member and such claim is filed on or before the date the election described in this paragraph (b)(3)(ii)(C)(2) is filed. The election must be made in a separate statement entitled “THIS IS AN ELECTION PURSUANT TO §1.1502-21T(b)(3)(ii)(C)(2) TO WAIVE THE PRE-[insert the first day of the first taxable year for which the member (or members) was a member of the acquiring group] CARRYBACK PERIOD FOR THE CNOL ATTRIBUTABLE TO THE [insert taxable year of loss] TAXABLE YEAR OF [insert names and employer identification numbers of members].” Such statement must be filed as provided in paragraph (b)(3)(ii)(C)(5) of this section.
(3) Partial waiver of pre-acquisition Extended Carryback Period. If one or more members of a consolidated group become members of another consolidated group, then, with respect to the Applicable CNOL for which the acquiring group has made an election pursuant to section 172(b)(1)(H), the acquiring group may make an irrevocable election to relinquish, for the part of the Applicable CNOL attributable to such member, the portion of the Extended Carryback Period (as defined in paragraph (b)(3)(v) of this section) during which the corporation was a member of another group. This election could thus operate to relinquish carryback for up to three taxable years.
However, any other corporation joining the acquiring group that was affiliated with the member immediately before it joined the acquiring group must also be included in the waiver, and the conditions of this paragraph (b)(3)(ii)(C)(3) must be satisfied. The acquiring group cannot make the election described in this paragraph (b)(3)(ii)(C)(3) with respect to any particular portion of an Applicable CNOL if a carryback to one or more taxable years that are prior to the taxable year that is two taxable years preceding the taxable year of the Applicable CNOL is claimed, as provided in paragraph (b)(3)(ii)(C)(4) of this section, with respect to any such loss on a return or other filing by a group of which the acquired member was previously a member, and such claim is filed on or before the date the election described in this paragraph (b)(3)(ii)(C)(3) is filed. The election must be made in a separate statement entitled “THIS IS AN ELECTION PURSUANT TO §1.1502-21T(b)(3)(ii)(C)(3) TO WAIVE THE PRE-[insert the first day of the first taxable year for which the member (or members) was a member of the acquiring group] EXTENDED CARRYBACK PERIOD FOR THE CNOL ATTRIBUTABLE TO THE [insert taxable year of losses] TAXABLE YEAR OF [insert names and employer identification numbers of members].” Such statement must be filed as provided in paragraph (b)(3)(ii)(C)(5) of this section.
(4) Claim for a carryback. For purposes of paragraphs (b)(3)(ii)(C)(2) and (b)(3)(ii)(C)(3) of this section, a carryback is claimed with respect to a net operating loss if there is a claim for refund, an amended return, an application for a tentative carryback adjustment, or any other filing that claims the benefit of the NOL or CNOL in a taxable year prior to the taxable year of the loss, whether or not subsequently revoked in favor of a claim based on an Extended Carryback Period provided under section 172(b)(1)(H).
(5) Time and manner for filing statement. A statement described in paragraph (b)(3)(ii)(C)(2) or (b)(3)(ii)(C)(3) of this section that relates to an Applicable CNOL shall be made by the due date (including extension of time) for filing the return for the taxpayer's last taxable year beginning in 2009.
(6) Example:
(i) Waiver in case of pre-consolidation separate return years. T was a separate corporation that was not part of a consolidated group, until December 31, 2004, when it was acquired by the X Group. On December 31, 2007, the X Group sold all of the stock of T to the P Group. P did not make the election described in §1.1502-21(b)(3)
(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. In 2008, the P Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). P elected a Five-Year Carryback (as defined in paragraph (b)(3)(v) of this section) pursuant to section 172(b)(1)(H) with regard to the P Group's 2008 CNOL, and the P Group elected, pursuant to paragraph (b)(3)(ii)(C)(2) of this section, to waive the portion of the carryback period during which T was included in any other consolidated group. T's fifth and fourth taxable years preceding the year of the loss were its 2003 and 2004 separate return years. Due to the P Group's election pursuant to paragraph (b)(3)(ii)(C)(2) of this section, T's allocable portion of the P Group's 2008 CNOL will not be carried back to the years for which it was a member of the X Group. However, T's allocable portion of the P Group's 2008 CNOL will be carried back to T's non-consolidated taxable years (2003 and 2004), subject to the limitation provided in section 172(b)(1)(H)(iv).
(ii) Split-waiver election made. The facts are the same as in paragraph (i) except that the group made the election described in §1.1502-21(b)(3)(ii)(B) with regard to its acquisition of T in 2007. Due to the P Group's election pursuant to §1.1502-21(b)(3)(ii)(B), T's allocable portion of the P Group's 2008 CNOL will not be carried back to the years for which T was a member of the X Group. However, T's allocable portion of the P Group's 2008 CNOL will be carried back to T's non-consolidated taxable years (2003 and 2004), subject to the limitation provided in section 172(b)(1)(H)(iv). (b)(3)(iii) and (b)(3)(iv) [Reserved]. For further guidance, see §1.1502-21(b)(3)(iii) and (b)(3)(iv).
(v) Extended Carryback Period under section 172(b)(1)(H). Section 172(b)(1)(H) allows a taxpayer to elect to carry back a single net operating loss arising in a taxable year ending after December 31, 2007, and beginning before January 1, 2010 (Applicable NOL) to its third, fourth, or fifth taxable year preceding the taxable year of the loss (Extended Carryback Period). As contemplated by section 172(b)(1)(H), the designated taxable year within the Extended Carryback Period may be the fifth taxable year preceding the year of the loss (Five-Year Carryback), and section 172(b)(1)(H)(iv) limits the amount of the Applicable NOL that may be carried back to 50 percent of the taxpayer's taxable income (computed without regard to any NOL deduction attributable to the loss year or any taxable year thereafter) for such fifth preceding taxable year. This paragraph (b)(3)(v) provides rules for computing the 50 percent limitation under section 172(b)(1)(H)(iv) where a Five-Year Carryback is made to a consolidated return year from any consolidated return year or separate return year.
(A) Election—(1) In general. Except as otherwise provided in this section, a consolidated group may elect an Extended Carryback Period pursuant to section 172(b)(1)(H) with regard to a consolidated net operating loss arising in a taxable year ending after December 31, 2007 and beginning before January 1, 2010 (Applicable CNOL). However, no election may be made under this paragraph for a taxpayer described in section 13(f) of the Worker, Homeownership, and Business Assistance Act of 2009, Public Law 111-92, 123 Stat. 2984 (November 6, 2009). The election pursuant to section 172(b)(1)(H) applies to the entire Applicable CNOL, except as otherwise provided in paragraph (b)(3)(ii)(C) of this section or in this paragraph (b)(3)(v).
See also paragraph (c) of this section (SRLY limitation).
(2) Revoking a previous carryback waiver. A consolidated group may revoke a prior election pursuant to §1.1502-21(b)(3)(i) to relinquish the entire carryback period with respect to an Applicable CNOL, but only if the group makes the election pursuant to section 172(b)(1)(H) with regard to such Applicable CNOL.
(3) Pre-acquisition electing member. If a member (Electing Member) of a consolidated group makes an Extended Carryback Period election pursuant to section 172(b)(1)(H) with regard to a loss from a separate return year ending before the Electing Member's inclusion in a consolidated group, the election will not disqualify the acquiring group from making an otherwise available election pursuant to section 172(b)(1)(H) with regard to an Applicable CNOL incurred in a consolidated return year that includes the Electing Member.
(B) Taxpayer's taxable income. For purposes of computing the limitation under section 172(b)(1)(H)(iv) on a Five-Year Carryback to any consolidated return year from any consolidated return year or separate return year, taxpayer's taxable income as used in section 172(b)(1)(H)(iv)(I) means consolidated taxable income (CTI) (computed without regard to any CNOL deduction attributable to Five-Year Carrybacks to such year or any NOL from any member's equivalent taxable year as defined in §1.1502-21(b)(2)(iii), or any taxable year thereafter) in the consolidated return year that is the fifth taxable year preceding the year of the loss.
(C) Limitation on Five-Year Carrybacks to a consolidated group.—(1)
Annual Limitation. The aggregate amount of Five-Year Carrybacks to any consolidated return year may not exceed 50 percent of the CTI for that year (computed without regard to any CNOL deduction attributable to Five-Year Carrybacks to such year or any NOL from any member's equivalent taxable year as defined in §1.1502-21(b)(2)(iii), or attributable to any taxable year thereafter) (Annual Limitation).
(2) Pro rata absorption of limited and non-limited losses. All Five-Year Carrybacks and other net operating losses from years ending on the same date that are available to offset CTI in the same year are absorbed on a pro rata basis. See §1.1502-21(b)(1).
(D) Election by small business. This paragraph (b)(3)(v) does not apply to any loss of an eligible small business as defined in section 172(b)(1)(H)(v)(II) with respect to any election made pursuant to section 172(b)(1)(H) as in effect on the day before the date of the enactment of the Worker, Homeownership, and Business Assistance Act of 2009.
(E) Examples. The rules of this paragraph (b)(3)(v) are illustrated by the following examples. For purposes of the examples, all affiliated groups file consolidated returns, all corporations are includible corporations that have calendar taxable years, the facts set forth the only relevant corporate activity, and all transactions are with unrelated parties.
Example 1. Computation and Absorption of Five-Year Carrybacks. (i) Facts. P is the common parent of the P Group. On June 30, 2006, P acquired all of the stock of T from X, the common parent of the X Group. The X Group has been in existence since 1996. P did not make the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. In 2008, the P Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). P elected a Five-Year Carryback pursuant to section 172(b)(1)(H) with regard to the P Group's 2008 CNOL. P did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which T was included in the X Group. T's fifth taxable year preceding the year of the loss was the X Group's 2004 consolidated return year. For 2004, T's separate return limitation year (SRLY) limitation for losses carried into the X Group was $400. The X Group's CTI for 2004 is $200. The X Group did not make a Five-Year Carryback election for a CNOL from its 2008 or 2009 taxable year. There are no other NOL carrybacks into the X Group's 2003 or 2004 consolidated taxable year.
(ii) Five-Year Carryback from separate return year. Pursuant to paragraph (b)(3)(v)(C)(1) of this section, the amount of T's apportioned loss that is eligible for Five-Year Carryback is limited to 50 percent of the X Group's CTI for 2004, or $100 ($200 x 50 percent). Therefore, $100 of T's apportioned loss will be carried into the X Group's 2004 consolidated return year. In addition, T's 2008 loss is subject to the SRLY limitation of $400 with respect to the X Group. Thus, the amount of T's portion of the P Group's 2008 CNOL that may offset the X Group's 2004 CTI is $100 (the lesser of $400 (T's SRLY limitation) or $100 (the amount of T's Five-Year Carryback)).
(iii) Pro rata absorption of limited and non-limited losses within a single consolidated return year. The facts are the same as in paragraph (i), except that the X Group sustained a $750 CNOL in 2008, which X elected to carry back four years to its 2004 consolidated return year (no Five-Year Carryback). Further, the X Group had CTI of $500 in 2004. Therefore, the X Group and the P Group both carry back CNOLs from years ending December 31, 2008, although only the P Group's CNOL (including the portion allocable to T) constitutes a Five-Year Carryback. The Annual Limitation on Five-Year Carrybacks will be $250 [$500 x 50 percent]. The $750 CNOL carryback within the X Group is subject to no limitation. Under §1.1502-21(b)(1), because the 2008 CNOL of the X Group and the 2008 SRLY loss of T are losses from years ending on the same date and are available to offset CTI in the same year, the two losses offset the X Group's $500 CTI on a pro rata basis. Accordingly, $375 of the X's Group's 2008 CNOL [$500 x $750/($750 + $250)] and $125 of T's portion of the P Group's 2008 CNOL [$500 x $250/($750 + $250)] offset the X Group's 2004 CTI.
Example 2. Multiple carryback years. (i) Facts. On January 1, 2004, Individual A formed X, which formed corporations S and T, and X elected to file a consolidated Federal income tax return. For its 2004 consolidated taxable year, the X Group's CTI was $1,100. For its 2005 consolidated taxable year, the X Group's CTI was $1,000. On June 30, 2007, the X Group sold all of the S stock to the Y Group and sold all of the T stock to the Z Group. The X Group terminated in 2007. Neither Y nor Z made the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to S and T, respectively, the portion of the carryback period for which S and T were members of the X Group. In 2008, the Y Group sustained an $800 CNOL, $400 of which was attributable to S under §1.1502-21(b)(2)(iv)(A). Y elected a Five-Year Carryback with regard to the Y Group's 2008 CNOL pursuant to section 172(b)(1)(H). Y did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which S was included in the X Group. In 2009, the Z Group sustained a $1,000 CNOL, $600 of which was attributable to T under §1.1502-21(b)(2)(iv)(A). Z elected a Five-Year Carryback with regard to the Z Group's 2009 CNOL pursuant to section 172(b)(1)(H). Z did not make an election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the Extended Carryback Period during which T was included in the X Group.
(ii) Analysis. The $400 of Y Group's 2008 CNOL that is apportioned to S is carried back as a separate return year Five-Year Carryback to the X Group's 2004 consolidated return year. The $600 of Z Group's 2009 CNOL that is apportioned to T is also a separate return year Five-Year Carryback to the X Group's 2005 consolidated return year. The Annual Limitation on Five-Year Carryback to the X Group's 2004 consolidated return year computed under paragraph (b)(3)(v)(C)(1) of this section equals $550 ($1,100 of CTI x 50 percent). Because S is making the sole Five-Year Carryback to the X Group's 2004 consolidated return year, S will make a Five-Year Carryback of the full $550. Similarly, the Annual Limitation for Five-Year Carryback to the X Group's 2005 consolidated return year computed under paragraph (b)(3)(v)(C)(1) of this section equals $500 ($1,000 of CTI x 50 percent).
Because T is making the sole Five-Year Carryback to the X Group's 2005 consolidated return year, T will make a Five-Year Carryback of the full $500.
The SRLY limitations for S and T, respectively, may limit the absorption of the Five-Year Carrybacks within the X Group.
Example 3. Pre-acquisition election by T. P is the common parent of the P Group. On December 31, 2008, P acquired all of the stock of T from X, the common parent of the X Group. T had been a member of the X Group since 1999. P did not make the election described in §1.1502-21(b)(3)(ii)(B) to relinquish, with respect to all CNOLs attributable to T, the portion of the carryback period for which T was a member of the X Group. Pursuant to section 172(b)(1)(H), the X Group elected to make a Five-Year Carryback of its 2008 CNOL back to 2003. A portion of this CNOL is attributable to T pursuant to §1.1502-21(b)(2)(iv)(A). In 2009, the P Group incurred a CNOL of $1,000, $600 of which is attributable to T pursuant to §1.1502-21(b)(2)(iv)(A). Pursuant to section 172(b)(1)(H), the P Group elected a Five Year Carryback with regard to its 2009 CNOL. P did not make the election pursuant to paragraph (b)(3)(ii)(C) of this section to waive any portion of the period during which T was included in the X Group. The Five-Year Carryback election by the X Group with respect to its 2008 CNOL (which includes the portion of the CNOL attributable to T) does not disqualify the P Group from electing a Five-Year Carryback with regard to its 2009 CNOL. Therefore, the P Group may carry back its CNOL, including the portion attributable to T, in accordance with §1.1502-21 and the rules of this section. (c) through (h)(8) [Reserved]. For further guidance, see §1.1502-21(c) through (h)(8).
(9) Section 172(b)(1)(H)—(i) Applicability date. This section applies to any consolidated Federal income tax return due (without extensions) after
[INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER], if such return was not filed on or before such date.
However, a consolidated group may apply this section to any consolidated Federal income tax return that is not described in the preceding sentence.
(ii) Expiration date. The applicability of this section will expire on June 21, 2013 .
*****
Steven T. Miller
Deputy Commissioner for Services and Enforcement.
Approved: June 16, 2010
Michael F. Mundaca
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-15087 Filed 06/22/2010 at 8:45 am; Publication Date: 06/23/2010]
© 2010 Thomson Reuters/RIA. All rights reserved.
Saturday, June 19, 2010
GETTING THE RIGHT AMOUNT OF TAX WITHELD
In most situations, the tax withheld from your pay will be close to the tax you figure on your return - if you follow these two rules.
• You accurately complete all the Form W-4 worksheets that apply to you.
• You give your employer a new Form W-4 when changes occur.
However, because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations:
• You are married and both you and your spouse work.
• You have more than one job at a time.
• You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income.
• You will owe additional amounts with your return, such as self-employment tax.
• Your withholding is based on obsolete Form W-4 information for a substantial part of the year.
• Your earnings are more than $130,000 if you are single or $180,000 if you are married.
• You work only part of the year.
• You change the number of your withholding allowances during the year.
If you need help downloading Form W-4 or have questions on how to fill it out properly, give us a call. We are happy to help.
• You accurately complete all the Form W-4 worksheets that apply to you.
• You give your employer a new Form W-4 when changes occur.
However, because the worksheets and withholding methods do not account for all possible situations, you may not be getting the right amount withheld. This is most likely to happen in the following situations:
• You are married and both you and your spouse work.
• You have more than one job at a time.
• You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income.
• You will owe additional amounts with your return, such as self-employment tax.
• Your withholding is based on obsolete Form W-4 information for a substantial part of the year.
• Your earnings are more than $130,000 if you are single or $180,000 if you are married.
• You work only part of the year.
• You change the number of your withholding allowances during the year.
If you need help downloading Form W-4 or have questions on how to fill it out properly, give us a call. We are happy to help.
Saturday, June 12, 2010
FINANCIAL PLANNING TIPS FOR JUNE 2010
Review Your Insurance Policies
You reviewed your "asset" policies in April. This month, review your life, health, and disability insurance policies. Check with your employee benefits office as to what programs are available. Make certain you have adequate coverage. Call us to determine the appropriate amounts for your age and income.
Lower Your Utility Costs
Review your utility costs for the year. Make certain you are getting the best possible deal where multiple providers are available. For example, obtain competitive quotes for long-distance phone service. For other utilities, review your usage to see if any savings are available. Consider the use of annual "budget" plans with the utilities to even out annual payments.
Analyze Budget vs. Actual
Compare May income and expenditures with your budget. Make adjustments as appropriate to your June expenditures. Make sure you have invested your planned savings amount for May.
If you have any questions or need assistance in your overall tax and financial planning please call our office.
You reviewed your "asset" policies in April. This month, review your life, health, and disability insurance policies. Check with your employee benefits office as to what programs are available. Make certain you have adequate coverage. Call us to determine the appropriate amounts for your age and income.
Lower Your Utility Costs
Review your utility costs for the year. Make certain you are getting the best possible deal where multiple providers are available. For example, obtain competitive quotes for long-distance phone service. For other utilities, review your usage to see if any savings are available. Consider the use of annual "budget" plans with the utilities to even out annual payments.
Analyze Budget vs. Actual
Compare May income and expenditures with your budget. Make adjustments as appropriate to your June expenditures. Make sure you have invested your planned savings amount for May.
If you have any questions or need assistance in your overall tax and financial planning please call our office.
Friday, June 11, 2010
IRS IS NOT COMPLYING WITH LEGAL REQUIREMENTS FOR SEIZURES OF ASSETS
The IRS Taxpayer Inspector General for Tax Administration recently issued a report on IRS seizures that included instances of IRS still failing to meet all legal requirements in seizures. They reviewed a random sample of 50 of the 578 seizures conducted from July 1, 2008, through June 30, 2009, looking at the required 58 guidelines for each seizure. They identified 34% of the seizures in which the IRS did not comply with the Internal Revenue Code.
If you wish to review the entire report click on the following link: http://www.treas.gov/tigta/auditreports/2010reports/201030049fr.pdf
If you wish to review the entire report click on the following link: http://www.treas.gov/tigta/auditreports/2010reports/201030049fr.pdf
Thursday, June 10, 2010
COURT SUPPORTS IRS AGAINST “S” CORPORATION FOR UNDERPAYING EMPLOYEE-OWNER
Background
A “S” Corporation if a regular corporation that is treated like a sole proprietorship or partnership for tax purposes resulting in the net income of the corporation flowing through the individual tax returns and taxed at the lower individual tax rate in lieu of the corporate rate. Unlike an unincorporated self-employed person, that income is not subject to self-employment taxes. Consequently, the tax code requires employee – owners of “S” Corporations to be paid a “reasonable” salary thus requiring the withholding and payment of Social Security, Disability and Unemployment taxes. The salary is treated as a corporation expense, reducing the amount of income that flows through the sole proprietor or partner.
In times past, a common practice was to pay a minimal salary to the employee-owner and take out cash as a dividend. This will reduce total taxes by reducing the amount paid in Social Security, Disability and Unemployment taxes. For example, the employee-owner would take a $24,000 salary per year and withdraw cash from the corporation of $100,000 as a dividend. The Social Security, Disability and Unemployment tax would be paid on the $24,000 but not on the $100,000.
Court Ruling
In Watson v. U.S the district court ruled that a portion of the dividend distributions by an “S” corporation to its sole owner should be recharacterized as wages subject to employment taxes, the court rejected the corporation's assertion that IRS could not compel the corporation to pay a higher salary to the owner. This resulted in underreporting and underpayment penalties and interest on the corporation’s payroll tax returns over a two-year period.
Conclusion
Employee-owners of “S” corporations should pay a “reasonable” salary. What is a “reasonable” salary? That is a good question; there is no guidance in tax law or by the IRS. It is a case-by-case determination. To determine a reasonable salary, one needs to look at the prevailing wages paid for the same job description of the employee-owner and the income of the corporation.
Please call me for guidance on how this affects you personally.
A “S” Corporation if a regular corporation that is treated like a sole proprietorship or partnership for tax purposes resulting in the net income of the corporation flowing through the individual tax returns and taxed at the lower individual tax rate in lieu of the corporate rate. Unlike an unincorporated self-employed person, that income is not subject to self-employment taxes. Consequently, the tax code requires employee – owners of “S” Corporations to be paid a “reasonable” salary thus requiring the withholding and payment of Social Security, Disability and Unemployment taxes. The salary is treated as a corporation expense, reducing the amount of income that flows through the sole proprietor or partner.
In times past, a common practice was to pay a minimal salary to the employee-owner and take out cash as a dividend. This will reduce total taxes by reducing the amount paid in Social Security, Disability and Unemployment taxes. For example, the employee-owner would take a $24,000 salary per year and withdraw cash from the corporation of $100,000 as a dividend. The Social Security, Disability and Unemployment tax would be paid on the $24,000 but not on the $100,000.
Court Ruling
In Watson v. U.S the district court ruled that a portion of the dividend distributions by an “S” corporation to its sole owner should be recharacterized as wages subject to employment taxes, the court rejected the corporation's assertion that IRS could not compel the corporation to pay a higher salary to the owner. This resulted in underreporting and underpayment penalties and interest on the corporation’s payroll tax returns over a two-year period.
Conclusion
Employee-owners of “S” corporations should pay a “reasonable” salary. What is a “reasonable” salary? That is a good question; there is no guidance in tax law or by the IRS. It is a case-by-case determination. To determine a reasonable salary, one needs to look at the prevailing wages paid for the same job description of the employee-owner and the income of the corporation.
Please call me for guidance on how this affects you personally.
Monday, June 7, 2010
Summer Travel Tax Deductions
The summer travel season is almost upon us. Keep in mind that if your summertime travel is primarily for business or career-related education, then a portion of the trip may be tax-deductible. As long as most of your travel days are for business purposes, you can deduct the cost of travel (airfare, trains, car), hotel, parking, taxi service, meals, and so on.
As defined by the IRS, travel expenses are the Ordinary and Necessary expenses of traveling away from home for your business, profession, or job. An Ordinary expense is one that is common and accepted in your field of trade, business, or profession. A Necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.
The key factor is that your trip must be primarily for business
Days of leisure can be added to a trip and still be considered primarily for business. The more days and time per day spent on business will help substantiate the trip. There are no set rules on how many days and how much time per day need to be spent on business for your trip to be considered business related.
Keep all the documentation for business-related travel, including confirmations of appointments, emails, phone records, registration to conferences, etc. The days spent traveling to and from a business trip are considered part of the trip. This includes the weekend if it is impractical to come home between weekday business meetings. Planning ahead can make this happen.
Traveling with Your Spouse
If a spouse goes with you on a business trip or to a business convention, his or her travel expenses can only be deducted if your spouse
1. is your employee,
2. has a bona fide business purpose for the travel, and
3. would otherwise be allowed to deduct the travel expenses.
To be an employee, your spouse must be on the payroll and payroll taxes must be paid. If your spouse is not an employee and travels with you on vacation, you can still deduct the cost of your room at the single-occupancy-per-day rate, rather than half the rate. Meals could also be deductible. If you are paying for lunch or dinner for a customer or business associate and that person's spouse, the full cost of the meals might qualify under the 50% meal deduction. Let us know if you're unclear on this deduction; we can give you the details.
Examples
Bill drives to Boston on business and takes his wife, Joan, with him. Joan is not Bill's employee. Joan occasionally types notes, performs similar services, and accompanies Bill to luncheons and dinners. The performance of these services does not establish that her presence on the trip is necessary for Bill's business. Her expenses are not deductible.
Bill pays $199 a day for a double room. A single room costs $149 a day. He can deduct the total cost of driving his car to and from Boston, but only $149 a day for his hotel room. If he uses public transportation, he can deduct only his fare. Further, if Bill has dinner with a customer and spouse, the meal may be deducted under the 50% meal deduction.
Travel Outside of the United States
With travel outside of the United States, the transportation for business trips of one week or less may be deducted. However, only a portion of transportation costs for longer trips are deductible.
Example
You live in New York. On May 4 you flew to Paris to attend a business conference that began on May 5. The conference ended at noon on May 14. That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. The primary purpose for the trip was to attend the conference.
If you had not stopped in Dublin, you would have arrived home the evening of May 14. You did not meet any of the exceptions that would allow you to consider your travel entirely for business. May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are non-business days.
You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris.
You cannot deduct your expenses while in Dublin. You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin.
You paid $450 to fly from New York to Paris, $200 to fly from Paris to Dublin, and $500 to fly from Dublin back to New York. Round-trip airfare from New York to Dublin would have been $850.
You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($850 - 7/18 = $331) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($450 + $200 + $500 = $1,150). Your deductible air travel expense is $819 ($1,150 - $331).
What Expenses Are Deductible?
Here's what you can deduct when you travel away from home for business.
(1) Transportation Expenses
You can deduct Transportation Expenses when you travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship, additional rules and limits apply.
(2) Taxi, Commuter Bus, Subway, and Airport Limousine Fares
You can deduct the fares for these and other types of transportation that take you between the airport or station and your hotel, and the hotel and the work location of your customers or clients, your business meeting place, or your temporary work location.
(3) Baggage and Shipping Expenses
You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations.
(4) Car Expenses
You can deduct the cost of operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.
(5) Lodging and Meals
You can deduct your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. Additional rules and limits may apply.
(6) Cleaning Clothes
You can deduct the dry cleaning and laundry expenses you incur while away on business.
(7) Telephone
All business calls while on your business trip are deductible. This includes business communication by fax machine or other communication devices.
(8) Tips
You may deduct the tips you pay for any expense listed above.
Other Expenses
You can deduct other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, or Internet access fees.
If you have any questions about business travel this summer, just give us a call or send us an email.
As defined by the IRS, travel expenses are the Ordinary and Necessary expenses of traveling away from home for your business, profession, or job. An Ordinary expense is one that is common and accepted in your field of trade, business, or profession. A Necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.
The key factor is that your trip must be primarily for business
Days of leisure can be added to a trip and still be considered primarily for business. The more days and time per day spent on business will help substantiate the trip. There are no set rules on how many days and how much time per day need to be spent on business for your trip to be considered business related.
Keep all the documentation for business-related travel, including confirmations of appointments, emails, phone records, registration to conferences, etc. The days spent traveling to and from a business trip are considered part of the trip. This includes the weekend if it is impractical to come home between weekday business meetings. Planning ahead can make this happen.
Traveling with Your Spouse
If a spouse goes with you on a business trip or to a business convention, his or her travel expenses can only be deducted if your spouse
1. is your employee,
2. has a bona fide business purpose for the travel, and
3. would otherwise be allowed to deduct the travel expenses.
To be an employee, your spouse must be on the payroll and payroll taxes must be paid. If your spouse is not an employee and travels with you on vacation, you can still deduct the cost of your room at the single-occupancy-per-day rate, rather than half the rate. Meals could also be deductible. If you are paying for lunch or dinner for a customer or business associate and that person's spouse, the full cost of the meals might qualify under the 50% meal deduction. Let us know if you're unclear on this deduction; we can give you the details.
Examples
Bill drives to Boston on business and takes his wife, Joan, with him. Joan is not Bill's employee. Joan occasionally types notes, performs similar services, and accompanies Bill to luncheons and dinners. The performance of these services does not establish that her presence on the trip is necessary for Bill's business. Her expenses are not deductible.
Bill pays $199 a day for a double room. A single room costs $149 a day. He can deduct the total cost of driving his car to and from Boston, but only $149 a day for his hotel room. If he uses public transportation, he can deduct only his fare. Further, if Bill has dinner with a customer and spouse, the meal may be deducted under the 50% meal deduction.
Travel Outside of the United States
With travel outside of the United States, the transportation for business trips of one week or less may be deducted. However, only a portion of transportation costs for longer trips are deductible.
Example
You live in New York. On May 4 you flew to Paris to attend a business conference that began on May 5. The conference ended at noon on May 14. That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. The primary purpose for the trip was to attend the conference.
If you had not stopped in Dublin, you would have arrived home the evening of May 14. You did not meet any of the exceptions that would allow you to consider your travel entirely for business. May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are non-business days.
You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris.
You cannot deduct your expenses while in Dublin. You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin.
You paid $450 to fly from New York to Paris, $200 to fly from Paris to Dublin, and $500 to fly from Dublin back to New York. Round-trip airfare from New York to Dublin would have been $850.
You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($850 - 7/18 = $331) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($450 + $200 + $500 = $1,150). Your deductible air travel expense is $819 ($1,150 - $331).
What Expenses Are Deductible?
Here's what you can deduct when you travel away from home for business.
(1) Transportation Expenses
You can deduct Transportation Expenses when you travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship, additional rules and limits apply.
(2) Taxi, Commuter Bus, Subway, and Airport Limousine Fares
You can deduct the fares for these and other types of transportation that take you between the airport or station and your hotel, and the hotel and the work location of your customers or clients, your business meeting place, or your temporary work location.
(3) Baggage and Shipping Expenses
You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations.
(4) Car Expenses
You can deduct the cost of operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.
(5) Lodging and Meals
You can deduct your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. Additional rules and limits may apply.
(6) Cleaning Clothes
You can deduct the dry cleaning and laundry expenses you incur while away on business.
(7) Telephone
All business calls while on your business trip are deductible. This includes business communication by fax machine or other communication devices.
(8) Tips
You may deduct the tips you pay for any expense listed above.
Other Expenses
You can deduct other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, or Internet access fees.
If you have any questions about business travel this summer, just give us a call or send us an email.
Friday, June 4, 2010
CALIFORNIA ADOPTS PERMANENT REGULATIONS FOR FILM CREDIT
Effective May 19, 2010 the California Film Commission (CFC) adopted eight final regulations that implement the Film and Television Tax Credit Program; which was previously adopted as an emergency regulation. The final regulations specify the process for the tax credit application and certificate issuance process, the application's contents, and the kind of production and wage expenditure that qualify. The CFC has issued a release summarizing the more significant changes in the regulations, including the following requirements:
(1) All productions' Financing Sources Report must be accompanied by documentation confirming at least 60% of the production's financing
(2) A new TV series for basic cable must have a running time of no less than 60 minutes
(3) A miniseries must consist of two or more episodes with a total running time of at least 150 program minutes.
Please call our office if you want more information or need assistance
(1) All productions' Financing Sources Report must be accompanied by documentation confirming at least 60% of the production's financing
(2) A new TV series for basic cable must have a running time of no less than 60 minutes
(3) A miniseries must consist of two or more episodes with a total running time of at least 150 program minutes.
Please call our office if you want more information or need assistance
Thursday, June 3, 2010
IMPORTANT INFORMATION FOR CALIFORNIA REGISTERD DOMESTIC PARTNERS
On February 24, 2006 the IRS issued a determination that an individual who is a Registered Domestic Partner (RDP) in California must report all of his or her income earned from the performance of personal services. However, California law changed on January 1, 2007 to treat the earned income of an RDP as community property for property law and state income tax purposes. Consequently, a California RDP must report one-half of the community income, whether received as compensation for personal services or income from property, on his or her federal income tax return. Similarly, an RDP is entitled to one-half of the income tax withheld on the income. Finally, the requirement under California law to treat an RDP's earnings as community property and thus one-half vested in the partner, does not result in a transfer of property to the partner for federal gift tax purposes.
For tax returns for 2009 and before a Registered Domestic Partner can amend prior returns to report his or her income in this manner.
Consequently, a Registered Domestic Partner in California who prepares an Offer in Compromise must include the assets of the other partner in figuring the Taxpayer's ability to pay their income taxes even if they file separate. This is because California law provides that both domestic partners have an equal interest and liability in the community property.
For tax returns for 2009 and before a Registered Domestic Partner can amend prior returns to report his or her income in this manner.
Consequently, a Registered Domestic Partner in California who prepares an Offer in Compromise must include the assets of the other partner in figuring the Taxpayer's ability to pay their income taxes even if they file separate. This is because California law provides that both domestic partners have an equal interest and liability in the community property.
Wednesday, June 2, 2010
HIRE ACT PAYROLL TAX EXEMPTION
Following changes by the HIRE Act signed by President Obama on 3/18/10, employers hiring unemployed workers after 2/3/10 and before 1/1/11 may qualify for a 6.2% payroll tax incentive, in effect exempting them from their share of the Social Security tax on wages paid to these workers after 3/18/10. A revised Form 941 (Employer's Quarterly Federal Tax Return) and instructions, to be used in claiming the exemption beginning with the second calendar quarter of 2010, are now available for download on www.irs.gov . The IRS also updated its series of Frequently Asked Questions (FAQs) on the HIRE Act payroll tax exemption—click on www.irs.gov/businesses/small/article/0,,id=220750,00.html
News Release IR-2010-64.
_____________________________________________________________________________________
Copyright © 2010 Thomson Reuters/PPC. All rights reserved.
News Release IR-2010-64.
_____________________________________________________________________________________
Copyright © 2010 Thomson Reuters/PPC. All rights reserved.
Tuesday, June 1, 2010
TAX INCENTIVES FOR SMALL BUSINESS - RECENT LIGISLATION
A variety of business tax deductions and credits were created, extended and expanded by the American Recovery and Reinvestment Act of 2009 (ARRA), this year's Hiring Incentives to Restore Employment (HIRE) Act and the Affordable Care Act. Because some of these changes are only available this year, eligible businesses only have a few months to take action and save on their taxes. Here is a rundown of some of the key provisions.
New Health Care Tax Credit Helps Small Employers
The small business health care tax credit, created under the Affordable Care Act, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
The credit takes effect this year and is generally available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small employers that primarily employ low- and moderate-income workers.
For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers. The maximum credit goes to smaller employers - those with 10 or fewer full-time equivalent (FTE) employees — paying annual average wages of $25,000 or less. The credit is completely phased out for employers with more than 25 FTEs or with average wages of more than $50,000.
Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals. More information about the credit, including a step-by-step guide and answers to frequently asked questions, is available on the IRS website.
Two New Benefits for Employers that Hire and Retain Recently Unemployed
Employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer's share of Social Security tax on wages paid to these workers after March 18. In addition, for each qualified employee retained for at least a year whose wages did not significantly decrease in the second half of the year, businesses may claim a new hire retention credit of up to $1,000 per worker on their income tax return.
These tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives generally do not qualify.
Employers must get a signed statement from each eligible new hire, certifying under penalties of perjury, that he or she was not employed for more than 40 hours during the 60 days before beginning employment with that employer. IRS Form W-11 can be used to meet this requirement. Further details, including answers to frequently asked questions, are posted on IRS.gov.
Work Opportunity Tax Credit Aids Employers That Hire Certain Workers
The work opportunity tax credit (WOTC) offers tax savings to businesses that hire employees belonging to various targeted groups. These groups include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, recipients of various types of public assistance, certain veterans, ex-felons and certain youth workers. The instructions for Form 8850 detail the requirements for each of these groups.
Certification by the state workforce agency is generally required. Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work.
An eligible employer can claim both the WOTC and the new hire retention credit for the same employee. However, an employer may not claim both the payroll tax exemption and the WOTC for the same employee. Therefore, any employer that chooses to apply the exemption to wages paid to a qualified employee may not receive the WOTC on any wages paid to that employee during the one-year period beginning on the employee's hiring date.
Exclusion of Gain on the Sale of Certain Small Business Stock
An extra incentive is now available to individuals who invest in small businesses. Investors in qualified small business stock can exclude 75 percent of the gain upon sale of the stock. This increased exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009, and before Jan. 1, 2011, and held for more than five years. For previously-acquired stock, the exclusion rate remains at 50 percent in most cases.
COBRA Credit
Employers that provide the 65 percent COBRA premium subsidy to eligible former employees can claim credit for this subsidy on their quarterly or annual payroll tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their payroll tax deposits by the amount of the credit.
_____________________________________________________________________________________
© 2010 Thomson Reuters/RIA. All rights reserved.
New Health Care Tax Credit Helps Small Employers
The small business health care tax credit, created under the Affordable Care Act, is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
The credit takes effect this year and is generally available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small employers that primarily employ low- and moderate-income workers.
For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers. The maximum credit goes to smaller employers - those with 10 or fewer full-time equivalent (FTE) employees — paying annual average wages of $25,000 or less. The credit is completely phased out for employers with more than 25 FTEs or with average wages of more than $50,000.
Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals. More information about the credit, including a step-by-step guide and answers to frequently asked questions, is available on the IRS website.
Two New Benefits for Employers that Hire and Retain Recently Unemployed
Employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer's share of Social Security tax on wages paid to these workers after March 18. In addition, for each qualified employee retained for at least a year whose wages did not significantly decrease in the second half of the year, businesses may claim a new hire retention credit of up to $1,000 per worker on their income tax return.
These tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives generally do not qualify.
Employers must get a signed statement from each eligible new hire, certifying under penalties of perjury, that he or she was not employed for more than 40 hours during the 60 days before beginning employment with that employer. IRS Form W-11 can be used to meet this requirement. Further details, including answers to frequently asked questions, are posted on IRS.gov.
Work Opportunity Tax Credit Aids Employers That Hire Certain Workers
The work opportunity tax credit (WOTC) offers tax savings to businesses that hire employees belonging to various targeted groups. These groups include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, recipients of various types of public assistance, certain veterans, ex-felons and certain youth workers. The instructions for Form 8850 detail the requirements for each of these groups.
Certification by the state workforce agency is generally required. Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work.
An eligible employer can claim both the WOTC and the new hire retention credit for the same employee. However, an employer may not claim both the payroll tax exemption and the WOTC for the same employee. Therefore, any employer that chooses to apply the exemption to wages paid to a qualified employee may not receive the WOTC on any wages paid to that employee during the one-year period beginning on the employee's hiring date.
Exclusion of Gain on the Sale of Certain Small Business Stock
An extra incentive is now available to individuals who invest in small businesses. Investors in qualified small business stock can exclude 75 percent of the gain upon sale of the stock. This increased exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009, and before Jan. 1, 2011, and held for more than five years. For previously-acquired stock, the exclusion rate remains at 50 percent in most cases.
COBRA Credit
Employers that provide the 65 percent COBRA premium subsidy to eligible former employees can claim credit for this subsidy on their quarterly or annual payroll tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their payroll tax deposits by the amount of the credit.
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© 2010 Thomson Reuters/RIA. All rights reserved.
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