Year-End Tax Planning Moves for Businesses

As the end of the year approaches, many are looking for ways to reduce their business profits before year's end. Here are some possible moves that might apply to your situation.

Self-employed Retirement Plans - If you are self-employed and haven't done so yet, you may wish to establish a self-employed retirement plan. Certain types of plans must be established before the end of the year to make you eligible to deduct contributions made to the plan for 2012, even if the contributions aren't made until 2013. You may also qualify for the pension start-up credit.

Increase Basis - If you own an interest in a partnership or S corporation that is going to show a loss in 2012, you may need to increase your basis in the entity so you can deduct the loss, which is limited to your basis in the entity.

Hire Veterans - If you are considering hiring some new employees between now and the end of the year, you might consider hiring a qualifying veteran so that you can qualify for the work opportunity tax credit (WOTC). The WOTC for hiring veterans in 2012 ranges from $2,400 to $9,600, depending on a variety of factors (such as the veteran's period of unemployment and whether he or she has a service-connected disability).

Purchase Equipment - If you are in the market for new business equipment and machinery and you place them in service before year-end, you will qualify for the 50% bonus first-year depreciation allowance. Or, you can elect to expense up to $139,000 of the newly acquired items using the Sec 179 expensing allowance. The $139,000 expense limit is reduced by one dollar for every dollar in excess of the $560,000 annual investment limit.

Purchase an SUV for Business - If you are in the market for a business car, and your taste runs to large, heavy SUVs (those built on a truck chassis and rated at more than 6,000 pounds gross [loaded] vehicle weight), consider buying in 2012. Due to a combination of favorable depreciation and expensing rules, and depending on the percentage of business use, you may be able to write off most of the cost of the heavy SUV this year.

These are just some of the year-end steps that can be taken to save taxes. Please contact this office so we can tailor a plan to your particular needs.

WHAT IF A PAYEE REFIUSES TO COOPERATE WITH THE PREPERATION OF 1099s

As part of the 1099 process, payees are required to provide their Tax Identification Number which is either their Social Security Number or Corporate ID Number. But what happens if a payee refuses? What do we do then?

Per the IRS, the 1099 still needs to be prepared and sent to the IRS, but with the tax identification Number blank. Then send the payee the following:
(1) A copy of the 1099 that is being sent to the IRS
(2) Form W-9, which is the form that the payee reports their Tax Identification Number to you
(3) A letter, on company letterhead, informing them that (a) The enclosed 1099 is being provided to the IRS,(b) Requesting them to return the enclosed completed orm W-9, (c) The IRS will assess a penalty against them for refusing to provide their tax identification number and (d) 28% will be withheld from all future payments
(4) A return envelope

You need to keep copies of all of this in a file to show the IRS that you did your best effort to get the payee’s Tax Identification number.

The IRS will then assess you a $50 penalty. The penalty can be waived if copies of the above are provided

If you need help in preparing 1099s, please give us a call today at 562-912-4334.

Please note, to comply with IRS regulations, we need to advise that any discussion of federal tax issues in this blog is not intended or written to be used, and cannot be used by you, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. For more information please go to http://www.lw.com/docs/irs.pdf

DECEMBER 2010 TAX BRIEFING

401(k) Distribution to Disabled Spouse:
In the Fall 2010 edition of the Retirement News for Employers , the IRS stated that a distributable event in a 401(k) plan includes an employee's disability, but not a spouse's or dependent's disability. However, the 401(k) plan may allow a hardship distribution based on an immediate and heavy financial need of the employee or the employee's spouse, dependents, or beneficiaries. The distribution can be no more than necessary to satisfy the financial need, but can include amounts needed to pay taxes resulting from the distribution. The plan's terms will define "immediate and heavy financial need,"which may cover disability-related medical expenses for the employee's spouse.

Real Estate Dealer or Investor:
The Tax Court held that a couple who bought and sold real estate recognized ordinary income instead of capital gains. In finding that the real estate transactions were conducted in the ordinary course of a trade or business and not for investment, the Tax Court noted that (1) taxpayers' objective in purchasing and selling real estate was to recognize the maximum gain within a short period (most sales occurred within four months after they purchased the property); (2) the real estate transactions were entered into regularly and resulted in significant gains; (3) taxpayers engaged in at least 15 sales over three years, and (4) they did not rely on the services of a real estate agent or broker to select, promote, or sell their properties. Wendell Garrison , TC Memo 2010-261 (Tax Ct).

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.
________________________________________

SOULD YOU FILE A TAX RETURN?

Do you ever wonder whether your income is high enough to warrant the filing of a tax return? Because the minimum income level varies depending on filing status, age, and the type of income you receive, it can be a bit complicated.
Use the following guide to determine whether you must file a federal income tax return for 2010.

Single Taxpayers
If you expect to file a single return, the IRS requires you to file a return for 2010 if your gross income for the year is at least $9,350 if you are under age 65 and $10,750 if you are 65 or older.

Married Filing Jointly
For married persons filing jointly, you are required to file a return if gross income for 2010 is at least $18,700 if both of you are under age 65. If one of you was at least age 65 in 2010, the limit is $19,850 - and if both of you were 65 or over, you must file if you made at least $20,900.

If you are not living with your spouse at the end of the year or you weren't living with them on the day they passed away, the IRS requires you to file a return if your gross income is at least $3,650. Each personal exemption in 2010 is worth $3,650.
For married persons filing a separate return, no matter what age, you must file a return if gross income is at least $3,650.

Head of Household
For persons filing as head of household, you must file a return for 2010 if gross income is at least $12,000 if under age 65 and $13,400 if at least age 65.

Qualifying Widow or Widower
For persons filing as a qualifying widow or widower with a dependent child, you must file a return for 2010 if gross income is at least $15,050 if under age 65 and $16,150 if at least age 65.

Other Situations That Require Filing
Even if you don't earn this much income, other situations necessitate filing a tax return. For example, a dependent has to file a return for 2010 if they received more than $950 in unearned income or more than $5,700 in earned income.

Other situations include:
You Owe Certain Taxes. If you owe FICA or Medicare taxes (also called payroll taxes) on unreported tips or other reported income that were not collected, you must file a return. You must also file a tax return if you are liable for any alternative minimum tax. Finally, you must file a return if you owe taxes on individual retirement accounts, Archer MSA accounts, or an employer-sponsored retirement plan.

Advance Earned Income Tax Credit Payments. The Earned Income Tax Credit is a federal income tax credit for eligible low-income workers. The credit reduces the amount of tax an individual owes, which may be returned in the form of a refund. If you receive advance payments for the earned income credit from your employer, you must file a return.

Self-Employment Earnings. If your net earnings from self-employment are $400 or more, you must file a return.

Church Income. If you earn employee income of at least $108.28 from either a church or a qualified church-controlled organization that is exempt from employer-paid FICA and Medicare taxes, you must file a return.

Questions?
Call us at 562-912-4334 for more information about filing requirements and your eligibility to receive tax credits.

Please note, to comply with IRS regulations, we need to advise that any discussion of federal tax issues in this blog is not intended or written to be used, and cannot be used by you, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. For more information please go to http://www.lw.com/docs/irs.pdf

How the Bush Tax Cuts Affect Tax-Saving Strategies

Each November, we like to look at the steps you can take to reduce your tax bill. This year, it's a little ambiguous, because the Bush tax cuts and credits are set to expire at the end of 2010. If they do expire, a lot of folks will experience a significant adjustment to their tax situation.

The "Bush tax cuts" refers to legislation enacted in 2001 and 2003. The cuts lowered tax rates on income, dividends, and capital gains; eliminated the estate tax; lowered burdens on married couples, parents, and the working poor; and increased tax credits for education and retirement savings.

Both Republicans and Democrats favor an extension of the tax cuts for the middle class. Where they differ is whether to extend the cuts for Americans in the top 2% of taxpayers.

With this in mind, we're looking at year-end measures separately for these two groups: the middle class - those making less than $200,000 for singles / $250,000 for married filers - and the higher income taxpayers - those making more than $200,000 / $250,000.

But first, let's take a quick look at what's at stake.

If All the Bush Tax Cuts Expire...
Among other things, if the Bush tax cuts were allowed to expire, the following would take place:
1. Tax brackets would change, from 10%, 15%, 25%, 28%, 33%, and 35% to 15%, 28%, 31%, 36%, and 39.6%.
2. Long-term capital gain tax rates would rise from 15% to a maximum of 20%.
3. The child tax credit would be lowered.
4. The alternative minimum tax would cease to be indexed for inflation.
5. The marriage penalty would be reinstated.

Middle-Income Taxpayers
We don't expect Congress to allow the tax cuts to expire for this group. That means middle-income taxpayers can take the same measures this year they have in previous years to reduce their tax burden for 2010.

We recommend the following steps to save on taxes this year: defer income, accelerate your deductions, and plan out your capital gains.

Defer Income
If you are planning to sell an investment on which you have a gain, it may be best to wait until the new year. This will defer payment of the taxes for another year (subject to estimated tax requirements).
• If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. Again, this can defer the payment of taxes (other than the portion withheld) for another year. (Note that deferral of tax generally won't work where the bonus is contractually due in 2010.)
• If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by the exercise of an option. (Exercise of the option is often a taxable event; sale of the stock is almost always a taxable event.)
• If you're self-employed, and you can afford the delay in cash inflow, defer sending invoices to clients until the end of December.

Accelerate Deductions
Pay a state estimated tax installment in December instead of at the January due date. Just make sure the payment is based on a reasonable estimate of your state tax.
• Pay your entire property tax bill, including installments due in 2011, by year-end. (This is not applicable to mortgage escrow accounts.)
• Try to bunch threshold expenses, such as medical expenses and miscellaneous itemized deductions. (Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income.) By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

Caution: In most cases, credit card charges are considered paid in the year of the charge regardless of when you pay on the card. But this does not apply to store revolving credit cards. If you charge expenses on a Wal-Mart store credit card, for example, the deduction cannot be claimed until the bill is paid.

Some tax benefits are phased out if you have more than a certain level of adjusted gross income. In these cases, a strategy of deferring income and accelerating deductions may also allow you to claim larger deductions, credits, and other tax breaks for 2010.

Tip: Deferring income into 2011 is an especially good idea for taxpayers who anticipate being in a lower tax bracket next year, either because of much-reduced income or much-increased deductible expenses.

Minimize Taxes on Investments
Judiciously match your capital gains and losses to reduce your tax burden for 2010. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35%) than long-term gains (15%). You might consider, where feasible, trying to reduce all capital gains and generate short-term capital losses of up to $3,000.

Tip: If you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses are deductible up to the amount of your capital gains plus $3,000.

High-Income Taxpayers
Depending on what Congress decides in this legislative session, individuals making more than $200,000 filing singly or $250,000 filing married in 2010 will owe more tax than they have since the 2001 Bush tax cuts were passed. What does this mean for end-of-year tax planning?

Don't Defer Income
If tax cuts for the richest Americans are allowed to expire at the end of the year, then many in the current 33% tax bracket will find themselves in the 36% bracket, and those currently taxed at the 36% rate will be taxed at 39.6%.

For these taxpayers, it makes sense to bump up 2010 income, to take advantage of the current lower rates. Grab that year-end bonus; sell stock acquired by the exercise of a company stock option; bill clients for as much work as possible if you're self-employed.

Take Capital Gains Now
Capital gains and qualified dividends for those in the higher tax brackets would be affected if the tax cuts are allowed to expire for the richest Americans. The capital gains rate would revert to a maximum of 20% for higher income filers (from 15% currently), and qualified dividends would resume being taxed at the regular tax rate of the filer, or as high as 39.6%.

This indicates that now is a good time to take any capital gains or qualified dividends. Selling assets now as opposed to 2011 could have positive tax consequences for higher income filers.

Let Us Help You
As you can see, this is a complicated year for tax planning. Please don't hesitate to come in and meet with us about your situation. There's still a lot we can do to minimize your tax burden for 2010.

Please note, to comply with IRS regulations, we need to advise that any discussion of federal tax issues in this blog is not intended or written to be used, and cannot be used by you, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. For more information please go to http://www.lw.com/docs/irs.pdf

NEW PENALTIES FOR FAILURE TO FILE INFORMATION RETURNS

Tax law requires businesses to provide information returns, such a 1099s, to each payee that the business has paid $600 or more for the year. The law also includes penalties for failure to file the same information returns with the IRS.

To ensure compliance with these requirements, there are substantial penalties, and, as part of the recently passed Small Business Jobs Act of 2010, those penalties have been doubled. The penalties are generally based upon how late the returns are filed with the IRS or provided to the recipient of the income and are broken down into three tiers:

Tier 1 – Where the returns are filed or provided late but within 30 days of the prescribed due date.

Tier 2 – Where the returns are filed or provided more than 30 days after the prescribed due date and before August 1 of the calendar year in which the filing was required.

Tier 3 – Where the returns are filed or provided after August 1 of the calendar year in which the filing was required.

In addition, the maximum penalties for the year are based on business size determined by the business’s gross receipts. Businesses with gross receipts of $5 million or less are subject to the small business penalty maximums.

In addition, the minimum penalty for each intentional failure-to-file act increases from $100 to $250.

Rental Owners Included in the Reporting Requirement Effective in 2011 – Effective for 2011 filings due in 2012, the 2010 Small Business Act provides that solely for purposes of filing information returns, a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. The new law does provide the IRS with the ability to permit exceptions to the filing requirement for hardship cases and when minimal rental income is received, but neither “hardship” nor “minimal” are yet defined.

In order to comply with these requirements and avoid these substantial penalties requires collecting the payee’s name, SSN number and contact information before making payment. If you need assistance setting up a procedure for collecting the required information or filing your information returns for the year, please give us a call at 562-912-4334

OCTOBER 2010 TAX BRIEFING

Informal Claim for Refund:
Informal claims for refund typically arise when the period of time for filing a claim on the appropriate form has expired, but to obtain a refund the taxpayer contends that a letter or some other communication sent or provided to the IRS meets the minimum requirements set forth in Reg. 301.6402-2 . Here, taxpayer and the IRS narrowed their dispute to whether taxpayer's 2004 tax year claim for refund was barred by limitations. In finding for the taxpayer, a New York District Court noted that taxpayer's January 2007 letter, although brief, "put the IRS on notice that he believed his disability pension had been improperly taxed as earned income since 1983. Although [taxpayer] did not use the word refund , the only reasonable construction of his letter is as a request for refunds for tax years since 1983 and an assurance that his pension would not be improperly taxed in the future." McMillan v. IRS , 106 AFTR 2d 2010-XXXX (DC E.D. N.Y.).

SIFL Rates for Employer-provided Aircraft:
Under Reg. 1.61-21(g) , employers can use a special computation rule to value employees' flights on an employer-piloted aircraft. The employer multiplies the Standard Industry Fare Level (SIFL) cents-per-mile rate in effect at the time of the flight by the appropriate aircraft multiple provided in Reg. 1.61-21(g)(7) , then adds the applicable terminal charge. For flights taken from 7/1/10–12/31/10, the SIFL rate will be $.2243 per mile for trips up to 500 miles, $.1710 per mile for trips from 501 to 1,500 miles, and $.1644 per mile for trips over 1,500 miles. The terminal charge will be $41.00. Rev. Rul. 2010-22, 2010-39 IRB .

Changes in 2010 Reporting of Uncertain Tax Positions:
The IRS announced significant changes to its original proposals for the reporting of Uncertain Tax Positions (UTPs) on 2010 corporate returns. The changes include: (1) a five-year phase-in of the reporting requirement based on a corporation's asset size, (2) no reporting of maximum tax adjustment, (3) no reporting of the rationale and nature of uncertainty in the description of the position, and (4) no reporting of administrative practice tax positions. Corporations with assets of $100 million (increased from $10 million for 2010) or more must file Schedule UTP starting with 2010 tax years. Instead of reporting the maximum tax adjustment for each UTP, the corporation will rank all reported positions based on U.S. federal tax reserve. The final schedule and instructions are available at www.irs.gov/businesses/corporations/article/0,,id=221533,00.html . IRS Ann. 2010-75, 2010-41 IRB .

IRS Policy of Restraint for Uncertain Tax Positions:
The IRS announced an expanded policy of restraint in seeking documents related to Uncertain Tax Positions (UTPs) coinciding with the release of newly modified Schedule UTP. Taxpayers may remove the following information from tax reconciliation workpapers provided to the IRS: (1) drafts, revisions or comments concerning the description of tax positions reported on Schedule UTP, (2) the amount of any reserves for tax positions reported on the schedule, and (3) computations determining the ranking of tax positions reported on the schedule. IRS Ann. 2010-76, 2010-41 IRB .

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

SEPTEMBER 2010 TAX BRIEFING

Reporting Receipt of Cash:
The issue in this program manager technical advice is whether a person who receives a check exceeding $10,000 in the course of a trade or business and cashes rather than deposits the check must file Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business). In concluding that the transaction is not reportable under IRC Sec. 6050I , the IRS notes that a personal check is not cash under Reg. 1.6050I-1(c)(1) . Therefore, the person receiving the personal check is not a recipient of cash for Section 6050I reporting purposes. The subsequent cashing of the check was not a receipt of cash for the underlying event (the relevant transaction), nor did it relate to the underlying transaction between the payer and recipient. The cashing of the check was a separate act by the recipient at a check casher. PMTA 2010-012.

Requesting Tax Payment Extension due to Undue Hardship:
An IRS memo addresses the rules for processing Form 1127 (Applications for Extension of Time for Payment of Tax Due to Undue Hardship), which was recently revised. Form 1127 cannot be used to request an extension of time to file a return, and if filed on that basis will be returned as nonprocessible. If the taxpayer is requesting an extension of time to pay a tax due on an upcoming return, Form 1127, with supporting documents, must be filed on or before the due date of that return, excluding extensions. If the taxpayer is requesting an extension of time to pay a deficiency, Form 1127, with supporting documents, must be filed on or before the due date for payment indicated in the tax bill. IRS Memo SB/SE-05-0710-029.

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

USE OF CELL PHONES FOR BUSINESS

The following is a summary of important tax developments concerning the use of cell phones for business use. Please call us for more information at (562) 912-4334.

Regardless if the phone is owned by you or your company, business uses is deductable. However because cell phones are indentified as “listed property”, there are strict substantiation requirements. Listed property is any property that lends itself to both business and personal use like computers, cars and cell phones. A Cell Phone Log should be used to substantiate the business use. The use of this log is required to take a business deduction. Therefore, providing you used this log, the company can reimburse you for the business use. It is important to note that if the company owns the phone, then any personal usage of an employer-provided cell phone is a taxable fringe benefit.

To get around the substantiation requirements, you should have two phones, one deducted to business and the other dedicated for personal.

As of the date of this e-mail, the IRS Commissioner and the Treasury Secretary have called on Congress to simplify the rules for cell phone substantiation and asked that no tax consequences will occur to employers or employees for personal use of cell phones provided by employers. Additionally, legislation has been introduced to eliminate cell phones from the listed property definition. Practitioners should monitor this issue for further developments.

Please call us at (562) 912-433 if you have any questions..

8 TIPS FOR TAXPAYERS WHO OWE MONEY

The vast majority of Americans get a tax refund each spring. However, what if you are not one of them? What if you owe money to the IRS or your state?

Here are nine tips for individuals who need to pay taxes. The tips are similar for corporations, but more involved.

1. If you get a bill for late taxes, you are expected to promptly pay the tax owed including any additional penalties and interest. If you are unable to pay the amount due, it is often in your best interest to get a loan to pay the bill in full rather than to make installment payments.

2. You can also pay the bill with your credit card. To pay by credit card contact either Official Payments Corporation at 800-2PAYTAX (also www.officialpayments.com) or Link2Gov at 888-PAY-1040 (also www.pay1040.com).

3. The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the IRS or your state.

4. You can pay the balance owed by electronic funds transfer, check, money order, cashier's check, or cash. To pay using electronic funds transfer you can take advantage of the Electronic Federal Tax Payment System by calling 800-555-4477 or 800-945-8400 or online at www.eftps.gov.

5. You may request an installment agreement if you cannot pay the liability in full. This is an agreement between you and the Taxing Authority for the collection of the amount due in monthly installment payments. To be eligible for an installment agreement, you must first file all returns that are required and be current with estimated tax payments.

6. For the IRS, if you owe $25,000 or less in combined tax, penalties, and interest, you can request an installment agreement using the web-based application called Online Payment Agreement found at IRS.gov.

7. If you owe your state, you might b required to submit a financial statement and documents proving your inability to pay in full.

8. You can also complete and mail an Installment Agreement Request [for the IRS Form 9465]. The Taxing Authorities will inform you usually within 30 days whether your request is approved or denied or if additional information is needed. If the amount you owe is $25,000 or less, provide the monthly amount you wish to pay with your request. For the IRS, at a minimum, the monthly amount you will be allowed to pay without completing a Collection Information Statement, Form 433, is an amount that will fully pay the total balance owed within 60 months.

You may still qualify for an installment agreement if you owe more than $25,000, but a Form 433F, Collection Information Statement, is required to be completed before an installment agreement can be considered. If your balance is over $25,000, consider your financial situation and propose the highest amount possible, as that is how the IRS will arrive at your payment amount based on your financial information.

9. If an installment agreement is approved, a one-time user fee will be charged. For the IRS the user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged. This is automatically figured and is based on your income.

For more information about installment agreements and other payment options, give our office a call at 562-912-4334.

AUGUST 2010 TAX BRIEFING

Adequately Disclosing a Gift for Limitation Purposes:
If a gift is not adequately disclosed on a gift tax return, gift tax can be imposed on the gift at any time under IRC Sec. 6501(c)(9) . According to Reg. 301.6501(c)-1(f)(2) , a gift to a trust is adequately disclosed if the gift tax return (or a statement attached to the return) includes the trust's tax identification number and brief description of the terms of the trust, or in lieu of that description, a copy of the trust instrument. Under the facts of this informal emailed advice, the IRS lawyer concluded that the taxpayer can file an amended gift tax return for the year in question and include the additional information that he believes is necessary to adequately disclose the gift. The IRS will then decide whether to audit the gift tax return. CCA 201030029 .

Defined Benefit Plans Using Special Funding Rules:
A pair of related notices provide guidance on the availability of special funding rules for (1) single-employer defined benefit plans under IRC Sec. 430(c)(2)(D) when Form 5500 (and Schedule SB) has been filed for that year, and (2) multi-employer defined benefit plans under IRC Sec. 431(b)(8) when Form 5500 (and Schedule MB) has been filed for that year. Notice 2010-55 , 2010-33 IRB, and Notice 2010-56, 2010-33 IRB .

HIRE Act Employment-related Tax Breaks:
Thanks to the HIRE Act, employers are exempt from their share of the Social Security tax on wages paid to eligible employees and can also claim a tax credit of up to $1,000 on wages paid to qualified new employees. The IRS recently updated its series of Frequently Asked Questions (FAQs) on these temporary tax breaks on www.irs.gov . The new FAQs address (1) the new hire retention credit and who it applies to, (2) the period of employment eligible for the credit, (3) Alternative Minimum Tax (AMT) implications, (4) eligible workers, and (5) the rules for calculating and claiming the credit. The FAQs note that an employer can claim the payroll tax exemption and the new hire retention credit for the same worker as long as the requirements for each are met.

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

JULY 2010 TAX BRIEFING

Addresses for Filing Elections and Statements:
Following the reorganization of the IRS (as required by the IRS Restructuring and Reform Act of 1998), the IRS issued Notice 2003-19 (2003-1 CB 703) to advise taxpayers of the revised addresses for filing elections, statements, returns, and other documents with the IRS. Since then, many of the locations listed in Notice 2003-19 for filing documents have changed and are no longer accurate. Accordingly, the IRS has revoked Notice 2003-19 . Instead, the address for filing many of the documents listed in Notice 2003-19 can be found (1) on www.irs.gov ; (2) in current IRS forms, instructions to forms, and publications; or (3) on a new IRS webpage accessible at www.irs.gov/file/article/0,,id=224931,00.html.

Bankruptcy Trustees Requesting Tax Refunds:
The IRS provided guidance to the trustee (or debtor- in-possession) representing a bankruptcy estate for properly requesting a tax refund, other than an application for a tentative carryback or refund adjustment under IRC Sec. 6411 . [ Editor's Note: The debtor in a Chapter 11 reorganization is a debtor-in-possession when the debtor remains in full control of all of the assets.] This guidance supersedes Rev. Proc. 81-18 (1981-1 CB 688) and applies to all cases commenced under the Bankruptcy Code except for Chapter 9 municipal debt adjustment cases and Chapter 15 ancillary and cross-border cases. Rev. Proc. 2010-27, 2010-31 IRB.

Gulf Oil Spill Assistance Day:
The IRS listed the Taxpayer Assistance Centers in seven Gulf Coast cities that will be open this Saturday, 7/17/10, to provide face-to-face assistance for taxpayers impacted by the BP oil spill. The following locations will be open from 9 a.m. to 2 p.m. Central Time: (1) 1110 Montlimar Drive, Mobile, Ala.; (2) 651-F West 14th St., Panama City, Fla.; (3) 7180 9th Ave. North, Pensacola, Fla.; (4) 2600 Citiplace Centre, Baton Rouge, La.; (5) 423 Lafayette St., Houma, La.; (6) 1555 Poydras Street, New Orleans, La.; and (7) 11309 Old Highway 49, Gulfport, Miss. Individuals with questions about the tax treatment of BP payments or who are experiencing filing or payment hardships because of the oil spill will be able to work directly with IRS personnel. News Release IR-2010-85.

Preventive Health Services:
Temporary regulations (found in TD 9493 ), issued in conjunction with regulations issued by other federal agencies, address preventive health services under the Patient Protection and Affordable Care Act. Group health plans and health insurance issuers offering group health insurance must provide coverage for, and may not impose any cost-sharing requirements (such as a copayment, coinsurance, or deductible) for, the enumerated list of items or services, which includes "immunizations for routine use in children, adolescents, and adults that have in effect a recommendation from the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention with respect to the individual involved." Temp. Reg. 54.9815-2713T generally applies to plan years beginning on or after 9/23/10; however, see Temp. Reg. 54.9815-1251T for the application of these rules to grandfathered health plans.

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

THE TAX COURT DISALLOWS THE EXCLUSION OF THE SALE OF HOME

In a tax court decision [David A. Gates and Christine A Gates, Petitioners v. Commissioner of the IRS, Respondent], held that taxpayers, who voluntarily demolished and constructed a new house on their property in order to enlarge and remodel their home, couldn't exclude the gain on the sale of the new house under the Code Sec. 121 exclusion for the sale of a principal residence. Although the taxpayers owned and used their old house as a principal residence for at least two of the five years before the sale, the Code Sec. 121 exclusion did not apply because they never lived in the new house and it was never used as their principal residence.

The Code Sec. 121 exclusion allows a taxpayer to exclude from income up to $250,000 of gain from the sale of a home owned and used by the taxpayer as a principal residence for at least two of the five years before the sale. The full exclusion does not apply if, within the two-year period ending on the sale date, the exclusion applied to another home sale by the taxpayer. Married taxpayers filing jointly for the year of sale may exclude up to $500,000 of home sale gain if (1) either spouse owned the home for at least two of the five years before the sale, (2) both spouses used the home as a principal residence for at least two of the five years before the sale, and (3) neither spouse is ineligible for the full exclusion because of the once-every-two-year limit.

If you want more information or need assistance, please call our office

CONGRESS OKs EXTEND CLOSING DATE FOR HOMEBUYER CREDIT

On June 30, Congress passed H.R. 5623, the Homebuyer Assistance Improvement Act of 2010. The Act, which is now cleared for the President’s signature, provides first-time homebuyer credit relief to taxpayers who couldn’t meet a key June 30, 2010, closing date.

Under prior law, both the regular Code 36 first-time homebuyer credit of $8,000 and the reduced credit of $6,500 for long-term residents generally expired for homes purchased after Apr. 30, 2010. However, if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit could be claimed if the purchase closed before July 1, 2010.

The Act amends Code Sec. 36(h)(2) to provide that if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit may be claimed if the purchase is closed before Oct. 1, 2010. Thus, this extension allows homebuyers who signed a contract no later than the April 30th deadline to complete their closing by the end of September.

The three-month extension of the closing date provides tax relief for those who couldn't close on time because of backlogs at lenders and federal programs involved in homebuyer loans. In the words of the Act’s supporters, the three-month extension “will give time for all the new mortgages to be processed and not punish those homeowners who have been delayed through no fault of their own.”

The cost of the three-month closing reprieve is fully offset with revenue raisers, including these tax changes: expanding the bad check penalty under Code Sec. 6657 to cover electronic payments, effective for instruments tendered after the enactment date; and providing for disclosure of prisoner return information under Code Sec. 6103(k)(10) to state prisons, effective for disclosures after the enactment date.

© 2010 Thomson Reuters/RIA. All rights reserved.

JUNE 2010 TAX BRIEFING

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.

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.

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.

Business Changes in HIRE Act

This is an overview of two key tax changes affecting business in the recently enacted “Hiring Incentives to Restore Employment Act of 2010” (the HIRE Act, P.L. 111-147 ). The centerpiece of this Act is a payroll tax holiday and up-to-$1,000 tax credit for businesses that hire unemployed workers which gives business a maximum tax benefit of $7,621 in paying an unemployed worker $106,800 per year. The act also creates a similar new set of rules allowing a payroll tax holiday for railroad retirement tax purposes. In addition the HIRE Act includes a one-year extension of the enhanced small business expensing option under Code Sec. 179.

Payroll tax holiday for employers who hire unemployed workers.
The new law exempts private-sector employers from the 6.2% OASDI tax per new hire for the remainder of 2010. A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to the OASDI. The qualifications are:
(1) The new hire must have been unemployed for at least 60 days before employment
(2) Applies to workers hired after February 3, 2010 [Date of introduction of the legislation]
(3) A worker who replaces another employee who performed the same job for the employer isn't eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
(4) Applies to wages paid from March 19, 2010 to on December 31, 2010
(5) Applies only to private-sector employment, including nonprofit organizations—public sector jobs are generally not eligible for either benefit. However, employment by a public higher education institution qualifies.
(6) Hiring family members do not quality.
(7) An employer cannot claim both the HIRE act provisions and the Work Opportunity Tax Credit or another type of employment tax credit. The employer must select one benefit or the other for 2010. There is no double dipping.
(8) There is no minimum weekly number of hours that the new employee must work for the employer to be eligible.

Credit for employers who retain new workers
An employer is eligible for an additional non-refundable tax credit of the lesser of $1,000 or 6.2% of the wages paid after a 52-week threshold is reached. This is taken on the employer’s 2011 tax return. In order to be eligible:
(1) All of the qualifications listed above must be meet, AND
(2) The employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Changes to tax forms
Per Thomson Reuters/RIA, the IRS explained changes to tax forms in an April 1 payroll industry teleconference call as follows:
(1) Form 941. IRS will be revising the second quarter Form 941, Employer's Quarterly Federal Tax Return, due on Aug. 2, 2010. It expects to finalize the new version on April 6. The electronic specifications for the form will be revised at a later date. A draft version of the form included a new line to report tip adjustments. That line will not be included in the final version of the form. IRS expects to include the tip adjustment line on the 2011 Form 941.
(2) New Form W-11. An employer may not claim the payroll tax exemption unless the new hire certifies by signed affidavit (under penalties of perjury) that he was employed for a total of 40 hours or less during the 60-day period ending on the date the employment begins. IRS has drafted Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, to help employers meet this requirement. It expects to finalize this form the week of Apr. 5. The form does not need to be notarized. IRS expects employees to be able to sign the form electronically at some point.
(3) Form W-2/W-3. There will be a new code on box 12 of the 2010 Form W-2 (Code CC) to indicate that a new hire had wages that qualified for the payroll tax exemption. Form W-3, Transmittal of Wage and Tax Statements, will be revised to include a line for total aggregate exempt wages.

Extension of enhanced small business expensing.
The new law also gives a one-year lease on life to enhanced expensing rules. For tax years beginning in 2010, the maximum amount that a business may expense is $250,000, and the expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets. These dollar limits are the same as those that were in effect for 2008 and 2009. Had the HIRE Recovery Act not been passed and signed into law, these dollar limits would have dropped this year to $134,000 and $530,000 respectively.

If you have any questions on how this applies to your business, please call the office of The John Ellis Company.