Although Obama has suggested lowering the corporate rate, Congressional Republicans will likely insist that any reform of corporate tax rules be combined with reforms for individuals. But as reported by Bloomberg, an election-year political stalemate remains the most likely scenario given Obama’s desire to raise the tax rate paid by the nation’s highest earners.

“I don’t think anything is going to happen this session,” said Neal Weber, a tax partner in the Washington office of Cherry Bekaert & Holland LLP. “People are going to posture during the next 10 months through the election.”

One of the biggest obstacles to a corporate tax overhaul is how to pay for it. Obama might seek to raise revenue for lowering the corporate rate by reviving calls to end tax breaks for oil and gas companies or corporate jets. Republicans have blocked such moves in Congress.

Any effort to revise corporate tax laws stands to divide the business community as well. Retail companies, whose assets are mostly inside the U.S., are more focused on lowering the corporate rate. Multinational companies with headquarters in the U.S. are interested in shifting to a territorial tax system, in which only domestically generated income would be taxed.

Obama’s desire to require a 30-percent effective tax rate for those individuals within annual income above $1 million could be proposed in a number of different ways, including limiting deductions, increasing the investment income tax rate, or revising the alternative minimum tax (AMT):

Taxes on capital gains could rise to as much as 25 percent for high earners next year once a new tax included in the 2010 health-care law and a provision that limits itemized deductions take effect, according to Donald Marron, director of the Tax Policy Center, a nonpartisan research group in Washington…. “There’s no way to get there unless you increase the rate on the lower-tax income,” he said. Another alternative for raising taxes for high earners…would be to prevent the deductibility of charitable giving for this group. While the Obama administration has proposed eliminating deductions for housing, health care, retirement and child care for the highest earners, it has spared charitable giving….

Another path could include revisions to the alternative minimum tax, or AMT, which is designed to prevent people from avoiding taxes legally. The parallel tax system doesn’t eliminate the preference for investment income, which is something Congress could change if lawmakers determined that was necessary, said Neal Weber, a tax partner in the Washington office of Cherry Bekaert & Holland LLP.

“In today’s tax law, capital gains are taxed at 15 percent for both regular tax purposes and for AMT tax purposes,” he said. “Perhaps under a new AMT tax regime, you would not use a 15 percent rate. You would use a different rate.”

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• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving expenses
• 14 cents per mile driven in service to charitable organizations

Rates for business miles driven remain unchanged from the July 1, 2011 adjustment while rates for medical and moving purposes are reduced by 0.5 cents per mile.

Taxpayers may not use standard mileage rates after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), or after claiming a Section 179 deduction for that vehicle. These and other restrictions are outlined in Rev. Proc. 2010-51.

Standard mileage rates for business, medical and moving purposes are based on an annual study of the fixed and variable costs of operating an automobile. Independent contractor Runzheimer International conducted the study.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using these rates. Notice 2012-01 contains the standard rates, guidelines for calculating reductions, and maximum rates under fixed and variable rate plans.

The Act also expands the Work Opportunity Tax Credit (“WOTC”) by creating the Returning Heroes Tax Credit and the Wounded Warriors Tax Credit to encourage employers to hire unemployed and disabled veterans.

Withholding Relief

Originally established by the Tax Increase Prevention and Reconciliation Act of 2005, the effective date of the three percent withholding requirement was postponed twice, most recently scheduled to take effect in 2013. It was intended to help close the “tax gap” created by government contractors and vendors that fail to pay all of the taxes they owe.

However, the provision ignited a firestorm of complaints that tax-compliant companies would be unfairly penalized by cutting their much-needed cash flow. Also, some federal agencies estimated that the cost to implement the requirement would outweigh any potential improvements in tax compliance.

Lawmakers voted with near unilateral support to repeal the provision. This change will benefit government contractors in all sectors, including construction contractors, equipment providers and healthcare institutions.

Employer Tax Credits

The Act expands the WOTC to provide employers with a tax credit equal to 40 percent of a portion of qualified first-year wages paid to new hires from certain veteran groups.

In addition to extending the WOTC for qualified veterans through December 31, 2012, the Act expands the WOTC to allow a credit for hiring unemployed veterans and certain disabled veterans with service-connected disabilities. The Act:

• Doubles the maximum credit, to $9,600, for disabled veterans who have been unemployed for six months or more in the preceding year;
• Adds a credit of up to $5,600 for hiring nondisabled veterans who have been unemployed for six months or more in the preceding year; and
• Adds a credit of up to $2,400 for hiring nondisabled veterans who have been unemployed for four weeks or more, but less than six months, in the preceding year.

In addition to providing tax incentives for hiring veterans, the new law creates or expands several programs that provide training, rehabilitation and other vocational benefits for veterans.

The WOTC is still scheduled to expire on December 31, 2011 for other targeted groups.

Inquire Before You Hire

Please note that employers looking to take advantage of these new credits will need to take several steps before extending a job offer. These steps include checking a prospective employee’s eligibility and completing certain forms. Employers will also need to apply with their state workforce agency for a certification of eligibility within 28 days of the employee’s start date.

If you have any questions about the effect of the repealed withholding or how to claim the Work Opportunity Tax Credit, please contact your local CB&H tax professional. 

In particular, companies operating in a number of industries may benefit from a Repair and Maintenance Study. These will include many in the banking, retail, hospitality, manufacturing, pharmaceutical, warehouse, auto retailers, distribution and utility industries who regularly refurbish or freshen their stores or facilities. These rules will benefit virtually all capital-intensive companies that invest significant dollars on recurring and incidental repairs and maintenance expenses, and capitalized rather than depreciated such costs.

By taking a current deduction of previously capitalized repair and maintenance costs, taxpayers can accelerate deductions that otherwise might not have been available for years. This could lower a company’s tax liability for the current year and possibly generate net operating losses that can be used to obtain a refund of taxes paid in prior years.

How Does It Work?

The purpose of a 263(a) study is to analyze the taxpayer’s business operations, determine appropriate “Units of Property” for purposes of capitalization and depreciation, and identify routine repair and maintenance expenditures that may have been capitalized and depreciated incorrectly instead. A thorough analysis of the taxpayer’s expenses for repairs and maintenance for current and prior years could result in a reduction in the taxpayer’s tax liability, generating tax refunds and thus improve cash flow. Where a taxpayer has been capitalizing the cost of assets that could be expensed as repairs and maintenance costs, a catch-up deduction in the current year can be achieved by filing Form 3115.

What Qualifies as Deductible Repair Costs?

Some examples of repair items we frequently see that may be deductible include the following:

• Remodeling/refurbishing a store concept
• Replacing windows and doors
• Replacing lighting
• Roof repairs
• Wallpapering
• New floor coverings
• Caulking cracks or seams
• Lining basement walls and floors
• Replacing sidewalks and parking lots
• Repairing plaster walls or ceilings

Deductible repairs may also include “incidental repairs” that help to maintain a property’s efficient operating condition but do not necessarily prolong its life, add material value or adapt the property for new or different use. These are not considered as capital expenditures and may also be reclassified to accelerate deductions in the current year.

Final IRS Guidance Expected Soon

Proposed regulations were issued in August of 2006 that define a unit of property as “improved” if the costs paid materially increased the value of the unit of property or restored the unit of property. The 2006 regulations were criticized for not drawing enough of a bright-line test. In March 2008, the Treasury Department and the IRS re-issued Proposed Regulation 1.263(a)-3.

In general, these proposed regulations were intended to reduce controversy and provide clarity on how to determine whether an amount paid must be capitalized under Section 263(a) as an improvement cost. These proposed regulations are expected to be finalized, with revisions, later this month.

Your CB&H tax advisor can help you determine if you would benefit from a Repair and Maintenance Study. Please call us today as it would be our pleasure to help you with this determination.

FOR MORE INFORMATION ABOUT REPAIR AND MAINTENANCE STUDIES, CONTACT:

Ronald G. Wainwright, Jr., CPA | bio
Partner
919.719.4221
rwainwright@cbh.com

Prior to the Jobs Act, a taxpayer could claim a deduction for cell phone expenses only if required substantiation tests were met. These included maintaining books and records of all business use of the cell phone. No deduction was allowed for this listed property unless the taxpayer could substantiate each expenditure or use with adequate records or sufficient evidence.

Fortunately, cell phones no longer fall under the “listed property” category. Pursuant to the Jobs Act, the IRS has issued guidance to clarify the tax treatment of employer-provided cell phones. Notice 2011-72 provides that in the case of an employee’s use of an employer-provided cell phone for reasons related to the employer’s trade or business, the IRS will treat such use as a working condition fringe benefit, the value of which is excludable from the employee’s income.

The cell phone must be issued primarily for non-compensatory business reasons, such as the employer’s need to contact the employee at all times for work-related emergencies, or the employer’s requirement that the employee be available to speak with clients at times when the employee is away from the office or outside the employee’s normal work schedule.

If this standard is met, then any personal use of the employer-provided cell phone will be treated as a de minimis fringe benefit, excludable from the employee’s gross income. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment. Cell phones provided for employee morale, recruiting, or additional compensation are not considered to be provided for qualifying business purposes. Therefore, cell phones provided for such purposes would not be exempt from the burdensome recordkeeping requirements and would not be considered tax-free.

Companies that do not provide their employees cell phones, but instead reimburse for cell phone use, are subject to similar requirements. The IRS recently released a Field Exam Memorandum to its examiners that outlines an administrative approach with respect to arrangements providing cash allowances and reimbursements for work-related use of personally owned cell phones.

In such cases, the employee must maintain the type of cell phone coverage that is reasonably related to the needs of the employer’s business, and the reimbursement must be reasonably calculated so as not to exceed the employee’s actual cell phone expenses. Additionally, the reimbursement must not be a substitute for a portion of the employee’s regular wages.

Under the recently issued guidance, tax-free treatment is available without burdensome recordkeeping requirements for employer-provided cell phones or reimbursement for business use of personally owned cell phones. Keep in mind that this provision only applies to cell phone use and reimbursement that is primarily provided for non-compensatory business reasons.

Whether a worker is performing services as an employee or as an independent contractor depends upon three factors, all related to the degree of control and independence:

1. Behavioral. Does the employer control, or have the right to control, what the worker does and how the worker does his or her job?
2. Financial. Does the employer control the business aspects of the worker’s job? For example, is the worker paid a salary? Does the employer reimburse the worker’s expenses? Does the employer provide the tools or supplies to do the job?
3. Type of relationship. Does the worker receive employee-type benefits? Will the relationship continue after the work is finished? Is the work a key aspect of the employer’s business?

An employer reclassifying workers would pay 10% of the past payroll tax obligations calculated under the reduced rates of IRC Section 3509. Effectively, the employer’s payment would equal just over 1% of the wages paid to the reclassified workers. For example, an employer that paid $500,000 in 2010 to workers, all of whom were compensated at or below the $106,800 Social Security limit, would have a payroll tax liability of $53,400 as determined under the IRS calculation. When reclassifying those workers under VCSP, the employer’s liability is reduced to 10%, or $5,340.

In addition to enjoying significant tax savings, the employer will not be liable for any interest or penalties and will not be subject to an employment tax audit on the classification of workers in prior years.

To participate in VCSP, the employer must have consistently treated the workers as nonemployees and have filed Forms 1099 for the workers in the previous three years. The employer also cannot currently be under audit by the IRS concerning the classification of workers. The employer’s application must be filed at least 60 days from the date the employer wants to begin treating its workers as employees. Employers who want to begin treating a class or classes or workers as employees for the 4th quarter of 2011 should apply as soon as possible.

Your CBH tax adviser can help you determine worker classification and eligibility for the VSCP. Please call us today as it would be our pleasure to help you with this determination.

Even if you have already filed your 2010 tax return, you are allowed to recharacterize (any portion) of a 2010 conversion back from a Roth to a Traditional IRA within six months (October 17, 2011) of the original filing deadline (April 18, 2011).

This is one of the few situations where you are able to use 20/20 hindsight and undo something that didn’t work out as advantageously as originally planned. If the value of a Roth IRA is now significantly below the value on the date it was converted in 2010, undoing the conversion will avoid taxes being paid on the higher value at the time of the original conversion.

The original Roth IRA conversion will be treated as though it had not occurred, and any recharacterized contribution will be treated as having been originally contributed to the Traditional IRA. Also, any loss that occurred in the Roth IRA will be treated as having occurred in the Traditional IRA. This will allow you to take advantage of the lower value (and pay less taxes) by reconverting back to a Roth IRA in 2011, as long as the reconversion is done by the later of the following:

• the beginning of the tax year following the year of the original Roth conversion, or
• the end of the 30-day period beginning on the day the original conversion was recharacterized (i.e., the day the Roth IRA was converted back to a traditional IRA).

Due to Hurricane Irene, the deadline has been extended to September 9, 2011.

Like the 15,000 offshore account owners who came forward under the first program, those seeking leniency won’t get IRS approval if federal investigators have already started probing the applicants’ accounts. Like the earlier program, those approved won’t face criminal prosecution.

2010-2011 proved to be a tumultuous year for taxpayers especially in the area of 1099 reporting requirements. Although the passing of the Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011 nullified some of the thorniest issues, companies, small businesses, and individuals need to understand the new 1099 requirements left over to stay ahead of the penalty curve.

Join us as we discuss:

• Update on all things 1099 for 2011 and beyond
• Impact of the repealed 1099-MISC reporting requirements expansion on Small Businesses and Landlords
• Small Business Paperwork Mandate Elimination Act of 2011
• Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011
• And other up-to-the-minute regulatory updates

This webcast will be presented by The Knowledge Group as part of The Knowledge Congress Live Webcast Series.

Click here for more details or to register.

However, the Act does outline expedited procedures for implementing another $1.5 trillion in deficit reductions, coupled with an additional increase in the debt ceiling of between $1.2 trillion and $1.5 trillion. To accomplish these future reductions, the Act created a bipartisan joint select committee on deficit reduction.

The committee, which will consist of six senators and six representatives with an equal number of Democrats and Republicans from each chamber, must make its recommendations (which require seven or more votes) and submit proposed legislation by December 2, 2011. Congress will then be required to vote on the bill, without the ability to make changes and pursuant to expedited procedures, by December 23, 2011.

Depending on the joint committee’s level of success, these additional savings will be coupled with an additional increase in the debt ceiling ranging from $1.2 trillion to $1.5 trillion (also subject to congressional disapproval by veto-proof resolution), which is expected to last until 2013. If the committee recommends, and Congress approves, between $1.2 trillion and $1.5 trillion in savings, the debt ceiling will increase on a dollar-for-dollar basis. So, for example, $1.3 trillion in savings would increase the debt ceiling by $1.3 trillion.

Failure to achieve at least $1.2 trillion in savings will trigger automatic spending cuts, beginning in 2013, coupled with a $1.2 trillion debt-ceiling increase. “Failure” under the Act translates to one of three things:

• The committee fails to produce a bill,
• Congress doesn’t pass the committee’s bill, or
• the legislation produces less than $1.2 trillion in savings.

If automatic spending cuts are triggered, half will come from defense spending and half from domestic programs. Certain benefits are exempt from cuts, including Social Security and Medicaid. But Medicare spending (on the provider side) is subject to cuts. The amount of automatic cuts is equal to the difference between $1.2 trillion and any savings achieved by the joint committee. The automatic cuts are designed to provide the joint committee and Congress with a powerful incentive to make a deal.

Alternatively, Congress can avoid automatic cuts by passing a balanced budget amendment and submitting it to the states for ratification. But a constitutional amendment requires a two-thirds majority in both the House and the Senate, a threshold that’s not likely to be met.

The Budget Control Act relieves some of the pressure the debt ceiling placed on the U.S. economy. At the same time, it creates a great deal of uncertainty over how lawmakers will satisfy their deficit reduction mandate. Once the joint committee makes its recommendations later this year, we’ll have a better understanding of how the law may affect your financial and tax planning strategies in 2012 and beyond.

While there are uncertainties as to what specific tax laws will be addressed and possibly recommended for change by the committee, it is clear that tax reform will be a part of the long-term deficit solution.

CB&H will continue to monitor the debates in Washington and the joint committee’s proposals and how they will impact you and your business.

• 55.5 cents per mile for business miles driven
• 23.5 cents per mile as part of moving and medical expenses
• 14 cents per mile driven in service of charitable organizations

Both the business and moving rates are up relative to last year from 51 and 19 cents, respectively. Taxpayers can use the actual cost of using the vehicle rather than the standard mileage rate. However, once actual costs are used, use of the standard mileage rate is not permitted. The standard mileage rate is also not applicable to any vehicle for hire or for more than four vehicles used simultaneously.

If you have any questions regarding deductions available to you in connection with operating a vehicle, please contact your local tax professional.

Table of Contents

Incentives for Individuals

Federal Estate & Gift Taxes

Incentives for Businesses

Payroll Tax Relief and Additional Economic Incentives Included in New Legislation

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, or H.R. 4853 (hereafter, “the Act”). The bipartisan legislation extends for two additional years many of the so-called “Bush-era tax cuts” originally enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

Key provisions of the new law extend the individual and capital gains/dividend tax cuts for all taxpayers through 2012, enact a payroll tax cut for 2011, provide a two-year AMT patch, establish a top estate tax rate of 35 percent with an exclusion of $5 million, create 100-percent bonus depreciation through 2011 and 50-percent bonus depreciation through 2012, and expand Code Sec. 179 expensing and investment limits for 2012.

INCENTIVES FOR INDIVIDUALS

Individual Income Tax Rates

The Act extends all individual income tax rates at their 2010 levels for two additional years through December 31, 2012. Under EGTRRA, the rates were originally scheduled to revert to pre-2001 levels beginning January 1, 2011. The 35-percent tax bracket will continue to be the top rate. Extending these rates further will likely be a contentious issue in the 2012 presidential election campaign.

Capital Gains/Dividends Tax Rates

The Act extends the current maximum tax rate for qualified long-term capital gains and dividends (i.e., 15 percent for most taxpayers, and zero percent for taxpayers in the 10-15 percent tax brackets) through December 31, 2012.

Qualifying dividends are those dividends received from a qualified domestic or foreign corporation, on which the underlying stock is held for at least 61 days within a specified 121-day period. The Act also extends the qualified dividend treatment for dividends passed through from a regulated investment company (RIC), real estate investment trust (REIT), or other qualified pass-through entities.

Payroll Tax Cut

The Act reduces the employee-share of Social Security Old-Age, Survivors, and Disability Insurance (OASDI) taxes from 6.2 percent to 4.2 percent for wages earned in 2011 up to the taxable wage base of $106,800. The employer’s share remains at 6.2 percent. Likewise, the share for self-employed individuals is reduced 2 percent down to 10.4 percent of income up to the threshold.

Alternative Minimum Tax (AMT) Patch

The Act includes an AMT patch, increasing the exemption amounts for 2010 to $47,450 for individuals, $72,450 for joint filers, and $36,225 for married taxpayers filing separately. For 2011, the exemption amounts increase to $48,450, $74,450, and $37,225 respectively.

Relief from the Marriage Penalty

The Act increases the basic standard deduction for a married couple filing jointly to twice that of a single individual through December 31, 2012, effectively extending relief from the marriage penalty as originally provided under EGTRRA. The Act also continues the expanded size of the 15-percent bracket for married couples filing jointly to twice the size of the bracket for single filers.

Child Tax Credit Extension

The Act extends the $1,000 child tax credit for two years through December 31, 2012, including enhancements made to the credit by EGTRRA and subsequent legislation. The credit continues to phase out for taxpayers with adjusted gross incomes of $110,000 for joint filers, $75,000 for other filers.

Tax Incentives for Education

The Act extends the following tax credits and deductions related to education expenses for two years through December 31, 2012, subject to the same income limitations and phase-out guidelines as before:

• The American Opportunity Tax Credit (AOTC)
• The exclusion of employer-provided education assistance (up to $5,250) from income and employment taxes
• The 60-month rule for the $2,500 above-the-line deduction for student loan interest deduction
• The $2,000 maximum contribution amount for Coverdell Education Savings and the eligibility of primary and secondary school expenses as qualified expenses

Residential Energy Property Credit

The Act extends the residential energy property credit, with some limitations, for one year through December 31, 2011. The credit is equal to 30 percent of the sum of expenditures for qualified energy-efficient improvements and property, limited to $500. Qualified property includes exterior windows and doors, water heaters, insulation, furnaces, and other qualifying purchases.

Other Tax Extenders for Individuals

The Act extends the following provisions, most for two years through December 31, 2012:

• EGTRRA’s repeal of the personal exemption phase-out
• EGTRRA’s repeal of the Pease limitation on overall itemized deductions
• EGTRRA’s increased adoption credit dollar limitation and income exclusion for employer-paid or reimbursed adoption expenses of $10,000
• Enhancements made to the Earned Income Tax Credit (EITC) under EGTRRA and subsequent legislation
• Enhancements made to the dependent care credit under EGTRRA
• Mortgage insurance premium deduction (extended for one year)

The Act also extends the following incentives, which had expired at the end of 2009, for two years through December 31, 2011:

• State and local sales tax deduction
• Higher education tuition deduction
• Classroom expense deduction for teachers
• Exclusion from income for charitable contribution of IRA proceeds
• Deduction for charitable conservation contributions of appreciated property
• District of Columbia first-time homebuyer credit

FEDERAL ESTATE & GIFT TAXES

The federal estate tax was scheduled to revert to its pre-EGTRRA levels (i.e., a maximum tax rate of 55 percent and a $1 million exclusion) beginning January 1, 2011. The Act reinstates the estate tax for decedents that die after December 31, 2009 but before January 1, 2013 at a maximum rate of 35 percent with a $5 million exclusion. The exclusion amount is adjusted for inflation for decedents that die in 2012. The Act also replaces the modified carryover basis rules with the stepped-up basis rules that were applicable until 2010.

The Act grants estates of decedents that die after December 31, 2009 but before January 1, 2011 the option to elect whether or not to apply either the reinstated estate tax (i.e., the 35-percent maximum rate and $5 million exclusion) with stepped-up basis, or no estate tax with the modified carryover basis rules allowable for 2010 under EGTRRA. The Act further grants the estates of decedents that die after December 31, 2009 and before December 17, 2010 additional time to file any return or make any payment.

The Act also provides for some portability of the maximum exclusion between spouses after December 31, 2010. This provision allows a surviving spouse to increase his or her maximum exclusion amount by claiming the unused portion of his or her deceased spouse’s estate tax exclusion.

This opportunity, which effectively enables married couples to protect up to $10 million, is only available when the proper election is made on a timely filed estate tax return. Should a surviving spouse be predeceased by more than one spouse, the exclusion amount would be limited to the lesser of $5 million or the unused exclusion of the most recently deceased spouse.

Additional Extended Provisions

The Act extends the following provisions, most for two years:

• EGTRRA’s state death tax deduction
• EGTRRA’s provisions regarding conservation easements
• EGTRRA’s provisions regarding small and family-owned businesses
• the availability of estate tax installment payments for closely held businesses

Gift Tax Rate

For gifts made in 2010, the Act provides a gift tax rate schedule that has a maximum tax rate of 35 percent with a $1 million exclusion. For gifts made after December 31, 2010, the Act recouples gift and estate taxes to apply a maximum rate of 35 percent with a $5 million exclusion.

Generation-Skipping Transfer (GST) Tax

The Act extends some technical provisions enacted under EGTRRA that effect the GST tax, and provides an exemption of $5 million (equal to the estate tax exclusion) with a GST tax rate of zero percent for transfers made in 2010. For transfers made after 2010, the GST tax rate would equal the highest estate and gift tax rate in effect for the year in which the transfer occurs. For example, in 2011 and 2012, this rate would be 35 percent.

INCENTIVES FOR BUSINESSES

Bonus Depreciation

The Act increases 50-percent bonus depreciation to 100-percent for qualified investments in new, original-use property made after September 8, 2010 through December 31, 2011. The Act also allows 50-percent bonus depreciation for qualified property placed in service after December 31, 2011 and before January 1, 2013. Transportation property and certain longer production period property is eligible for 100-percent expensing if placed in service before January 1, 2013. This provision is available for all businesses and is not subject to a dollar-level cap.

Expanded Code Sec. 179 Expensing

Under the Small Business Jobs Act of 2010 (SBJA), Code Sec. 179 expensing was expanded to give businesses the option of writing off the cost of qualifying capital expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. SBJA increased the maximum deduction from $250,000 to $500,000 and the investment limit from $800,000 to $2 million for tax years beginning in 2010 and 2011.

In 2012, the expensing and investment limits were scheduled to revert to their pre-2008 Stimulus Act levels of $25,000 and $200,000, respectively, not indexed for inflation. Under the new law, the maximum deduction will increase from $25,000 to $125,000 for 2012, and the investment limit from $200,000 to $500,000. The new law also treats off-the-shelf computer software placed in service prior to 2013 as qualifying property.

15-Year Recovery Period for Qualified Leasehold Improvements

The Act extends the accelerated depreciation allowance for qualified leasehold improvements, restaurant buildings, and retail improvements over a 15-year recovery period instead of a 39-year recovery period. Originally enacted under the Emergency Economic Stabilization Act of 2008 (EESA), this provision applied to leasehold improvement property placed in service by December 31, 2009. Qualified leasehold improvement property is any improvement to an interior portion of nonresidential real property (i.e., commercial property) provided that the following requirements are met:

• The improvement is made under, or pursuant to, a lease by the lessee, lessor or any sublessee to an interior portion of a building
• The improvement is made to a structural component of a building and is not classified as personal property (i.e., equipment or furniture)
• The lease cannot be between related parties
• The interior portion of a building has to be occupied exclusively by the lessee in that portion of the building
• The building has to be more than three years old

Qualified restaurant property is any real property which is an improvement to a building that is more than three years old and devotes more than 50 percent of the building’s square footage to the consumption of prepared meals. Qualified retail improvement property is an interior improvement to a building used for retail business if the building is at least three years old when the improvement is made.

Research Tax Credit

The Act renews the Code Sec. 41 research tax credit that expired at the end of 2009 for two years through December 31, 2011. The Act also extends the provision, originally enacted under the American Reinvestment and Recovery Act of 2009 (ARRA), that allows corporations to monetize unexpired AMT and research and development (R&D) credits by electing out of bonus depreciation. Companies that have been operating at a loss or are subject to AMT are most likely to benefit.

Work Opportunity Tax Credit

The Act extends the Work Opportunity Tax Credit (WOTC) for new employees who start work after August 31, 2011 and before January 1, 2012. The WOTC is equal to 40 percent of up to $6,000 of the qualifying employee’s first-year wages, subject to certain restrictions. However, the two additional target groups added to the WOTC under ARRA (i.e., unemployed veterans and disconnected youth) are not included in the credit after 2010.

New Markets Tax Credit

The Act extends through December 31, 2011 the tax credit designed to benefit individuals and businesses that make qualified private investments in community development entities. The Act sets the maximum annual amount of qualified equity investments at $3.5 billion each year.

Energy Tax Incentives for Businesses

The Act extends several energy tax incentives for businesses, including the Energy-Efficient New Home Credit for qualified builders and manufacturers of homes purchased before January 1, 2012, and the Energy-Efficient Appliance Credit (extended for one year with modifications).

Other Tax Extenders for Businesses

The Act also extends the following business tax credits and incentives, most for two years (the 2010 and 2011 calendar years in most cases, tax years that begin after December 31, 2009 and before January 1, 2012 in others) unless noted otherwise:

• Seven-year motor sports entertainment costs recovery
• Mine rescue training credit
• Election to expense advance mine safety equipment
• Tax credit for employers that provide child-care facilities to their employees
• Railroad track maintenance credit
• Differential wage credit
• Payments to controlling exempt organizations
• Active financing exception/look-through treatment for CFCs
• Five-year write-off of farm machinery/equipment
• Tax incentives for empowerment zones
• Tax incentives for investment in the District of Columbia
• Code Sec. 199 deduction for Puerto Rico
• SBJA’s gain exclusion on the sale of certain small business stock held for more than five years (extended for one year, through 2011)
• ARRA’s parity among employer-provided transit benefits (extended for one year, through 2011)

Gulf Opportunity Zone Incentives

The Act extends some targeted tax incentives designed to promote relief in the Gulf Opportunity Zone (GO Zone):

• Rehabilitation credit for historic GO Zone structures (two years)
• Placed-in service deadline for GO Zone low-income-housing tax credits (one year)
• Tax-exempt bond financing for GO Zone (one year)
• Bonus depreciation for qualifying GO Zone property (one year)

The Act also extends for two years the tax-exempt bond financing for the New York City Liberty Zone.

Bonds

The Act temporarily extends several bond programs, including tax-exempt private activity bonds for qualified education facilities and qualified zone academy bonds. However, the Act does not extend Build America Bonds, which must be issued by state and local governments before January 1, 2011, per ARRA.

Charitable Incentives for Businesses

The Act extends through December 31, 2011 deductions for charitable contributions of food inventory, of books to public schools by C corporations, and of computer equipment for educational purposes, as well as the adjustment to an S corporation’s stock basis for charitable contributions of property.

CONCLUSION

This short summary is by no means a comprehensive review of the new law. The IRS is expected to release key guidance regarding certain provisions of the Act in the coming weeks. Please do not hesitate to contact your CB&H tax professionals today to learn more about the new law’s tax implications for your unique personal and business situation.

Bonus Depreciation
Retroactive to January 1, 2010, the Act extended the 50-percent first-year bonus depreciation that previously expired at the end of 2009, giving businesses an important opportunity to reduce their tax burden. The bonus depreciation is available for qualifying property placed in service on or before December 31, 2010, and for certain longer production period property placed in service on or before December 31, 2011. Eligible property includes the following:

• Machinery, equipment, furniture, etc. with a recovery period of less than 20 years;
• Property with a class life of more than 20 years and either –
  • a production period exceeding two years, or
  • a production period exceeding one year and a cost exceeding $1 million;
• Leasehold improvement property; and
• Computer software not amortizable as a Section 197 intangible.

Property financed with tax-exempt bonds is excluded as qualified property. Of note to contractors looking to benefit from this opportunity, the Act separates bonus depreciation from allocation of contract costs under the percentage-of-completion accounting method rules for assets with a depreciable life of seven years or less. Therefore, contractors can now take advantage of bonus depreciation even when the contracted work is not completed within the same year.

The Act also increased the first-year depreciation limitation allowed under Code Sec. 280F for certain passenger vehicles when the taxpayer does not opt out of the additional first-year deduction. The $8,000 increase means that the maximum first-year depreciation for qualifying passenger automobiles in 2010 is $11,060.

Section 179 Expensing
The Act further expanded the availability of Sec. 179 expensing to give many larger businesses the option of writing off the cost of qualifying capital expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Although businesses have until December 31, 2011 to take advantage of Code Sec. 179 expensing, most property needs to be placed in service before December 31, 2010, for calendar year 2010 taxpayers to receive full tax benefits for the current year.

This popular provision allows eligible taxpayers to claim an expense deduction on the purchase price of qualifying Sec. 179 property, such as furniture, fixtures, machinery and equipment. The Act also temporarily expanded the definition of qualifying property to include qualified real property, such as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Up to $250,000 of the total $500,000 Sec. 179 expense can be qualified real property, and is subject to carryover limitations.

The Act increased the maximum deduction from $250,000 to $500,000 and the investment limit from $800,000 to $2 million for tax years beginning in 2010 and 2011. Thereafter, the expensing and investment limits are scheduled to revert to their pre-2008 Stimulus Act levels of $25,000 and $200,000, respectively, not indexed for inflation.

Conducting a cost segregation study on a commercial real estate property may be able to help taxpayers identify additional costs eligible for additional current year tax savings under the new law.

Please consult your local tax professional for more information about these and other tax savings opportunities that may be available to your business through the Small Business Jobs Act.

Click here for more year-end tax planning news from CB&H.

The relief applies to Forms W-2 issued in 2012 for the 2011 tax year. The IRS granted this relief to allow employers additional time to adjust payroll systems and procedures to ensure proper compliance with the new law.

Therefore, beginning with Forms W-2 issued in 2013 for the 2012 tax year, employers will need to report the cost of employer-sponsored health insurance on each employee’s Form W-2. “Employer-sponsored” coverage includes any group health plan available through the employer which is excludible from the employee’s gross income. The designation is not dependent on either the employee or employer paying for the plan.

The cost to be reported is an “aggregate” cost, and the procedures used to calculate this amount are similar to those used for applicable COBRA premiums. The aggregate does not include long-term care, accident, disability or indemnity insurance. The amounts reported on the W-2 are meant only for information and transparency purposes, and are not taxable.

For more information, please contact your local CB&H accounting professional.

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FOR MORE INFORMATION, PLEASE CONTACT:

Gil Weiner | bio
Firm Director, Compensation & Benefits Solutions
877.597.7438 | gweiner@cbh.com

Click here for more year-end tax planning news from CB&H.

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010, or H.R. 5297 (hereafter, “the Act”). Though many of the Act’s provisions focus on small businesses, the new law also contains tax incentives that apply to all businesses as well as new retirement savings incentives for individuals.

It is important to note that some of these provisions offer taxpayers a very small window of opportunity, requiring action before the end of the year to take advantage of the savings.

INCENTIVES FOR ALL BUSINESSES

The Act enhances and extends a number of tax incentives that were originally included in the Economic Stimulus Act of 2008 (“the 2008 Stimulus Act”) and the American Recovery and Reinvestment Act of 2009 (“the 2009 Recovery Act”).

Bonus Depreciation

Retroactive to January 1, 2010, the Act extends the 50-percent first-year bonus depreciation that previously expired at the end of 2009, giving businesses an important opportunity to reduce their tax burden. The bonus depreciation is available for qualifying property placed in service on or before December 31, 2010, and for certain longer production period property placed in service on or before December 31, 2011.

Of note to contractors looking to benefit from this opportunity, the Act separates bonus depreciation from allocation of contract costs under the percentage-of-completion accounting method rules for assets with a depreciable life of seven years or less. Therefore, contractors can now take advantage of bonus depreciation even when the contracted work is not completed within the same year.

The Act also increases the first-year depreciation limitation allowed under Code Sec. 280F for certain passenger vehicles when the taxpayer does not opt out of the additional first-year deduction. The $8,000 increase means that the maximum first-year depreciation for qualifying passenger automobiles in 2010 is $11,060.

Expanded Code Sec. 179 Expensing

The Act further expands the availability of Code Sec. 179 expensing to give many larger businesses the option of writing off the cost of qualifying capital expenses in the year of acquisition in lieu of recovering these costs over time through depreciation.

The Act increases the maximum deduction from $250,000 to $500,000 and the investment limit from $800,000 to $2 million for tax years beginning in 2010 and 2011. Thereafter, the expensing and investment limits are scheduled to revert to their pre-2008 Stimulus Act levels of $25,000 and $200,000, respectively, not indexed for inflation.

This popular provision allows eligible taxpayers to claim an expense deduction on the purchase price of qualifying Code Sec. 179 property, such as furniture, fixtures, machinery and equipment. The Act also temporarily expands the definition of qualifying property to include qualified real property, such as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. Up to $250,000 of the total $500,000 Sec. 179 expense can be qualified real property, and is subject to carryover limitations.

Shorter Holding Period for S Corp Built-In Gains

The new law also further shortens the holding period for S Corp built-in gains from seven years down to five for dispositions in any tax year beginning in 2011, if the fifth year in the recognition period precedes the year beginning in 2011.

This provision is designed to benefit corporations that were initially C Corps, but elected to be taxed as S Corps and had net built-in gains when they made the S Corp election. A built-in gain is the difference between the fair market value of an asset and its tax basis at the time the election is effective. The 2009 Recovery Act temporarily shortened the traditional 10-year holding period to seven years for dispositions in tax years beginning in 2009 and 2010.

Cell Phones Excluded from Code Sec. 280F Requirements

In addition, the Act removes cell phones, along with other similar devices provided to employees for business purposes, from the listed property classification. This action allows the fair market value of the personal use of such devices to be excluded from gross income, and frees such devices from the strict substantiation requirements of use as well as the additional restrictions placed on depreciation deductions.

SMALL BUSINESS INCENTIVES

In addition to provisions designed to improve access to credit, the Act includes some tax incentives targeted to help small businesses.

Extended Small Business Credit Carryback

The Act extends to five years the carryback period for qualifying small business credits determined in the taxpayer’s first tax year beginning after December 31, 2009. Eligible small business credits are the sum of the general business credits (e.g., investment tax credits, R&D credits, work opportunity credits) each tax year for a qualifying small business.

As defined in the Act, a qualifying small business is a corporation without publicly traded stock, a partnership, or a sole proprietorship, and has average annual gross receipts of $50 million or less for the prior three tax year periods. The credit can be used to offset both the taxpayer’s regular and AMT liabilities.

Exclusion of Gain on the Sale of Qualified Small Business Stock

The 2009 Recovery Act increased the exclusion of gain on the sale of certain small business stock held for more than five years from 50 percent to 75 percent for stock issued after February 17, 2009 and before January 1, 2011. The new law raises the gain exclusion to 100 percent, effectively eliminating all capital gains taxes on qualifying small business investments, for stock acquired after September 27, 2010 and before January 1, 2011.

Relief for Penalties Under Code Sec. 6707A

The Act provides a measure of relief to certain taxpayers liable for penalties assessed after December 31, 2006 under Code Sec. 6707A for failing to disclose participation in certain tax shelters. The retroactive date creates a possible refund opportunity for those taxpayers who may have already paid penalties that the IRS has not otherwise held in abeyance.

Under the new law, a taxpayer that fails to disclose participation in a reportable transaction is subject to a penalty equal to 75 percent of the decrease in tax shown on the return as a result of the transaction or which would have resulted if the transaction was respected for federal tax purposes. The penalty cannot exceed:

• $10,000 for an individual taxpayer who fails to disclose a reportable transaction, or $50,000 for all other taxpayers; or
• $100,000 for an individual taxpayer who fails to disclose a listed transaction, or $200,000 for all other taxpayers.

The Act also sets a minimum penalty of $5,000 for an individual taxpayer that fails to disclose a reportable transaction or a listed transaction, or $10,000 for all other taxpayers.

Enhanced Start-Up Expense Deduction

For 2010 only, the Act increases the deduction limit for qualified trade or business start-up expenses from $5,000 to $10,000. The $10,000 deduction is reduced (but not below zero) by the amount of total start-up costs that exceeds $60,000. Qualifying trade or business start-up expenses include costs related to investigating, creating, or acquiring an active trade or business. Qualifying costs are not directly related to capital or equipment.

Self-Employment Deduction for Health Insurance Costs

Starting in 2010, the Act allows self-employed individuals to deduct health insurance costs in calculating net earnings from self-employment for the purposes of determining self-employment taxes.

RETIREMENT SAVINGS INCENTIVES FOR INDIVIDUALS

The Act offers taxpayers some new options for retirement savings, including a first-time opportunity that allows participants in 401(k) and other plans to roll over existing balances to certain Roth accounts.

401(k) Rollovers to Roth Accounts

Effective immediately, the Act allows 401(k), 403(b), and 457(b) plan participants to roll over certain pre-tax account balances into designated Roth accounts within their plans. With an exception for any after-tax contributions, this rollover will be taxable. Unless the taxpayer elects otherwise, any amount rolled over in 2010 will be included ratably in income in 2011 and 2012.

457(b) Plan Deferrals

Starting in 2011, the Act allows participants of eligible state and local government 457(b) plans (but not plans of not-for-profit organizations) to make deferred contributions to designated Roth accounts.

Annuitization

The Act allows an owner of a nonqualified annuity contract to claim some of the contract’s benefits as a separate annuity payment stream without affecting the balance of the contract, which would continue to accumulate earnings on a tax-deferred basis.

The annuitization period must be for 10 years or more, or for the lives of one or more individuals. The provision applies to amounts received in tax years beginning after December 31, 2010.

ADDITIONAL REVENUE OFFSETS AND PENALTY INCREASES

In addition to the new retirement savings incentives, which will produce some tax revenue, the Act includes some notable new requirements and penalty increases.

Rental Property Expense Reporting

Under the Act, certain individuals who receive rental income from real property will need to start filing information returns with the IRS to report certain payments to service providers. This new information reporting requirement is effective for payments made after December 31, 2010, and is triggered if the individual receiving rental income pays a service provider $600 or more in any tax year. Certain exceptions and exemptions apply.

Increased Penalties for Failure to File Information Returns

The Act significantly increases the penalties assessed on taxpayers who fail to file information returns with the IRS in a timely manner. The Act also increases the penalties for failing to file information returns to payees. The minimum penalty for each intentional instance increases from $100 to $250 effective for returns required to be filed on or after January 1, 2011.

For qualified small filers with average gross receipts less than $5 million, the calendar-year maximum increases as follows:

• from $25,000 to $75,000 for the first-tier penalty
• from $50,000 to $200,000 for the second-tier penalty
• from $100,000 to $500,000 for the third-tier penalty

Levies for Cases Involving Federal Contractors

Effective immediately, the Act allows the IRS to issue levies before a collection due process (CDP) hearing in cases that involve particular federal contractors.

More Changes to the Cellulosic Biofuel Producer Credit

Retroactive to January 1, 2010, crude tall oil has been added to the list of corrosive fuels that no longer qualify for the cellulosic biofuel producer credit. Intended to reward taxpayers for the use of alternative fuels, Congress continues to target abuse of this particular credit category, and excluded the so-called “black liquor” by-product from qualifying for the credit earlier this year as part of the Health Care Reform legislation.

CONCLUSION

This short summary is by no means a comprehensive review of the new law. Look for more details in the months ahead about how these and other provisions of the Act may provide you and your business with considerable opportunities to maximize tax savings, or contact your local CB&H tax professional today to ensure that you and your business receive the maximum possible benefit of these provisions.

Join us as we clarify how this recent legislation will affect your organization

Earlier this year, President Obama signed into law significant pieces of legislation – the Hiring Incentives to Restore Employment (HIRE Act) and the Health Care Reform legislation (consisting of both the The Patient Protection and Affordable Care Act and the Health Care and Education and Reconciliation Act) – that will impact not-for-profit organizations from a tax perspective. Join us for this webinar as we discuss the following:

• What temporary tax credits does the HIRE Act offer to encourage job growth?
• How does a nonprofit employer qualify for or claim these credits?
• Which employers are eligible for the small employer health insurance tax credit, and how does a nonprofit claim the credit?
• What does the legislation mean for tax-exempt hospitals?
• What are the new Form 1099 reporting requirements imposed by the law?

Presenter

Janice Ratica, Director of Nonprofit Tax Services, Cherry, Bekaert & Holland
Janice is the Firm Director of Nonprofit Tax Services for Cherry, Bekaert & Holland. She has 15 years of experience regarding tax matters unique to tax-exempt organizations. Janice is both an attorney and certified public accountant. Her experience includes obtaining and retaining tax-exempt status or public charity status, minimizing unrelated business taxable income, structuring joint ventures with for-profit organizations, and preventing excess benefit transactions. In addition, Janice has successfully assisted organizations during IRS examinations and in determining employee/independent contractor status.

Click Here to view the recorded webinar.

Under this new provision, the maximum amount that a taxpayer may expense under Sec. 179, for tax years beginning after 2009 and before 2011, is $250,000 of the cost of qualifying property placed in service for the tax year. The $250,000 is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds $800,000.

As a refresher on the Sec. 179 expensing election, business taxpayers that satisfy limitations on annual investment may elect to expense the cost of qualifying property rather than to recover the cost of their investment through depreciation deductions over the property’s useful life as determined under the tax law.

Qualifying property is depreciable tangible personal property (new or used) purchased for use in the active conduct of a trade or business. Off-the-shelf computer software placed in service in tax years beginning before 2011 is considered qualifying property. The Sec. 179 deduction may not exceed the taxable income derived by the taxpayer from the active conduct of any trade or business. Any deduction disallowed under this limitation may be carried forward to succeeding tax years, with similar limitations, but may not be carried back.

For pass-through entities, the Sec. 179 limitations are applied at both the entity level and the individual level. Individuals who own multiple interests in S corporations, LLCs, and partnerships should exercise caution not to permanently lose any Sec. 179 benefits.

The increase in the Code Sec. 179 expense deduction and phase-out limitation enacted by the HIRE Act and previous legislation is intended to provide temporary incentives for business investment, and will expire at the end of 2010. Unless there is future legislative action to increase the amounts taxpayers are permitted to deduct for tax years beginning in 2011 and thereafter, Sec. 179 deductions are limited to $25,000 of the cost of qualifying property placed in service in the tax year, reduced (but not below zero), by the amount by which the cost of all qualifying property placed in service during the tax year exceeds $200,000. These amounts are not indexed for inflation.

PLANNING NOTES

• Although the HIRE Act extends the increased Sec. 179 limitations through 2010, it does NOT extend the 50 percent bonus depreciation allowance under Code Sec. 168(k).
• Cost segregation studies may be of especial benefit with the increased Sec. 179 limitations.
• States may or may not adopt the increased Sec. 179 limitations.
• In general, trusts are not eligible for Sec. 179 allocations.

If you have any questions about the retention credit, please contact your CB&H advisor.

HIRE NOW TAX CUT

The “Hire Now Tax Cut” provides $13 billion in tax breaks to qualified employers both in the form of payroll forgiveness for Social Security taxes paid for qualified new hires, as well as a tax credit for keeping those employees on payroll for 52 consecutive weeks.

Social Security Tax Forgiveness
Qualified Employer – The HIRE Act defines a qualified employer as any non-governmental entity hiring in the U.S. Any federal, state or local government or instrumentality, except for state colleges and universities, do not qualify for the Act’s tax forgiveness provisions. Any employer may choose to opt out of the forgiveness program.

Qualified Employee – The HIRE Act defines any previously unemployed individual, hired between February 3, 2010 and January 1, 2011, as a qualified employee. That individual must be able to show no more than 40 hours employment in the 60 days prior to hiring. That new hire cannot replace an employee unless that employee’s departure was either voluntarily or for cause. Relatives of the employer, or shareholders owning more than 50 percent of the business, are not eligible.

The HIRE Act also includes a 6.2-percent Old Age, Survivors and Disability Insurance (OASDI) forgiveness, which applies to wages paid after February 3, 2010. This adjustment will not show in reporting until the second quarter of 2010 to give payroll departments and the Social Security Administration time to implement the program. Any amount applicable from February 3rd to the second calendar quarter of 2010 will be credited against that employer’s second quarter statements.

This provision does not include any part-time or full-time hour requirements for the 6.2-percent employer contribution. The existing problem in misreporting “employees” versus “contractors” becomes further complicated under this definition as tax payments are only made for “employees.” Forgiveness will apply to workers returning to the same place of business, if a factory reinstates a previously cut shift for example, provided they meet the 60-day/no-more-than-40-hours unemployment requirement.

The IRS recently released the forms necessary for employers to claim the special payroll tax exemption provided by the Act. The forms released include a new Form W-11, HIRE Act Employee Affidavit, and a revised Form 941, Employer’s Quarterly Federal Tax Return. The Form 941 is currently in draft form with the final form and instructions expected next month. Click here for more information about Form W-11 and Form 941.

Retained Worker Tax Credit
Employers will be eligible for an additional tax credit for each qualified retained worker kept on the payroll for 52 consecutive weeks. That credit will come as an increase to the Code Sec. 38(b) credit by the lesser of $1,000 or 6.2 percent of wages paid during the 52-week period.

Qualified Retained Worker – A new worker, as defined by the Social Security Tax Forgiveness program, kept on the payroll for 52 consecutive weeks might qualify as a retained worker. To ensure just pay, that worker must earn an amount equal to at least 80 percent of his/her first 26-week accumulated wage in his/her second 26 weeks.

Employers are able to claim the retained worker credit only if the full 52-week period is met. Should a worker spend 51 consecutive weeks in employment and then leave, the employer would not be eligible for any portion of the tax credit.

ADDITIONAL PROVISIONS

Code Sec. 179 Expensing
The HIRE Act extends enhanced Code Sec. 179 expensing threshold levels through December 31, 2010. This extension means that the previous limits of $125,000 with a $500,000 cap will remain increased to $250,000 with an $800,000 cap through the end of the calendar year. Code Sec. 179 expensing, unlike bonus depreciation, is available on both new and used property.

Build America Bonds
The HIRE Act alters Build America Bonds, originally part of the American Recovery and Reinvestment Act of 2009 (ARRA), slightly to increase consumer interest. Subsidies will now be available through both a refundable tax credit and a direct payment equal to the amount of that credit.

OFFSET PROVISIONS

The HIRE Act also contains provisions designed to offset the full cost of the tax incentives. These provisions include a delayed implementation of the worldwide allocation of interest rules as well as several measures to increase offshore tax compliance.

Tax Compliance for Foreign Accounts
The HIRE Act contains increased compliance requirements for individuals holding foreign accounts. Foreign holding agents will now have to report the name, address and taxpayer ID number of all account holders or withhold 30 percent from certain payments.

Disclosure requirements will also intensify for individual accountholders, who will need to specify the type, issuer, and maximum value for various holdings throughout the year. The Act also increases penalties for both the failure to disclose and the failure to pay in full.

Click here to read a supplemental bulletin from CB&H’s International Tax Group that outlines more information on these and other changes related to international tax concerns.

Worldwide Interest Allocation
The HIRE Act further delays the one-time election to determine the foreign source of taxable income of an affiliated group, known as the Worldwide Interest Allocation. The Act delays the tax break until tax years beginning after December 31, 2020.

CONCLUSION

This short summary is by no means a comprehensive review of the new law. Look for more details in the months ahead about how these and other provisions of the HIRE Act may provide you and your business with considerable opportunities to maximize tax savings, or contact your local CB&H tax professional today to ensure that you and your business receive the maximum possible benefit of these provisions.

(download a pdf of this bulletin)

Retirement Planning

Look to maximize tax-deductible retirement plan contributions. The following table provides the maximum amounts that can be deferred under several popular retirement plan options during 2009.

Fund non-deductible IRA contributions in the amount of $5,000 ($6,000 if over age 50). Establish these as tax-free Roth IRA accounts for qualifying individuals (Qualifying individuals are single taxpayers with AGI less than $105,000 or couples, who file jointly and have AGI less than $166,000). If you exceed this income level, establish these as traditional non-deductible IRA accounts since a new provision in the law will allow you to convert these IRAs to tax-free Roth IRAs in 2010. Contributions to IRAs and Roth IRAs do not have to occur until April 15, 2010.

If you or your spouse operates a separate full or part-time business, consider establishing a separate retirement plan for that business and maximize tax-deductible contributions into it. Contact us to determine if the controlled group rules apply and how we can assist with plan design to ensure maximum benefit and minimal costs.

Alternative Minimum Tax

Don’t forget to consider the burdensome Alternative Minimum Tax. A planning technique that may save you a significant amount under the “regular tax” may be worthless if you fall unexpectedly into the AMT. On February 17, 2009, the American Recovery and Reinvestment Act became law. The bill included a one-year AMT patch which increased the exemption level to an amount slightly above that of 2008. This should alleviate some of the risk of paying the AMT in 2009, but you should still consider the calculation during planning.

Planning for AMT typically focuses on carefully examining normal income tax deductions that become “tax preference items” and no longer deductible under the AMT. These include the following:

• Personal exemptions
• Deductions for state and local income and property tax
• Home equity loans and other mortgage interest not incurred in buying, building or improving your personal residence
• Incentive stock options (which may generate AMT income even when sold at a loss)
• Deductions for unreimbursed business expenses
• Other itemized deductions subject to the two percent of AGI limitation

Homebuyer Tax Credits

As part of the American Recovery and Reinvestment Act of 2009, the First-Time Homebuyer Tax Credit was increased to a maximum of the lesser of 10% of the purchase price of the home or $8,000. Last month, President Obama signed into law the Worker, Homeownership, and Business Assistance Act of 2009 (H.R. 3548) which extended and expanded the credit. Scheduled to expire after November 30, 2009, the new law extended the credit to apply for home sales to a first-time homebuyer that close on or before April 30, 2010.

The new law also expanded the credit to qualifying non-first-time homebuyers for home purchases after November 6, 2009. Taxpayers who qualify as “long-time residents of the same principal residence” may now qualify for a modified credit of $6,500. This expansion applies to homebuyers who have owned and used the same residence as their principal residence for five consecutive years during the eight-year period that ends on the purchase date of a new residence.

Income thresholds do apply to these tax credits, and the purchase price of the new residence cannot exceed $800,000. If you have recently purchased a new home or are planning to buy a home in the next several months, it is recommended that you speak with your tax advisor.

Energy-Efficient Vehicles

Consider purchasing a hybrid vehicle for business or personal use. The IRS is constantly updating the list of qualifying vehicles and the amount of the tax credit available to the purchaser of such vehicles. The tax credits range from $1,500 to $3,000. However, this credit is unavailable to taxpayers subject to the Alternative Minimum Tax. In 2009, there is no credit available for purchases of Toyota, Lexus and Honda hybrid vehicles.

If you are considering purchasing a new Audi, BMW, Mercedes, or Volkswagen, there is a $900 to $1,800 federal income tax credit for the purchase of any new qualified lean-burn diesel vehicle. These credits will offset your 2009 federal income tax liability even if you are subject to Alternative Minimum Tax.

If you are considering the option of purchasing a plug-in electric drive motor vehicle instead of a hybrid for business or personal use, if purchased in 2009 you will benefit from a $2,500 credit for the purchase of these vehicles purchased after the first of the year.

New Vehicle Tax Credit

One important note to remember for 2009, all state and local sales tax and excise taxes paid on any new vehicle purchased between February 17, 2009 and December 31, 2009 can be deducted from you federal income tax. The write-off is limited to the amount of taxes on the first $49,500 of the purchase price of the vehicle. However, limitations on income can reduce or completely eliminate this deduction for individuals.

Mortgage Considerations

Convert nondeductible interest on personal loans into fully deductible status through paying off the debt using a home equity line of credit or consolidating loans as part of a home mortgage refinancing. Please remember that interest on home equity lines can only be deducted on the first $100,000 of indebtedness and AMT limits the amounts deducted when funds are used for non-residential purposes.

Accelerate personal tax deductions by prepaying your January home mortgage payment before year-end. You will want to make sure that you make the payment early enough so to allow the mortgage company to process your payment before December 31, 2009.

Charitable Contributions

Watch out for new charitable contribution rules for 2009. You can no longer deduct any cash contribution unless you retain either a bank record that supports the donation (such as a canceled check or credit card receipt) or a written statement from the charity that meets tax-law requirements. For cash donations of $250 or more, a bank record is not enough. You must obtain a charity-provided statement that meets tax-law standards.

In lieu of cash donations, increase charitable contributions deductions by making gifts of property, such as stocks, bonds, artwork or real estate that have appreciated in value. The full fair-market value of the property is tax-deductible (subject to adjusted gross income limitations) as a charitable contribution if held for at least 12 months, and the gain is not subject to regular or alternative minimum tax.

Consider making non-cash contributions of clothes, household appliances and furniture to your choice of charitable organizations. The new rules concerning charitable contributions require that the contributed property be in good used condition or better to be deductible. Remember to keep accurate records (lists and photos) of the items gifted and request a receipt from the charitable organization. Also, it is advisable to use online tools such as www.itsdeductible.com to provide you with a fair value of the items gifted.

Flexible Spending Accounts

If your company offers a Flexible Spending Account (FSA) program, you must specify before year-end how much of your 2010 salary you wish to convert into tax-free contributions to the plan. You can then take tax-free withdrawals next year to reimburse yourself for out of pocket medical and dental expenses and qualifying child care costs. However, FSAs are “use-it-or-lose-it” accounts. Therefore, you don’t want to set aside more than what you’ll likely have in qualifying expenses for the year.

Since participants in an FSA are allowed to set aside money on a pre-income tax and pre-FICA tax basis, the participant is able to get a better income tax deduction than claiming an itemized deduction for medical expenses. However, participants are typically limited to the amount that they can contribute to Health FSAs.

If you currently have an FSA for tax year 2009, make sure that you deplete the account by incurring eligible expenses before the deadline for this year. Otherwise, as mentioned earlier, you’ll lose the remaining balance. It’s not hard to drum some things up: over-the-counter drugs, new glasses or contacts, dental work that you’ve been putting off, or prescriptions that can be filled early.

Energy Efficiency Incentives

Initiatives to spur energy saving and alternative fuel use have been instituted in recent laws passed during 2008 were planned to expire in 2009. However, there have been recent changes made in 2009 for deductible improvements to your residence. Credit limits have been increased to 30% from 10% and a combined limited (2009-2010) of $1,500 from a lifetime limit of $500. Also, the credit has been extended through 2010. If you are considering going green and making energy saving renovations to your primary residence, let’s discuss your different options for 2009.

Investment Strategies

Now is a good time to review your investment portfolio to see if there are any losers you should sell. Since 2009 has had many indexes lose a significant amount of their value, you may have investments that are worth less than what you paid for them. This is an opportunity to offset capital gains recognized during the year or to take advantage of the $3,000 limit on deductible net capital losses.

Owners of partnership interests or S Corps should monitor the amount of basis that they have in the entity. If losses exceed the owner’s basis, the loss is generally suspended until the owner has more basis. Also, in cases where cash and property distributions exceed basis, the owner may be subject to capital gain. Please call us for ways to avoid potentially adverse tax effects of having little or no basis.

If you have investment and income producing property, you should consider transferring it to a limited liability company (LLC), which can be established for your family’s benefit. You can gift interests in the LLC to your children, who are 18 or older, to shift the tax burden to a lower tax bracket. A valuation of the LLC units needs to be done by an accredited valuation expert so that gift can be properly reported to the Internal Revenue Service. Also, the valuation may be able to provide some estate tax planning benefits as well.

Bonus Depreciation

The Recovery Act has extended the Section 179 allowance at $250,000 on assets purchased in 2009. However, if the deduction is greater than the individual limit, the excess is lost and cannot be recaptured in future periods. An important note to remember is that in 2010 the section 179 allowance will be reduced to $130,000. In addition, the 50-percent bonus depreciation deduction in addition to the regular depreciation for new qualifying new assets has been extended through 2009.

Other Considerations

• If you own a proprietorship, partnership, or closely held corporation, you may consider the employment of your children. Wages paid by the business are deductible to the business and are taxed at the child’s tax rate. In addition, since your children’s wages are considered earned income. The Kiddie Tax does not apply and this also gives you the opportunity to fund an IRA for your children. Furthermore, this can reduce your business’ payroll tax (Children under the age of 21 are exempt from FUTA), while reducing your self-employment tax.
• The Pension Act of 2006 made permanent the current ultra-favorable income tax treatment of §529 Plans used to finance college education costs that were scheduled to sunset in 2010. This eliminates the concern that funds distributed after 2010, when many §529 beneficiaries will be in college, could be taxed. It may be time to reconsider §529 Plans. If you are uncertain of which college savings plan to use and what benefits they provide, please feel free to contact our office.
• In light of the Fisher case (U.S. Ct. Cl. No. 04-1726T) that concluded in August of 2008, you may be entitled to a refund from prior years. If you received stock from a life insurance company as a result of a demutualization of that company and subsequently sold the stock, you may have reported excessive capital gains. The Fisher case determined that the stock received from the insurance company actually did have basis. Therefore a protective claim for refunds should be filed.
• If you fell victim to the recent Madoff fraud scandal, there is some relief for tax purposes. Investors that lose money in a Ponzi scheme are able to deduct the losses not as capital losses subject to the $3,000 loss limitation for the current tax year. These losses are allowed to be deducted in 2009 for all losses up to 95% of the loss, less the reimbursement you expect to receive.
• Consider the following — $1,000,000 invested in a conservative 60/40 portfolio and withdrawing 4.5% will only provide $3,750 per month for 30 years (and that is before taxes). We would be happy to discuss where you are with your financial planner. If you are in need of a financial planner or are concerned about your current retirement savings, CB&H provides financial planning resources through CB&H Wealth Management. Also, the AICPA provides some great resources at www.360financialliteracy.org.
• If you are currently retired and have been taking distributions from an IRA or have recently celebrated your 70^th birthday and anticipate taking distributions from an IRA, the required minimum distribution (RMD) rules have changed. The Worker, Retiree, and Employer Act of 2008 waives the RMDs generally applicable to defined contribution retirement plans, including IRAs. Consequently, participants and beneficiaries will not be required to take RMDs for tax year 2009.
• Review your disability, disability overhead and life insurance coverage. How much you need varies from individual to individual due to differences in life stages, financial obligations, and income levels. Please contact us if you would like for us to help you in the review of your coverage levels.
• Due to stock market declines and a low interest rate environment, many permanent and cash balance life insurance policies are not performing as designed, which may require additional/higher premiums to be paid or a lapse in coverage. Please contact your life insurance representative to determine whether or not your life insurance policy is performing as intended. If you would like for us to review the policy, we have life insurance professionals available through CB&H Wealth Management.
• Consider utilizing your annual gift exclusion amount to move assets to your children and out of your estate. The annual exclusion for 2009 is $13,000 ($26,000 for joint estates). If you consider involving your grandchildren in the potential estate, then the gift tax savings increase even more. Also, the annual gift tax exclusion is expected to remain the same at $13,000 ($26,000 for joint estates) in 2010.
• With the depressed market values of many assets (such as stocks and real estate) and low interest rates, NOW is a good time to consider certain estate and gift planning strategies for individuals seeking to minimize estate and gift taxes or develop a succession plan for the business. Essentially, if you believe that the current market will continue to rebound in the future, transferring assets now will allow for transferring greater value and appreciation out of your estate.
• Have you updated your Last Will and Testament lately? If you do not have a will or have not updated your will recently, your estate and heirs may be exposed to an unexpected tax liability or your estate may be distributed in a manner that is not of your choosing. Contact Mike Kirkman, Firm Director of Estates and Trusts Services, to review your estate, gift and trust planning strategies.

Prepare for Today and Tomorrow

When it comes to taxes, preparation is the key. As the calendar year draws to a close, be sure to consult with your local CB&H tax professional to ensure that you maximize your potential tax savings and develop strategies that will pay off in 2009 as well as in the future.