These Taxing Times

The Internal Revenue Service today issued a news release reminding eligible taxpayers that they must act soon if they want to take advantage of the expanded business loss carryback option included in this year’s American Recovery and Reinvestment Act (the Act). Eligible calendar-year corporations have only until Tuesday, September 15, to choose this special carryback option. Eligible individuals have an additional month until October 15. Deadlines vary for fiscal-year taxpayers, depending upon when their fiscal year ends, and whether they are making the choice for the tax year that ends or begins in 2008. This choice may be made for only one tax year.

This special carryback provision offers small businesses that lost money in 2008 an excellent way to quickly get some much needed cash if they were profitable in previous years. This option is only available for a limited time, so small businesses should consider it carefully and act before it’s too late.

Under the Act, many small businesses that had expenses exceeding their income for 2008 can choose to carry the resulting loss back for up to five years, instead of the usual two. This means that a business that had a net operating loss in 2008 could carry that loss as far back as tax-year 2003, rather than the usual 2006. Not only could this mean a special tax refund, but the refund could be larger, because the loss is being used over as many as five tax years, rather than just two.

A small business that chooses this option can benefit by:

• offsetting the loss against income earned in up to five prior tax years,
• getting a refund of taxes paid up to five years ago, and
• using all or part of the loss now, rather than waiting to claim it on future tax returns.

Eligible taxpayers generally are small businesses that have no more than an average of $15 million in gross receipts over a three-year period. These includes sole proprietors, individual partners in a partnership, and S corporation shareholders. 

Taxpayers must choose this special carryback by either:

• attaching a statement to an income tax return for the tax year that begins or ends in 2008 or,
• claiming a refund on Form 1045 (Application for Tentative Refund) or Form 1139 (Corporation Application for Tentative Refund), or
• claiming a refund on an amended return for the tax year to which the loss is being carried back.

If you need assistance in determining if your business is eligible for this special carryback option, speak to your tax professional or contact me via email or by phone at 214.957.3366. Time is short, however, and you should act quickly.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

Congress returns from its summer vacation tomorrow and has a lot on its plate. Health care reform will take most of Congress’ time.

Wholesale tax reform is off the table until, my guess is, 2012. We can look for tax increases to be included in a health care bill, however. Whose ox gets gored will depend on the scope of the legislation. Upper income taxpayers, for sure; middle income taxpayers remain a target; small businesses very likely.

In all likelihood, the estate tax will be extended in its present form. Congress will simply not allow this tax to disappear in 2010. The question is, for how long will the present provisions ($3.5 million exemption and a 45% maximum rate) be extended? One school of thought is that they will be extended for only one year and allowed to revert to the 2006 levels of $1 million exemption and a 50% maximum rate in 2011. The proposed carryover of  a decedent’s unused exemption to a surviving spouse is likely dead this year. The bigger question is whether valuation discounts will be addressed this year, and if so, the effective date. The use of family limited partnerships for discount purposes remains an effective tax-planning tool for now but it could be significantly impaired before the end of the year.

The alternative minimum tax will be patched again and other tax incentives expiring after 2009 will probably be extended for one year. Some incentives, such as the $250,000 business equipment expensing election and bonus first-year depreciation, may be allowed to fall to lower levels in 2010 as presently scheduled.  With the Bush-era tax cuts being sunset after 2010, Congress may well effect an overall tax increase in 2011 by simply allowing them to expire.

With the housing market showing signs of rebounding, the first-time home buyers credit may not be extended beyond its current expiration date of November 30, 2009. In question, too, is the special deduction for sales taxes paid on new automobiles purchased in 2009. Qualified charitable distributions from IRAs are scheduled to end after 2009.

Bottom line is that federal tax federal legislation passed during the next few months will be interesting, but not revolutionary. The key will be in the health care package. Next year may be more important. I’ll keep you posted.

Ronnie

Copyright 2009, Ronnie C. McClure, PhD, CPA

I haven’t cluttered your inbox with a tax update newsletter lately because, while a lot of tax proposals are floating around Washington, it is all posturing at this point. As things begin to jell somewhat, I’ll resume tracking legislation and report to you what is developing.

The Internal Revenue Service recently released a brief series of tax tips on starting a new business. With the economic and employment outlook still somewhat fluid, I have had several requests recently for help in setting up new ventures. I have put a little flesh on the bones of the Service’s tips and share them with you below:

• Ensure that the activity is truly a business rather than a hobby. For example, do the time, effort, and money you invest in the activity evidence a profit objective. Will you depend on profit from the activity as a reliable source of income? The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year (at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses). Early operating losses do not necessarily flag a venture as a hobby, but a continuing pattern of expenses in excess of income may indicate a more personal activity (unless, of course, you are in the automobile business).
• Choose the correct type of business organization for your venture. This typically requires both legal and tax advice. If losses or torts from the activity may subject your personal, non-business, assets to risk of loss, you will probably want a “limited liability” organization. This may be a corporation or a “limited liability company” (LLC). The form of business organization is a state law issue; with the exception of a regular “C” corporation, the choice of entity does not necessarily determine how the venture is taxed. A wholly owned LLC (or one owned only by husband and wife) offers limited personal liability, but is taxed as a sole proprietorship. A business organization with multiple owners is generally taxed as a partnership, but may elect to be taxed as a regular corporation (generally not advantageous). A state law corporation may elect under subchapter S of the Internal Revenue Code to be taxed much like a partnership.
• The type of business you operate determines what taxes you must pay and how you pay them. The primary types of business taxes are income tax, employment tax, and self-employment tax. Regular corporations are income tax paying entities and generally must pay their tax in quarterly installments. S corporations, partnerships, and most LLCs pass-through their taxable income to their owners and taxed at that level. There is no withholding on this income, so quarterly estimated payments are generally required. Businesses generally must withhold federal income tax from its employees’ wages. It withholds part of Social Security and Medicare taxes from your employees’ wages and the business pays a matching amount itself. A business pays federal unemployment tax (FUTA) from its own funds. There is no employee withholding for FUTA taxes. Self-employment (SE) tax is a social security and Medicare tax primarily for individuals who work for themselves (sole proprietorships, partners, and most LLC owners). It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. LLCs pay employment tax on their non-owner employees; LLC owners pay SE taxes.
• All business ventures with employees, corporations, and partnerships are required to have their own employer identification number (EIN). Sole proprietorships and single owner LLCs with no employees may use the owner’s social security number as their EIN.
• Good records will help you monitor the progress of your business (particularly against your business plan), prepare your financial statements, identify source of receipts, keep track of deductible expenses, prepare your tax returns, and support items reported on tax returns. Regular corporations may use any 12-month period as their taxable year. All other types of business entities are typically required to use the calendar year as their taxable year.

These are only brief highlights of some of the federal tax issues to consider in starting a new business. State law and state tax schemes may also affect your choice of entity decision, based on the type of activity you will undertake. A well thought out business plan is a must. You should have it reviewed by experts for legal, accounting, financial, and tax issues. Operating your own business is challenging, exciting, and rewarding. If you are considering starting your own business, discuss these issues carefully with your professional team or visit my web site at www.phdcpa.com and call or email me.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

The American Recovery and Reinvestment Tax Act of 2009 (also know as the Stimulus Act) contained important provisions that are applicable to 2008 business income tax returns currently being prepared. The amendments affects the carryback of 2008 net operating losses. This is particularly important to corporate returns that have an original due date of March 15, 2009.

A net operating loss (NOL) generally means the amount by which a taxpayer’s business deductions exceed its gross income. Prior to amendment, an NOL could generally be carried back only two years and carried forward 20 years to offset taxable income in those years. NOLs offset taxable income in the order of the taxable years to which the NOL may be carried (oldest first). Taxpayers may elect to forego carrying an NOL back, and only carry it forward. Different rules apply with respect to NOLs arising in certain circumstances. Alternative minimum tax rules provided that a taxpayer’s NOL deduction could not reduce the taxpayer’s alternative minimum taxable income (AMTI) by more than 90 percent of AMTI.

The Act provides an election for a business with gross receipts of $15 million or less to use a longer carryback period of three, four, or five years. This may allow a quicker and larger tax refund resulting from a 2008 NOL than was previously available. The Act also suspends the 90-percent AMTI limitation on the use of of 2008 losses.

That all sounds good, but it now gets a little tricky. For a calendar year business, these elective carryback provisions apply only to an NOL arising in tax year 2008. Fiscal year taxpayers, however, have a choice; they may apply these provisions to their 2007-2008 or their 2008-2009 tax years, but not both. Once made, an election to use these extended carryback provisions is irrevocable. The Service will tell us later how to make one of these elections.

Corporate net operating losses are fairly straightforward. The computation of NOLs for individuals is more complicated because they involve only business income or losses (including wages, income and losses from sole proprietorships, and pass-through income or loss from partnerships, limited liability companies, and S corporations). Individual tax attributes such as itemized or standard deductions, personal exemptions, and non-business items are factored out. Application of the new provisions to partnerships is not entirely clear, since current law governing net operating losses does not apply to these entities; partnership losses pass through and the NOLs are determined at the partner level. The Service will clarify later how the new provisions apply to partnerships and partners.

Taxpayers that have already filed returns carrying back 2008 NOLs for only two years, or who have already elected to forego the two-year carryback period entirely, may revoke those elections and elect to use the extended carryback periods, provided the revocation and new election is made before April 18, 2009 (60-days after the president signed the new law).

Bottom line is that if you have business net operating losses in 2008, you may want to consider extending the due date of the return until you can review your options under these one-time election provisions. Corporations with fiscal years either ending or beginning in 2008 have more options. Taxpayers who have already filed 2008 tax returns with NOLs need to quickly consider if they want to change their NOL treatment. If you are faced with any of these choices, discuss them carefully with your tax professional, or call or email me.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

The American Recovery and Reinvestment Act of 2009 (the Stimulus Act), which became law February 17, includes 27 pages (by my count) of changes to the health benefit provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly referred to as COBRA. The new law affects former employees and their families, employers, and others involved in providing COBRA coverage. The Act establishes an employer-provided subsidy for employees who involuntarily lose their jobs. This post deals with only a smidgen of these provisions.

COBRA provides certain former employees, retirees, spouses, former spouses and dependent children the right to temporary continuation of health coverage at group rates. COBRA generally covers health plans maintained by private-sector employers with 20 or more full and part-time employees. It also covers employee organizations or federal, state or local governments. It does not apply to churches and certain religious organizations, although the new subsidy provisions do apply to insurers required to offer continuation coverage under state law similar to the federal COBRA.

Workers who have lost their jobs may qualify for a 65 percent subsidy for COBRA continuation premiums for themselves and their families for up to nine months. Eligible workers will have to pay 35 percent of the premium to their former employers. Employers must treat the 35 percent payment by eligible former employees as full payment, but the employers are entitled to a credit for the other 65 percent of the COBRA cost on their payroll tax return.

To qualify for the new subsidy, a worker must have been involuntarily separated (i.e., fired, downsized, or terminated, but not those employees who divorced, quit, or otherwise went West) between Sept. 1, 2008, and Dec. 31, 2009. Workers who lost their jobs between Sept. 1, 2008, and February 17, 2009, but failed to initially elect COBRA because it was unaffordable, get an additional 60 days to elect COBRA and receive the subsidy. This subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, do not qualify for the subsidy.

The Internal Revenue Service has now released new detailed information that will help employers claim credit for the COBRA medical premiums they pay for their former employees. The new information about the COBRA changes on its website, www.irs.gov. You may also get additional information about COBRA payments and the new law from www.dol.gov.

The Service’s website includes an extensive set of questions and answers for employers. In addition, the site contains a revised version of the Employer’s Quarterly Federal Tax Return (Form 941) that employers will use to claim credit for the COBRA medical premiums they pay for their former employees. In mid-March, the Service will send this revised Form 941 to about 2 million employers. The new form will be used to claim the new COBRA premium assistance payments credit, beginning with the first quarter of 2009.

Employers claiming the credit must maintain supporting documentation including:

• Documentation of receipt of the employee’s 35 percent share of the premium.
• In the case of insured plans, a copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier.
• Declaration of the former employee’s involuntary termination.

I guess it is a nice idea, but this is going to impose a very heavy recordkeeping burden on employers. This is just one more reason I’m glad I practice solo! If you have questions, call or email me and I’ll pull up the Act itself and see if I can find an answer for you.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

In a separate post, which most of you have received, I have published a brief summary of the recently enacted American Recovery and Reinvestment Tax Act of 2009 (also known as the Stimulus Act) as it applies to individuals. This post will summarize the provisions of the Act applicable to businesses. I will follow this with others going into somewhat more detail for each of these provisions.

• The favorable 50% bonus depreciation deduction now applies for property acquired after December 31, 2007 and placed in service during 2009 (and 2010 in the case of certain longer-lived and transportation property). Taxpayers having unused AMT or research credits may elect to accelerate these credits in lieu of taking bonus depreciation.
• The “Section 197” election for a business taxpayer to expense property purchases was due to be reduced to $125,000 for 2009. The $250,000 amount available for 2008 has now been extended and covers equipment purchased in tax years beginning in 2009. The other limitations to use of the maximum section 179 deductions are basically unchanged.
• The Internal Revenue Code has for years contained a provision that allowed a current year net operating loss (NOL) of a business to be carried back to the two immediately preceding tax years in order to effect an immediate tax refund for taxes paid in those years. Any remaining NOL did not disappear, but could be carried forward for an additional 20 years following the loss year. Certain extended carryback provisions applied to certain disaster areas and industries. The Act has modified the NOL carryback provisions by adding additional, elective, carryback periods for small businesses. A small business is defined as one have a three-year average of less than $15,000,000 in gross receipts. Electing small businesses may now elect to carry a 2008 or 2009 loss back as far as five years. However, if more beneficial, the taxpayer may also elect to carryback only as far as the fourth or third years preceding 2008. Careful, this is a one-time election and may require significant planning to produce the maximum tax refund (that is, you can only make the longer carryback election for losses incurred in 2008 or 2009, but not both 2008 and 2009). Note that this provision may be applicable to 2008 tax returns currently being prepared.
• Here’s a change that is applicable to “qualified” individuals, estates, and trusts making estimated tax payments in 2009 and having business income from “small” sole proprietorships, S corporations, and partnerships in 2008. Under present law, the required annual estimated payment was to have been the lesser of 90 percent of the actual tax on their 2009 return or 100 percent (110 percent for 2008 AGI of more than $150,000) of the tax shown on their 2008 return. This 100 or 110 percent amount has been reduced to 90 percent. A “qualified” person is one whose AGI in 2008 did not exceed $500,000 ($250,000 if married and filing separately) and who certifies that more than 50 percent of their 2008 gross income came from a “small business.” The Service will issue regulations as to how a taxpayer makes this certification. For this purpose, a “small business” means a trade or business having an average of less than 500 employees in 2008.
• The law currently contains a “work opportunity tax credit” for up to 40 percent of “qualified first-year wages” (generally providing a credit not exceeding $2,400 per new employee) paid to members of certain targeted groups. The classes of targeted groups have been expanded to include “unemployed veterans” and “disconnected youth” hired in 2009 or 2010. I’ll expand this explanation, including definitions, in a future post.
• Regular “C” corporations, or any person involved with a trade or business, who “reacquires” outstanding business debt for less than the remaining balance of that debt is required to recognize “discharge of indebtedness” income. In other words, you must take into income the amount you no longer have to repay. One reacquires outstanding debt by paying it off, renegotiating the note with the lender, or issuing new debt in place of the old. Typically, this income is recognized in the year of cancellation. Under the Act, a taxpayer may elect to recognize income resulting from forgiveness of business debt in 2009 or 2010 ratably over five years beginning in 2014. This spreads the income hit equally over tax years 2014 – 2018. Note: this applies to business debt only, not personal mortgage indebtedness. That may be the subject of separate legislation.
• Under present law, non-corporate taxpayers may exclude from income 50 percent of any gain resulting from the sale or exchange of “qualified small business” stock held for five years. In the case of such stock acquired after February 17, 2009 and before January 1, 2011, the Act raises the amount excludable to 75 percent. The bad news is that the five-year holding period still applies. Taxpayers will not realize any benefit from this provision for sales of such stock before February 17, 2014. A “qualified small business” is a C corporation with assets of less than $50 million.
• S corporations that once were regular C corporations are subject to a special “built-in gains tax” for 10 years on any realized gain (including goodwill) that arose in their C corporation tax years. This produces “double tax” (once to the corporation, again to the shareholders) for that gain. For tax years beginning in 2009 and 2010, this 10-year period is reduced to 7 years. If it makes good business sense, S corporation with appreciated assets from C corp years more than 7 years ago may want to dump those assets in 2009 or 2010 and be taxed only once (at the shareholder level) on such gains.

These are the only provisions applicable to most businesses. There are other provisions applicable to particular industries, tax-exempt bonds, and energy incentives. I’ll flesh out later the provisions I have summarized above. In the meantime, if you have any questions, please email or call me.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA

It has been hard to write about the recently enacted American Recovery and Reinvestment Act of 2009 (the Stimulus Bill), because it is so terribly disappointing. I didn’t like it when I first read it, neither the market nor the public liked it, and the more I read it, the more disappointed I am. Any stimulus to the economy is likely going to be first realized by money the Act gives to the states to keep them afloat and to spend on infrastructure repair and replacement. I trust this will create new employment before the end of the year.

So much for venting (for now). There’s a lots to not like, but let me quickly summarize the tax provisions – which do little – applicable to individuals. I will supplement this summary with additional information over the next few days concerning specific parts of the tax legislation. I will have different posts for individuals and businesses. I will also do a business summary similar to this one. First, understand that the Stimulus Act is in two parts (Parts A and B). Within the Act’s 1,071 pages (my copy, which is the hand-marked up, margin-annotated version of the conference committee bill) are numerous titles and subsections that carry their own names, leading one to believe they were separate pieces of legislation (they probably were once, and have been lying around the House for years). The tax title, in Part B, is known as the American Recovery and Reinvestment Tax Act of 2009. Here’s the brief summary applicable to individuals in this section of the Act:

• You’ve heard about the much-touted Making Work Pay Credit, which is to give each individual a maximum $400 ($800 for joint filers) tax reduction in 2009 and again in 2010. You’ll get this through reduced income tax withholding ($400/52 equals about $8 per week) beginning sometime later this year. If your adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers), you’ll have to pay some or all of it back when you file your 2009 tax return.
• The Earned Income Tax Credit is increased for 2009 and 2010, particularly for taxpayers with three or more children. Those taxpayers may now claim a maximum credit of about $5,656. The credit phases out for all taxpayers above a certain earned income level regardless of the number of children and is completely phased out at $35,463 of earnings ($40,463 if married filing jointly).
• Current law provides that individuals with children below the age of 17 (24 for students) may be entitled to a Child Tax Credit of $1,000 per child. The credit is phased out above AGIs of $110,000 (married filing jointly), $75,000 (unmarried individuals) and $55,000 (married filing separately). If the credit exceeds the taxpayer’s tax liability, a portion of the credit may be refunded. The new Act increased the refundable amount.
• The Hope Scholarship Credit has been modified (by adding a new American Opportunity Tax Credit) for 2009 and 2010. The maximum credit is now $2,500 of college tuition and related expenses. Related expenses now include course materials. The credit is now available during the student’s first four (up from two) years of college. The modified credit is phased out for taxpayers with adjusted gross income between $80,000 and $90,000 ($160,000 and $180,000 for married taxpayers filing a joint return). The modified credit may be claimed against a taxpayer’s alternative minimum tax liability. A portion of the credit may be refundable if it exceeds the taxpayer’s tax liability.
• Computer equipment, Internet access and related services (not games) may now be funded from a section 529 qualified tuition account if the technology, equipment, or services are to be used by the beneficiary and family while the beneficiary is enrolled at an eligible educational institution.
• The Act extends the existing refundable “first-time” homebuyer tax credit for qualifying home purchases completed before December 1, 2009, increases the maximum credit amount to $8,000 ($4,000 for a married individual filing separately), and waives recapture of the credit for qualifying home purchases after December 31, 2008 and before December 1, 2009. A first-time homebuyer is an individual (and spouse) who had no ownership interest in a principal residence in the United States during the three-year period prior to the purchase of the new home. The credit phases out for individual taxpayers with AGI between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.
• Under the Act, the first $2,400 of unemployment compensation received in 2009 is not taxable.
• Taxpayers who do not elect to deduct general state sales taxes instead of state income taxes may now be able to deduct sales taxes on certain automobiles, motorcycles, and motor homes with a sales price not to exceed $49,500. This will be of little to no benefit in Texas, for example, since we do not have a state income tax and can already deduct sales taxes. The difference will be that non-itemizers may also claim the deduction. This deduction begins to phase out at AGI of $125,000 ($250,000 in the case of a joint return), and is completely phased out at AGI of $135,000 ($260,000).
• The alternative minimum tax is patched for 2009, so we don’t have to wait until November or December to face that. At some point, Congress is going to have to address the whole AMT tax system.

That’s about it for individual tax changes. I will next post a summary of business provisions, and then expand on both individual- and business-specific provisions. In the meanwhile, call or email me if you have questions.

Ronnie

Copyright 2009 Ronnie C. McClure, PhD, CPA