The third quarter of 2010 brought many tax developments from Congress, the IRS, and the courts. We have highlighted some of the more important federal tax developments for you. Please give our office a call or send us an email if you have any questions about these developments.
Small Business Jobs Act. On September 27, 2010, President Obama signed the Small Business Jobs Act (H.R. 5297), which includes $12 billion in tax incentives. The new law extends many business tax incentives that are effective immediately, such as bonus depreciation for 2010, enhanced Code Sec. 179 expensing for 2010 and 2011, an increased business start-up expense deduction, and more. The new law also authorizes 401(k), 403(b) and 457(b) governmental plans to permit plan participants to roll over pre-tax account distributions into a designated Roth account within their plans. However, not all of the new law’s provisions benefit businesses. One of the more controversial provisions, for example, will require individuals receiving rental income from real property to file information returns with the IRS and to service providers reporting payments of $600 or more during the year for rental property expenses.
Health FSAs. After December 31, 2010, purchases of over-the-counter medicines, without a prescription, will no longer be reimbursed by health flexible spending accounts (FSAs) or health reimbursement accounts (HRAs), the IRS reminded taxpayers. Over-the-counter medicines and drugs will continue to be reimbursable after 2010 if the taxpayer obtains a prescription for them. Over-the-counter medical supplies and equipment also will continue to be reimbursable without a prescription, as will insulin.
Small employer health insurance credit. In September, the IRS posted a draft version of Form 8941, Credit for Small Employer Health Insurance Premiums, on its web site for small employers to use to calculate the new Code Sec. 45R tax credit. The Patient Protection and Affordable Care Act created the credit to help small employers offset the costs of providing health insurance to employees. For-profit small employers will use Form 8941 to calculate the credit and include the amount of the credit as part of the general business credit on their federal income tax returns. Nonprofit small employers will claim the Code Sec. 45R credit on Form 990-T.
Passive activity loss rules. In September, the Tax Court found that the time a taxpayer was “on-call” does not count as time spent on his real estate rental properties and cannot be used to avoid the passive activity loss (PAL) limits (Moss, 135 T.C. No. 18). The taxpayer did not perform any actual work on the properties during the time he was “on-call” and, therefore, could not count those hours in trying to come under the 750-hour exception carved out for real estate professionals.
Net operating losses. in August, the IRS issued guidance on various scenarios for taxpayers to make a one-time, irrevocable election to carry back net operating losses (NOLs) for up to five years under the Worker, Homeownership, and Business Assistance Act of 2009 (2009 Worker Act). The guidance highlights the distinctions between the NOL carryback under the 2009 Worker Act and its predecessor, the American Recovery and Reinvestment Act of 2009.
Cancellation of indebtedness. The IRS issued guidance in August on the acceleration of cancellation of indebtedness (COD) income that has been deferred under Code Sec. 108(i). Code Sec. 108(i) allows businesses to defer COD income realized on the reacquisition of a debt instrument in 2009 or 2010. A taxpayer can elect to defer the income until 2014 and then recognize it ratably over five years. Code Sec. 108(i)(5)(D) requires the taxpayer to accelerate and recognize the deferred income on the occurrence of certain events. The proposed regulations describe events that trigger the taxation of deferred COD income to C corporations.
Uncertain tax positions. The IRS made some significant changes to its plans to require mandatory reporting of uncertain tax positions by corporations. In September, the IRS unveiled final Schedule UTP, Uncertain Tax Position Statement, instructions and related guidance. Among other things, the IRS adopted a five-year phase-in of the reporting requirement, based on a corporation’s asset size. The IRS also removed a controversial proposed provision that would have required Schedule UTP filers to calculate the maximum tax adjustment (MTA) with respect to each tax position included on the schedule.
Payment card reporting. In August, the IRS also issued final information reporting rules for payment card and third-party network transactions. The Housing Assistance Tax Act of 2008 created Code Sec. 6050W, requiring information reporting for payments made in settlement of payment card and third-party network transactions. Generally, credit card companies and electronic payment processors will be required after 2010 to annually file aggregate transaction reports with the IRS listing their total annual payments to individual merchants who receive more than $20,000 and conduct more than 200 transactions each year.
Foreign tax reforms. On August 10, President Obama signed a package of foreign tax reforms in the Education, Jobs and Medicaid Assistance Act. In related news, the IRS issued preliminary guidance in September on new reporting and withholding imposed under the Hiring Incentives to Restore Employment (HIRE) Act of 2010 in connection with foreign financial institutions (FFIs).
Corrosive drywall. The IRS will allow taxpayers to claim a casualty loss under a safe-harbor method in connection with damages from the installation of certain imported drywall. Homeowners have reported health problems and damage to appliances and electrical systems from the drywall.
Per diem rates. The IRS issued its annual update of simplified per-diem rates that taxpayers can use to reimburse employees for lodging, meals, and incidental expenses incurred during business travel. The simplified high-low per-diems are $233 for high-cost localities and $160 for all other localities.
Home sale exclusion. In July, the Tax Court found that the voluntary demolition of a principal residence resets the clock for residency at zero in establishing qualification for the home sale exclusion on the sale of any new home built in its place (Gates, 135 T.C. 1). No portion of the gain on the sale could be excluded under the Code Sec. 121 exclusion since the taxpayers never moved into the new house prior to its sale.
These are just some of the many federal tax developments that occurred over the last three months. Please contact our office if you have any questions about the impact of these, or any other tax recent changes, on your particular situation.