Publications
01.04.12
by Kevin Jones, Principal, Business Tax Advisory Services
As we now move into 2012, it is a good time to reflect back on 2011 from a tax perspective. Without a doubt, most expected a quiet year. Nevertheless, significant action came from the Obama Administration, the Treasury Department, IRS and the courts. Although it is impossible to review every item in detail, below is a summary of some of the more important items, some of which will impact individuals and businesses in the coming year and beyond.
• Payroll Tax Cut. As most people know, the 2010 Tax Relief Act reduced the employee share of FICA taxes from 6.2-percent to 4.2-percent for the calendar year 2011. Just before Christmas, Congress passed and the President signed legislation extending the payroll tax cut for an additional 2 months, through February 2012.
• Business Information Reporting. Previous legislation scheduled to begin in 2012 and requiring all businesses, charities, and state and local governments to file information returns for all payments aggregating $600 or more in a calendar year was repealed. Also repealed was the requirement for certain landlords to report rental property expense payments of $600 or more in conjunction with their rental properties.
• Government Contractor Withholding. Particularly important in the Washington, DC area where so many government contractors reside, the 3-percent withholding on payments by the government to contractors was repealed prior to its effective date. The withholding was scheduled to go into effect in 2013.
• Veterans Employment Incentives. The Work Opportunity Credit was expanded for employers hiring veterans who have been unemployed for a minimum of 4 weeks. Previously, the credit required veterans to be unemployed for at least 6 months.
• Expiring Tax Provisions. Unless Congress takes action, a number of tax provisions expired at the end of 2011. These include:
- State and local sales tax deduction
- Transit benefit parity
- Higher education tuition deduction
- Charitable distributions from IRAs
- Teacher’s classroom expense deduction
- Research tax credit
- Code sec. 25C residential energy credit
- Code sec. 45L energy efficient home construction credit
- Biodiesel and renewable diesel incentives
- Various tax incentives for the District of Columbia
• FUTA Surtax. The 0.2-percent FUTA surtax expired after June 30, 2011
• Worker Classification. Prior to 2011, the IRS stepped up efforts at challenging worker classification in an effort to force employers to properly report and pay payroll taxes for workers improperly classified as independent contractors rather than employees. During 2011, the IRS announced the Voluntary Classification Settlement Program offering a streamlined way for employers to voluntarily reclassify their workers as employees and to be subject to a reduced penalty.
• Broker Information Reporting. Starting in 2011, brokers are required to file information returns that not only provide details on sales proceeds from trades executed but also information on customer basis and holding period in the security.
• Foreign Bank Account Reporting (FBAR). Treasury issued final rules identifying which types of accounts qualify as foreign financial accounts subject to the reporting requirements. In addition, the IRS launched a second offshore voluntary disclosure initiative which provided for a reduced penalty to taxpayers in exchange for full disclosure of unreported offshore accounts.
• FATCA Reporting. The Foreign Account Tax Compliance Act (FATCA) enacted in 2010 requires certain U.S. taxpayers holding foreign financial assets to report information about those assets on a new form attached to the tax return. Also foreign financial institutions are required to report directly to the IRS certain information about financial accounts held by U.S. taxpayers. In 2011, the IRS issued guidance addressing the reporting requirements and issued Form 8938 for purposes of complying with the reporting requirements.
• Foreign Tax Credit. The IRS issued final regulations on the computation of the foreign tax credit, continuing with the strict “basket” approach and fine-tuned certain recapture and safe-harbor rules.
• Other Foreign Transactions. The IRS issued final regulations preventing the use of triangular reorganizations that allowed certain entities to repatriate earnings of a foreign subsidiary tax-free.
• W-2 Reporting. The IRS expanded employers’ relief from reporting the cost of employer-provided health insurance coverage on Form W-2 for employers with fewer than 250 forms W-2.
• Plan Benefits Summary. Proposed regulations were issued by the IRS, Health and Human Services and the Department of Labor explaining the requirement that summaries of plan benefits provided to employees be in “plain English.”
• Disregarded Entities. New regulations were issued applying the family and religious member FICA and FUTA exceptions to disregarded entities although such entities will continue to be treated as corporations for all other employment tax purposes.
• Partnerships. The IRS issued proposed regulations in response to recent court defeats outlining when an LLC interest can be tested under all the material participation tests under the passive activity loss rules of section 469.
• S Corporations. The Court of Federal Claims held that a taxpayer who conducted his business as an individual and through several S corporations created a “unified business enterprise” engaged in for profit.
• Bonus Depreciation. The 2010 Tax Relief Act increased the 50-percent additional first year depreciation deduction to 100-percent for qualified investments made after September 8, 2010 and before January 1, 2012. In 2011, the IRS issued guidance on how taxpayers can elect to take 50-percent, rather than 100-percent bonus depreciation and other procedural items.
• Small Business Expensing. Enhanced section 179 expensing of asset purchases is scheduled to continue through 2012 but at a less generous amount than in 2011. The dollar limit for 2012 is $139,000 and the investment limit at which phase-out of the provision begins is $560,000.
• Mileage Rates. For 2011, the IRS made a mid-year adjustment to the mileage rates allowed. For business miles driven after June 30 until the end of 2011, the standard rate increased from 51 cents per mile to 55.5 cents. The rate for medical and moving purposes increased from 19 cents per mile to 23.5 cents. For 2012, the standard business mileage rate remains at 55.5 cents per mile and the medical/moving rate goes to 23 cents.
• Business Travel. The IRS issued the simplified per diem rates that taxpayers can use to reimburse employees for business travel after September 30, 2011.
• Employer-Provided Cell Phones. The IRS issued guidance providing that employer provided cell phones are generally nontaxable to the employee.
• Real Estate Activities. The IRS issued procedures allowing qualified real estate professionals to make a late election to aggregate real estate interests for purposes of applying the passive activity loss rules. Previously, a costly and time consuming private letter ruling was required.
• Compensation. The IRS issued proposed regulations for purposes of the $1 million limit on compensation deductions of publicly-held the corporations addressing the treatment of certain performance-based compensation attributable to stock options and stock appreciation rights.
• Goodwill. The 9th Circuit Court of Appeals held that the goodwill portion of proceeds on the sale of a dental practice belonged to the corporation rather than constituting personal goodwill of the owner because of the non-competition portion of an employment agreement.
• Accounting for Employee Bonuses. The IRS issued a Ruling stating that accrual of employee bonuses is allowed even though the employer would not know the identity of any specific recipient and the exact amount payable to that recipient until after the end of the tax year where the total amount payable to all is fixed at the end of the year.
• Extension of Bush Era Tax Cuts for Individuals. Remains unresolved.
• 2012 COLA Limits for Qualified Plans. Cost-of-living adjustments (COLAs) for qualified plans increased the limits on contributions or elective deferrals. For 2012, the limits on elective deferrals for 401(k), 403(b), and 457 plans increase from $16,500 for 2011 to $17000 for 2012. The limitation for defined contributions plans increases from $49,000 for 2011 to $50,000 for 2012.
• Social Security Wage Base. The Social Security wage base increases from $106,800 for 2011 to $110,100 for 2012.
• Estate Tax Events. As a result of the 2010 Tax Relief Act, estates of decedents dying in 2010 could elect to opt out of the federal estate tax and apply a modified carryover basis regime. In 2011, the IRS developed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, for estates to make the election. The form is due January 17 for decedents dying in 2010. In addition, for 2012, the applicable unified estate and gift tax exclusions are $5,120,000, an increase of $120,000 over 2011.
• Exempt Organization Reinstatement of Status. The IRS announced a special program to help organizations whose tax-exempt status was automatically revoked to regain their status. An application must be filed within 15 months of revocation of tax-exempt status.
Federal Tax Refunds. The Treasury launched a pilot program in 2011 to issue federal tax refunds to individuals on prepaid debit cards.
Please contact Kevin Jones, Principal, Business Tax Advisory Services by phone 703.770.6354 or email kjones@argy.com.
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