Friday, January 7, 2011

Many tax changes for preparers, businesses and investors go into effect in 2011 Many important tax changes go into effect this year. Most are the result of new rules in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) as well as in six other tax laws enacted in 2008—2010, while others are triggered by regs. This Practice Alert reviews non-extender, non-indexing changes for return preparers, businesses, and investors. A separate Practice Alert will cover non-extender, non-indexing changes for individuals and retirement plans. New-for-2011 tax return preparer requirements. New regs require tax return preparers to obtain a preparer tax identification number (PTIN) for tax returns or refund claims filed after Dec. 31, 2010. In some cases, return preparers may obtain a provisional PTIN. See ¶ 3 for details on the latest guidance on the new-for-2011 tax return preparer rules. EFT rules now in place. Beginning Jan. 1, 2011, employers must use electronic funds transfer (EFT) to make all federal tax deposits (such as deposits of employment tax, excise tax, and corporate income tax). (See Weekly Alert ¶ 13 12/09/2010 ) Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used after Dec. 31, 2010. E-filing by return preparers. Under the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA, P.L. 111-92 ), for returns filed after 2010, specified tax return preparers who expect to file more than 10 individual returns must file them electronically. For this purpose, an individual income tax return also includes income tax returns for estates and trusts. ( Code Sec. 6011(e)(3) ) In December of 2010, IRS announced that it was phasing in the new e-filing requirement over 2 years (see Weekly Alert ¶ 9 12/09/2010 ). Accordingly, for calendar year 2011, a tax return preparer must file electronically if he expects to file—or if he is a member of a firm that reasonably expects in the aggregate to file—100 or more individual income tax returns during the year. A hardship waiver is available (Form 8944, Preparer e-file Hardship Waiver Request, see Weekly Alert ¶ 12 12/23/2010 ) Up-to-$1,000 credit for “retained workers” in 2011. For any tax year ending after Mar. 18, 2010, Sec. 102 of the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147 ) provides an up-to-$1,000 increase (retention credit) to the general business credit for “retained workers.” A retained worker is any qualified individual (as defined for purposes of the employer payroll tax holiday that was in effect for hiring unemployed workers, see Weekly Alert ¶ 1 03/25/2010 ) who makes a proper certification on Form W-11 and: (1) who was employed by the taxpayer on any date during the tax year, (2) who was employed by the taxpayer for a period of not less than 52 consecutive weeks, and (3) whose wages (as defined for income tax withholding in Code Sec. 3401(a) ) for that employment during the last 26 weeks of the period (described in item (2) above) equaled at least 80% of the wages for the first 26 weeks of that period. (HIRE Act §102(b)) The retained worker must have begun employment with a qualified employer after Feb. 3, 2010, and before Jan. 1, 2011. Shorter S corp built-in gain period. For tax years beginning after Dec. 31, 2010, the “Small Business Jobs Act of 2010,” the tax title of H.R. 5297, the Small Business Lending Funding Act ( P.L. 111-240 ) provided that for S corporation tax years beginning in 2011, no tax is imposed on the net unrecognized built-in gain of an S corporation if the fifth year in the recognition period preceded the 2011 tax year. ( Code Sec. 1374(d)(7)(B)(ii) ) New basis and character reporting rules. Under the Emergency Economic Stabilization Act of 2008 (EESA, P.L. 110-343 ), generally effective on Jan. 1, 2011, every broker required to file an information return reporting the gross proceeds of a “covered security” must include in the return the customer's adjusted basis in the security and whether any gain or loss with respect to the security is short term or long term under Code Sec. 1222 . ( Code Sec. 6045(g) ) A covered security is any specified security acquired on or after the applicable date if the security: (i) was acquired through a transaction in the account in which the security is held, or (ii) was transferred to the account from an account in which the security was a covered security, but only if the broker received a statement under Code Sec. 6045A regarding the transfer. ( Code Sec. 6045(g)(3)(A) ) Jan. 1, 2011, is the applicable date for stock in a corporation (other than stock in a regulated investment company or stock acquired in connection with a dividend reinvestment plan). A specified security is: (a) any share of stock in a corporation (including regulated investment company (RIC), or RIC shares), (b) any note, bond, debenture, or other evidence of indebtedness, (c) any commodity, or contract or derivative with respect to the commodity, if IRS determines that adjusted basis reporting is appropriate, and (d) any other financial instrument with respect to which IRS determines that adjusted basis reporting is appropriate. For details, see Weekly Alert ¶ 2 10/21/2010 , Weekly Alert ¶ 4 10/21/2010 , and Weekly Alert ¶ 6 10/21/2010 . Corporate actions that affect stock basis must be reported. Effective Jan. 1, 2011, under Code Sec. 6045B , as added by EESA, issuers of specified securities must file a return according to IRS forms or regs describing any organizational action (e.g., stock split, merger, or acquisition) that affects the basis of the specified security, the quantitative effect on the basis of that specified security, and any other information required by IRS. The issuer's return (and information to nominees or certificate holders) must be filed within 45 days after the date of the organizational action or, if earlier, by Jan. 15 of the year following the calendar year during which the action occurred. Nominees or certificate holders must (unless IRS waives this requirement) be given a written statement showing (1) the name, address, and telephone number of the information contact of the person required to file the return, (2) the information required to be included on the return with respect to the security, and (3) any other information required by IRS. For details, see Weekly Alert ¶ 2 10/21/2010 , Weekly Alert ¶ 4 10/21/2010 , and Weekly Alert ¶ 6 10/21/2010 . Reporting requirement for payment card and third-party payment transactions. The Housing Assistance Tax Act of 2008, Div. C. of P.L. 110-289 , added Code Sec. 6050W . After 2010, it generally requires banks to file an information return with IRS reporting the gross amount of credit and debit card payments a merchant receives during the year, along with the merchant's name, address, and TIN. Similar reporting is also required for third party network transactions (e.g., those facilitating online sales). For final regs on the subject, see Weekly Alert ¶ 18 08/19/2010 . Information reporting for real estate. Under the Small Business Jobs Act of 2010, for payments made after Dec. 31, 2010, except as provided below, solely for purposes of Code Sec. 6041(a) information reporting, a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. ( Code Sec. 6041(h)(1) ) Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more during the tax year to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider.) The rental property expense payment reporting doesn't apply to: ... any individual who receives rental income of not more than a minimal amount, as determined under IRS regs; ... any individual (including one who is an active member of the uniformed services or an employee of the intelligence community) if substantially all rental income is derived from renting the individual's principal residence (as defined for purpose of the home sale exclusion in Code Sec. 121(d)(9)(C)(iv) ) on a temporary basis; ... any other individual for whom the Code Sec. 6041 requirements would cause hardship, as determined under IRS regs. ( Code Sec. 6041(h)(2) ) Increased information return penalty and failure to furnish payee statement penalty. For information returns required to be filed after Dec. 31, 2010, the Small Business Jobs Act of 2010 increases the penalty for failure to file under Code Sec. 6721 and the penalty for failure to furnish payee statements under Code Sec. 6722 ; see Weekly Alert ¶ 45 09/30/2010 for details. Annual fee on drug manufacturers and importers. Under Sec. 9008 of the Patient Protection and Affordable Care Act (PPAC, P.L. 111-148 ), as amended by Sec. 1404 of the Health Care and Education Reconciliation Act of 2010 ( P.L. 111-152 ), for calendar years beginning after Dec. 31, 2010, each manufacturer or importer with gross receipts from branded prescription drug sales that is engaged in the business of manufacturing or importing such drugs for sale to any specified government program or pursuant to coverage under any such program, must pay an annual nondeductible fee, which will be credited to the Medicare Part B trust fund. (PPACA Sec. 9008) The annual flat fee (e.g., $2.5 billion for 2011) is apportioned among the covered entities each year based on each entity's relative share of branded prescription drug sales taken into account during the previous calendar year. (See Weekly Alert ¶ 2 04/01/10 for more details.) Multiple foreign tax credit related crackdowns go into effect. A number of foreign tax credit related crackdowns in the Education Jobs and Medicaid Assistance Act ( P.L. 111-226 , see Weekly Alert ¶ 17 08/12/2010 ) go into effect this year: A matching rule to prevent the separation of creditable foreign taxes from the associated foreign income. If there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by the taxpayer, the tax isn't taken into account before the tax year in which the related income is taken into account for U.S. tax purposes under Chapter 1 of the Code by the taxpayer. ( Code Sec. 909(a) ) A similar rule applies if there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by a Code Sec. 902 corporation. There is foreign tax credit splitting if the related income is (or will be) taken into account by a covered person. ( Code Sec. 909(d)(1) ) A covered person means, with respect to any person who pays or accrues a foreign income tax (i.e., the payor) (1) any entity in which the payor holds, directly or indirectly, at least a 10% ownership interest (determined by vote or value); (2) any person which holds, directly or indirectly, at least a 10% ownership interest (determined by vote or value) in the payor; (3) any person related under Code Sec. 267(b) or Code Sec. 707(b) ; and (4) any other person specified by IRS. ( Code Sec. 909(d)(4) ) These new rules apply to: foreign income taxes paid or accrued in tax years beginning after Dec. 31, 2010; and foreign income taxes paid or accrued by a Code Sec. 902 corporation in tax years beginning on or before Dec. 31, 2010 (and not deemed paid under Code Sec. 902(a) or Code Sec. 960 ), but only for purposes of applying Code Sec. 902 and Code Sec. 960 after Dec. 31, 2010. (Act Sec. 211(c)) In general, for covered asset acquisitions between related parties after Dec. 31, 2010, the disqualified portion of any foreign income tax determined with respect to the income or gain attributable to the relevant foreign assets is (a) not taken into account in determining the foreign tax credit, and (b) in the case of a foreign income tax paid by a Code Sec. 902 corporation, not taken into account for purposes of the deemed paid credit under Code Sec. 902 or Code Sec. 960 . ( Code Sec. 901(m)(1) ) A covered asset acquisition is: a qualified stock purchase to which Code Sec. 338 applies; any transaction treated as an acquisition of assets for U.S. purposes and treated as the acquisition of stock of a corporation (or is disregarded) for purposes of the foreign income taxes of the relevant jurisdiction; any acquisition of an interest in a partnership which has an election in effect under Code Sec. 754 ; and to the extent provided by IRS, any other similar transaction. ( Code Sec. 901(m)(2) ) For tax years beginning after Aug. 10, 2011, a separate foreign tax credit limitation applies for each item that (1) would be treated as derived from sources within the U.S.; (2) would be treated as arising from sources outside the U.S. under a treaty obligation of the U.S.; and (3) the taxpayer chooses the benefits of such treaty. The foreign tax credit limitation rules under Code Sec. 904(a) , Code Sec. 904(b) and Code Sec. 904(c) ; the Code Sec. 902 deemed paid credit rules; the special rules in Code Sec. 960 relating to oil and gas income; and the special rules for foreign tax credits under Code Sec. 960 , are applied separately for each item. ( Code Sec. 904(d)(6)(A) ) Under the “anti-hopscotch rule,” for acquisitions of U.S. property after Dec. 31, 2010, taxpayers can't maximize their foreign tax credits by selectively repatriating income from high-taxed foreign subsidiaries while continuing to defer U.S. tax on income of low-taxed foreign subsidiaries. If there is an amount included in the gross income of a domestic corporation under Code Sec. 951(a)(1)(B) attributable to the earnings and profits (E&P) of foreign corporation which is a member of a qualified group with respect to the domestic corporation, then the amount of any foreign income tax deemed to have been paid during the tax year by the domestic corporation under Code Sec. 902 by reason of Code Sec. 960(a) with respect to such gross income inclusion can't exceed the amount of foreign taxes that would be deemed paid if cash in an amount equal to the amount of the inclusion in gross income were distributed as a series of distributions (determined without regard to any foreign tax which would be imposed on an actual distribution) through the chain of ownership which begins with the foreign corporation and ends with the domestic corporation. ( Code Sec. 960(c)(1) ) For acquisitions after Aug. 10, 2011, there's an additional limit on the E&P of a foreign acquiring corporation that may be taken into account in determining the amount (and source) of a distribution that's treated as a dividend in a constructive redemption. The E&P of an acquiring foreign corporation in a Code Sec. 304(a) related party stock purchase isn't taken into account in determining the amount treated as a dividend under Code Sec. 304(b)(2)(A) , if more than 50% of the dividends arising in connection with the acquisition would neither: (1) be subject to U.S. income tax for the year in which the dividends arise; nor (2) be includible in E&P of a controlled foreign corporation (CFC), as defined in Code Sec. 957 without regard to Code Sec. 953(c) . ( Code Sec. 304(b)(5)(B) ) To compute the foreign tax credit limitation, a taxpayer must determine the amount of its taxable income from foreign sources by allocating and apportioning deductions between its U.S. source and foreign source gross income. Special rules apply for allocating and apportioning interest under which all members of a corporate affiliated group are normally treated as a single corporation (the one taxpayer rule), and an allocation is made on the basis of assets rather than gross income. For tax years beginning after Aug. 10, 2011, notwithstanding the general definition of “affiliated group” for purposes of the interest allocation rules, a foreign corporation is treated as a member of the affiliated group if: (1) more than 50% of the gross income of the foreign corporation for the tax year is effectively connected with the conduct of a trade or business within the U.S.; and (2) at least 80% of either the vote or value of all outstanding stock of the foreign corporation is owned directly or indirectly by members of the affiliated group (determined with regard to this new rule). ( Code Sec. 864(e)(5)(A) ) 80/20 company rules repealed. Effective generally for tax years beginning after Dec. 31, 2010, the rule that treats as foreign source all or a portion of any interest paid by a resident alien individual or U.S. corporation that meets the 80/20 test is repealed by the Education Jobs and Medicaid Assistance Act ( P.L. 111-226 , see Weekly Alert ¶ 17 08/12/2010 ), subject to a grandfathering exception. ( Code Sec. 861(a)(1) ) This Act also repeals the provision that treats all or a portion of any dividends paid by an 80/20 corporation as exempt from withholding tax, subject to a grandfathering exception. ( Code Sec. 871(i)(2)(B) ) 888-712-7690

No comments: