The year 2010 has already been a year of significant tax law change. Given the weak U.S. economic recovery, the results of the mid-term elections and the lame duck tax issues still to be addressed before year-end, the next month will likely further transform the tax system. In this issue, we take a quick look back at some of the noteworthy changes and also glance forward to see what might be on the horizon.
Small Business Jobs Act
On September 27, President Obama signed into law the Small Business Jobs Act of 2010, which included a number of important tax provisions for both large and small businesses. Many of the provisions affecting business are retroactive to January 1, 2010. The Act’s business tax provisions include the following:
Zero taxes on capital gains from key small business investments: 100 percent of capital gains on key small business investments are excluded from taxes in 2010, provided these investments are held for five years.
Extension and expansion of small businesses’ ability to immediately expense capital investments: For 2010 and 2011, the Act increases the amount of investments that businesses are eligible to immediately write off to $500,000, while raising the level of investments at which the write-off phases out to $2 million.
Extension of 50 percent bonus depreciation: The Act extends the 50 percent “bonus depreciation” through 2010.
Five-year carryback of general business credits: The Act allows certain small businesses to carry back their general business credits to offset five years of taxes while also allowing these credits to offset the Alternative Minimum Tax.
Given that many of these provisions are retroactive and apply to the 2010 tax year, you should consult with your tax advisor to ensure that you are taking advantage of all tax savings opportunities. For example, because of the expanded depreciation rules, it may be beneficial to accelerate certain capital equipment purchases to 2010.
The Hiring Incentives to Restore Employment (HIRE) Act, signed into law on March 18, 2010, includes two incentives that may provide tax savings for qualifying organizations that hire new employees. These incentives include a payroll tax exemption and a credit worth up to $1,000 per worker. Because a large part of the incentive is tied to payroll taxes, the legislation can immediately enhance employers’ cash flow by permitting employers to retain their portion of the Social Security tax ordinarily remitted to the IRS.
Qualifying employees include individuals hired between February 3, 2010, and January 1, 2011, who have not worked more than 40 hours within the 60 days prior to being hired. The payroll tax exemption has no cap or limit on the total amount of tax benefits that can be claimed by an employer. Employers can save up to $6,622 per qualifying employee, whether they hire one new employee or hundreds of new employees. In addition to the current payroll tax exemption, employers may also receive an income tax credit of up to $1,000 for each qualifying employee who is retained for at least 52 consecutive weeks after being hired.
As we pointed out earlier this year (see ), the HIRE Act tax incentives apply to a large range of potential new employees. In addition, the reporting requirements are fairly limited.
Most employers already have similar systems in place to comply with their normal federal and state payroll tax reporting requirements. If you are already taking advantage of the Work Opportunity Tax Credit (WOTC), it should be relatively painless to adapt your WOTC reporting procedures to the HIRE Act. An audit trail of proper documentation is important to sustaining the HIRE Act benefits. Standard documentation will include a Form W-11 for each new employee, maintained in an easily accessible format and location.
Uncertain Tax Positions (UTP)
We have paid special attention to the IRS requirement that businesses disclose certain “uncertain” tax positions beginning with their 2010 tax returns. And with good reason, as this new reporting requirement will have a major impact on corporate tax reporting. According to an analysis of the most recent Securities and Exchange Commission (SEC) filings, the 2010 Fortune 500 companies reported more than $200 billion in uncertain tax positions — exceeding the $138 billion paid in corporate taxes last year. And, at least 40 companies exceeded $1 billion in such reserves. The $200 billion number covers all jurisdictions and all open years for these companies. How much of this reserve is for federal income taxes is not known, but many expect that the federal component represents the majority of this amount.
We also devoted a webcast to this subject which is archived. This webcast focused on specific action steps and questions that tax departments should be asking now, not in the spring of 2011.
Undoubtedly, there will be more refinements and clarifications, which are sorely needed. Questions loom about how to interpret some of the net operating loss (NOL) examples in the Schedule UTP Instructions. Many taxpayers are still complaining about how to comply with the requirement to disclose positions that a taxpayer “expects to litigate.” And, of course, the states are just now beginning to jump in. So the parade of horrors continues, and 2011 is likely to continue to bring with it new compliance rules for this controversial IRS requirement.
Paid Preparer Number
Beginning January 1, 2011, all paid tax preparers will have to register with the IRS and obtain a preparer tax identification number, or PTIN. Recently issued final regulations define a tax return preparer as “an individual who prepares for compensation, or assists in preparing, all or substantially all of a tax return or claim for refund of tax.” The regulations do not define “substantially all,” but instead point to the specific facts and circumstances surrounding each potential preparer. Factors to consider in determining whether an individual is a tax return preparer include, but are not limited to:
- The complexity of the work performed by the individual relative to the overall complexity of the tax return or claim for refund of tax;
- The amount of the items of income, deductions or losses attributable to the work performed by the individual relative to the total amount of income, deductions or losses required to be correctly reported on the tax return or claim for refund of tax; and
- The amount of tax or credit attributable to the work performed by the individual relative to the total tax liability required to be correctly reported on the tax return or claim for refund of tax.
The IRS plans to require paid tax preparers applying for a PTIN who are not attorneys or CPAs to pass a competency test. In addition, the IRS is considering requiring preparers who are not attorneys or CPAs to meet certain continuing education requirements. Testing was expected to begin in mid-2011, but just before this issue went to press, IRS officials (including IRS Commissioner Douglas Shulman) made public comments that the IRS will likely waive the requirement that newly registered tax return preparers take annual continuing education classes in 2011. Commissioner Shulman also said “it is highly likely . . . there will be some relief for testing and continuing education requirements for people who do not sign a return and work in a professional firm under the supervision of an accountant, enrolled agent, or lawyer.” Thus, the full impact of the new PTIN rules may not be felt until 2012.
The IRS also issued an updated version of Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application, in mid-October. The revised form asks for detailed information. For example, applicants are asked if they are current on both their individual and business federal taxes, including any corporate and employment tax obligations. You should review the IRS webpage set up for PTINs at IRS.gov, and familiarize yourself with the application process and PTIN requirements. The IRS also recently issued Revenue Procedure 2010-41, which explains how foreign tax return preparers and U.S. citizens without a social security number (due to conscientious religious objection) can obtain a PTIN.
New 1099 Reporting Requirements
For many years, businesses have been required to report various payments on different versions of Form 1099. For instance, when a business pays $600 or more during a calendar year to an independent contractor for services, the business must issue the contractor a Form 1099-MISC that reports the amount paid that year. The business must also furnish a copy of the Form 1099-MISC to the IRS. Other types of payments that businesses must report on a Form 1099 include commissions, fees and other compensation paid to a single recipient when the total amount paid in a calendar year is $600 or more, as well as interest, rents, royalties, annuities and income items paid to a single recipient when the total amount paid in a calendar year is $600 or more.
The recent health care bill requires that businesses in the health care industry file a Form 1099 with the IRS for any purchased goods valued at more than $600. The Small Business Jobs Act, discussed above, extends the Form 1099 requirement to amounts paid in consideration of property and other gross proceeds. Under the Act, payments to corporations will no longer be automatically exempt from reporting requirements by virtue of the payee's corporate status, despite existing regulations to the contrary. The addition of a new subsection (h) (i.e., IRC Section 6041(h)) effectively supersedes regulations concerning reporting exemptions. Thus, payments made to corporations after December 31, 2011, will no longer be automatically exempt from information reporting requirements unless the corporation is a tax-exempt entity. However, the Act does not require Form 1099 reporting of payments that are made for non-business reasons.
The intent of Congress seems to be to reduce the tax gap by encouraging the voluntary payment of taxes. However, the impact on most businesses will be significant because their bookkeeping systems may need to be modified to accommodate tracking the aggregate amounts paid to each payee to comply with the new requirements for the types of payments and payees that will trigger 1099 reporting. In addition to creating a new reporting requirement, Congress put teeth in the expanded 1099 reporting requirements by substantially increasing the penalties for failure to file a correct Form 1099.
As mentioned above, the new Form 1099 reporting rules don't cover payments made before 2012. So there is time to make sure that you have accounting systems in place that will allow you to properly track payments that may be subject to the new 1099 requirements. But keep an eye on this provision before you commit any resources to modify your accounting systems. There are already efforts in the lame duck session of Congress to repeal this measure. On November 15, Senate Finance Committee Chair Max Baucus introduced the Small Business Paperwork Relief Act, which would repeal this provision. Even the President is in favor of repeal. During a November press conference, he said, “The 1099 provision in the health care bill appears to be too burdensome for small businesses. It just involves too much paperwork, too much filing. It's probably counterproductive. It was designed to make sure that revenue was raised to help pay for some of the other provisions, but if it ends up just being so much trouble that small businesses find it difficult to manage, that's something that we should take a look at.”
No Extenders Legislation
As a result of a combination of election-year politics and budgetary concerns regarding spending offsets for extended tax provisions, Congress failed to advance extenders legislation despite continued calls from both sides of the political spectrum. However, the lame duck Congress, which convened last week, has another opportunity to deal with the various expired tax provisions. One of the larger corporate incentives yet to be extended is the research and development tax credit. Despite President Obama’s call for an expanded and permanent R&D credit in a major policy speech this fall, Congress was unable even to extend the current R&D credit regime, let alone enact a permanent credit.
This year’s scenario appears similar to 2006, when the R&D credit was not extended until that year’s lame duck Congress convened during President Bush’s final term (see ). As we discussed in that article, we have grown all too accustomed to the fact that the R&D credit is not a permanent tax benefit. Unlike most other tax provisions, which are effective until repealed, the R&D credit has a long history of enactment as a temporary incentive. However, except for one year about 10 years ago, the bipartisan support of this incentive virtually guarantees that it will be extended prior to expiration, or retroactively re-enacted in those instances when passage of an extender package fails to materialize before the existing law expired, such as this year.
Just as they did in 2006 before the extension, taxpayers still have important decisions to make about their R&D tax credit. We outlined these important issues for you last month, and it’s worth a quick recap.
Unfortunately, the benefit cannot be recorded until the extenders bill is passed and signed into law by the President. That said, taxpayers should not ignore the R&D tax credit now. Neglecting to follow a process of documenting and calculating the R&D credit may result in having insufficient information to claim the credit on the originally filed return. Taxpayers should also examine how the absence of an extenders package influences R&D tax credits at the state level. Each state has its own set of expiration dates and definitions for calculating the credit. Therefore, maintaining the process and documentation, even while the credit is expired at the federal level, will still be just as important. Once the extenders package is signed into law, tax departments should be prepared to substantiate large credit amounts that need to be recorded in a single quarter.
Alvarez & Marsal Taxand Says:
As you can see, 2010 has been a busy year with a number of significant tax law changes. And more changes are likely to follow before 2011. We recommend that you make time now, in consultation with your tax advisor, to review these changes and how they will impact your 2010 tax return and tax provision before 2011 is upon us.
- David Kocieniewski, “I.R.S. Plan to Uncover Companies’ Tax Strategies,” New York Times, August 24, 2010.
- Regulation Section 1.6109-2
- White House website, press conference by the President, November 3, 2010.
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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