Proposed regulations (NPRM REG-153340-09) eliminate the rules for making federal tax deposits by paper coupons for businesses of any kind that make payments to the IRS. Instead, most taxpayers or taxpaying businesses will use the Electronic Federal Tax Payment System (EFTPS). The paper coupon system will be abandoned. The final regulations could be expected to apply to remittances made no earlier than January 1, 2011.

The proposed rules requiring electronic deposits would apply to federal deposits of: employment taxes, corporate income and corporate estimated taxes, unrelated business income taxes paid by tax-exempt organizations, private foundation excise taxes, as well as taxes withheld on nonresident aliens and foreign corporations, estimated taxes on certain trusts, railroad retirement taxes, non-payroll taxes, FUTA taxes, and excise taxes reported on Form 720, Quarterly Federal Excise Tax Return.

The proposed rules would maintain the existing de minimus rule that allows employers with a deposit liability of less than $2,500 for a return period to remit their employment taxes with their quarterly or annual return.

The proposed regulations remove references to “banking days,” providing that if a federal tax deposit would otherwise be due on a Saturday, Sunday or legal holiday, the taxes will be treated as timely deposited if deposited on the next day that is not a Saturday, Sunday or legal holiday.
The proposed regulations provide that tax deposits can be made online or by telephone, 24 hours a day, seven days a week.

CCH News, Federal Tax Day – Current,I.8IRS Proposes Regulations Generally Eliminating Paper Coupon Federal Tax Deposits (IR-2010-92; NPRM REG-153340-09), (Aug. 20, 2010)

It is with great pleasure that we announce that Lori Ray has joined TaxOps. Prior to joining TaxOps, Lori was an International Tax analyst with sun Microsystems where she focused on earnings and profits, subpart F, Accounting for Income Taxes for the foreign entities and tax compliance for the foreign operations. Prior to Sun, she worked for PricewaterhouseCoopers in the Tax Department where she focused on corporate taxation and gained significant experience in domestic compliance and the U.S. implications of doing business abroad, Accounting for Income Taxes and general tax consulting for business entities. See Lori’s full bio at www.taxops.com/team

On August 10, 2010, the Education and Jobs Act (Act) was signed into law by the president. The act contains provision for foreign tax credits, individual credits, pension funding, disclosure of tax return information, excise taxes and other miscellaneous provisions. This blog only addresses the foreign tax credit provisions, as they are most likely to impact our client base.

The Act tightens the rules on the use of foreign tax credits that multinationals use to lower their U.S. tax bill. In general, the new law’s foreign tax provisions attempt to (1) make foreign tax credits (FTCs) available only when the income to which the FTCs relate is actually taxed by the U.S., (2) prevent artificial inflation of foreign source income, and (3) modify the resourcing rules to limit FTCs.

Here is a brief overview of the new foreign tax provisions.

Foreign tax credit “splitting” – The Act prevents splitting FTCs from income by implementing a matching rule that suspends the recognition of foreign tax until the related foreign income is taken into account for U.S. tax purposes. The provision applies to all “split” foreign taxes paid or accrued in tax years beginning after Dec. 31, 2010.

Covered asset acquisition – The new law denies a FTC for the disqualified portion of any foreign income tax paid or accrued in connection with a covered asset acquisition (e.g., acquiring interests in entities that are corporations for foreign tax purposes, but are non-corporate entities (such as partnerships) for U.S. tax purposes). The provision generally applies to covered asset acquisitions after Dec. 31 2010.

Separate application of foreign tax credit limitation to items resourced under tax treaties - The Act prevents artificially inflating foreign source income by providing a separate foreign tax credit limitation for each item of income that could be treated as U.S. source income under the Code or foreign source income under a treaty and that the U.S. taxpayer elects to treat as foreign source. The provision applies to tax years beginning after the date of the new law’s enactment.

Limit FTCs with respect to “hopscotched” dividends - Under a prior anti-abuse rule, U.S. corporations with multiple lower-tier subsidiaries could create a “deemed dividend” from a lower-tier subsidiary that may be eligible for a higher FTC than if the dividend flowed up through the full chain of ownership to the U.S. parent. The new law limits FTCs to the maximum that could be claimed if the dividend did not “hopscotch” over the intermediary subsidiaries. The provision applies to the affirmative use of the deemed dividend rule after Dec. 31, 2010.

Redemptions by foreign subsidiaries - The Act provides a new limitation on when a foreign acquiring corporation’s earnings and profits may be reduced by a Code Sec. 304 deemed dividend. Under the Act, the foreign earnings remain subject to U.S. income tax when repatriated to a higher-tier U.S. subsidiary and subject to U.S. withholding tax when distributed to the foreign parent as a dividend. The provision applies to acquisitions after Dec. 31, 2010.

Repeal of 80/20 rules - The Act repeals the 80/20 rules for interest and dividends paid by U.S. corporations or resident alien individuals. Regardless of the amount of active foreign business income earned by the payor, dividends and interest paid by U.S. corporations or resident alien individuals to foreign persons are classified as U.S. source and subject to 30% withholding tax. The Act includes relief for existing 80/20 companies that meet specific requirements and are not abusing the 80/20 company rules. Subject to the relief for existing 80/20 companies, the provision applies to tax years beginning after Dec. 31, 2010.

Modification of affiliation rules for allocating interest expense - The Act modifies the affiliation rules to provide that the assets and interest expense of foreign corporations, satisfying income and ownership tests, are taken into account in allocating and apportioning the interest expense of the affiliated group for purposes of computing the foreign tax credit limitation. The provision applies to tax years beginning after the date of the new law’s enactment.

With the release of Announcement 2010-30, the IRS made it pretty clear they’re serious about requiring certain corporations to include in their tax returns a schedule reporting all their uncertain tax positions (“UTPs”). The announcement included Instructions to the Schedule UTP and a draft Schedule UTP, which is required to be filed beginning with the 2010 tax year (i.e. 2011 filing season). This week, and in weeks ahead, I’ll be discussing some of the nuances of this initiative and what it means for corporate taxpayers.

First who needs to be concerned? Broadly, corporations with assets in excess of $10 million, who file a Form 1120, issue audited financial statements and record a UTP in those financial statements will be required to file Schedule UTP. Pass-through entities and tax-exempt organizations are not required to file Schedule UTP for 2010 tax years.

I was talking to a CFO of a multinational company last week, telling him about the Schedule UTP. He made the comment that perhaps he would just switch to IFRS and not have to deal with this because his financials were not filed in accordance with U.S. GAAP. That’s not an option. The IRS thought of that. It doesn’t matter under which accounting standards the audited financials are issued; the Schedule UTP instructions refer to U.S. GAAP, IFRS or any other country-specific accounting standards. What he may have been thinking, and here he would have a valid point, is that a UTP required to be recorded under U.S. GAAP is not necessarily required to be recorded under IFRS. And generally, if it’s not recorded in the financial statements, it’s not reportable on Schedule UTP. That particular fact pattern, however, is rare.

Likewise, the IRS contemplated that U.S. corporations might try to circumvent the reporting requirement by having a foreign parent record the UTP as a top-side adjustment. The instructions specifically require the reporting of a corporation’s tax positions for which the corporation or a related party has recorded a reserve in an audited financial statement.

Corporation A is a corporation filing Form 1120 with $20 million of assets.  Corporation B is a foreign corporation not doing business in the United States and is a related party of Corporation A.  Corporations A and B issue their own audited financial statements.  If Corporation A has taken a tax position in a tax return, but does not record a reserve with respect to that tax position in its own audited financial statements, that tax position must be reported by Corporation A on its Schedule UTP if the audited financial statements of Corporation B include a reserve with respect to that tax position. Schedule UTP Instructions

I’ll finish with a piece of good news. Schedule UTP is not retroactive. A corporation is not required to report a tax position taken in a tax year beginning before December 15, 2009, or beginning on or after December 15, 2009 and ending before January 1, 2010.

You are doing one or the other. You are either conditioning or deconditioning. No one can achieve a level and maintain it. We all know that person who always looks the same. Never seems to gain any weight and always looks like they are in great shape. They do a great job of managing their conditioning and deconditioning cycles so neither strays too far from the trend line. Others tend to have higher volatility. The important part is that we recognize the cycles and keep the trend line going in an upward direction.

Don’t worry. I’m not turning this into a fitness blog. This obviously applies to our professional lives as well as our personal lives. While we face plenty of obstacles and challenges with the seasonal nature of our business and other demands, we need to minimize the deconditioning cycles in those periods and focus on an increased level of overall conditioning in the areas of personal development, management and leadership, relationships and communication, project management, and technology skills as well as our critical technical skills.

Note that this should not be confused with maintaining a level of responsibility. We understand that not everyone aspires to make partner or to move past their current position. That’s completely acceptable. To use another sports metaphor, we don’t need everyone to constantly look for a more challenging slope to ski down, but we do want everyone to work on technique so it looks easy and they’re not exhausted at the bottom. Then they can decide whether to go up for another, look for a more challenging run, or just call it a day knowing that they achieved some incredible results for our clients, themselves and our firm.

Many times companies will simply include all the wages, supplies and contract expenses of their designated R&D Department(s) into their R&D Credit calculation and “be done” with it. And though this might be a good way to estimate or guess the credit possibility from a high-level perspective, it is not a good way to make an accurate claim.

Were improper expenses included? Did substantially all the activities of individuals working in the R&D Department qualify for the Credit according to the tax law justifying such a claim? Were all the qualifying activities included?

Just because the department does not say “R&D” doesn’t mean that qualified activities exist. In order to qualify, the activities must meet the §41 requirements, not what people simply assume R&D to be. Furthermore, besides direct research qualifying, direct supervision and direct support of the research can qualify as well.

Maybe a product development process perspective would identify more or all the qualifying R&D areas. I have had a lot of success working with the IRS to agree to the proper credit amounts based on qualifying all the related activities of a company up to where the product meets its functional and economic requirements.

Furthermore, it is imperative that the company has and retains the technical support the contemporaneous documentation to support any research credit. In fact the documentation should be ready before any examination begins. Taxpayers obtain better results when the technical analysis is complete before the tax return is filed. Not all R&D Credit determinations are created equal – but a proper analysis with the applicable documentation can provide for an accurate and beneficial credit.

It seems like every year we have the discussion with one or two of our clients whether someone is an employee or independent contractor.  I also see court cases each year where someone was not categorized properly by the taxpayer (usually treating them as a contractor rather than an employee).  If someone is an employee, the employer is required to withhold taxes from that person as well as pay their share of employment taxes.  If they are a contractor, there is generally no withholding and all tax is the responsibility of the individual.  Recently there was another case on this very point, Bruecher Foundation Services Inc v. U.S. (CA 5 06/18/2010) 105 AFTR 2d ¶ 2010-997.  If you’re paying someone to do work for you and you’re not withholding taxes, you may want to evaluate if they truly are a contractor or should they be an employee.  These determinations are generally done on a “facts and circumstances” basis.  If you wait for the IRS, state revenue agency or department of labor to make the determination for you, it can be a very painful and expensive process to fix this.  In the above mentioned case, they list some of the items that are looked at when making such a determination, starting with:

“Whether a worker is an independent contractor or employee generally is determined by whether the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it. Under the common-law rules (so-called because they originate from court cases rather than from the Code), factors used to determine if an individual is a common law employee are”

• The degree of control exercised by the principal;
• which party invests in work facilities used by the individual;
• the opportunity of the individual for profit or loss;
• whether the principal can discharge the individual;
• whether the work is part of the principal’s regular business;
• the permanency of the relationship;
• the relationship the parties believed they were creating; and
• the provision of employee benefits.

This is by no means an exhaustive, list, but a start to get you thinking about the issue.  There has been a great deal published in this area.

For additional information view our previously posted blog “Misclassification of employees as independent contractors”. or visit the IRS’s summertime tax tips.

The U.S. Senate recessed for the extended July 4th holiday without acting on H.R. 4213, the American Jobs and Closing Tax Loopholes Act of 2010 (the extenders bill).  Among the bill’s numerous provisions are extensions through 2010 for the tax credit for increasing research activities; the new markets tax credit; accelerated depreciation for farming business machinery and equipment, qualified leasehold improvements, qualified restaurant buildings and improvements, qualified retail improvements, motorsports entertainment complexes, and business property on Indian reservations; the charitable tax deduction for corporate contributions of computer technology and equipment for educational purposes; ) expensing of environmental remediation expenditures; the tax deduction for income attributable to domestic production activities in Puerto Rico; the subpart F exemption (which excludes such income from the shareholder’s foreign personal holding company income) for active financing (insurance, banking, financing, or similar businesses) income earned on business operations overseas; and rules for adjusting the basis of stock of S corporations making charitable contributions of property. The bill also includes revenue raising provisions aimed at the taxation of carried interests.

Congratulations to the Colorado State Board of Accountancy for changing the continuing education (CE) requirements!  The State adopted the CE guidelines of the National Association of State Boards of Accountants and the American Institute of Certified Public Accountants.  Prior to the change, CE was segregated in two categories; A, or technical education, and B, non-technical.  Everyone referred to A as good and B as bad.  The fact that B was in a separate bucket had a negative connotation.  The first sentence of guidance – Other programs or courses which contribute to the development and maintenance of other professional skills may be acceptable – didn’t really put a positive spin on it.  A is where it was at. 

But if you looked further, the guidance from the State regarding B CE read – Such programs may include, but are not limited to, the areas of communication, quantitative methods, behavioral sciences, statistics and practice management.  Although it isn’t very clear, it doesn’t sound all bad.  Coursework aimed at being effective at communicating with clients, mentoring co-workers and running our practices.  Maybe it just got overlooked because of the presentation.

I love the new format.  No more A and B CE.  No more good and bad.  Just twenty three equally weighted fields of study that do contribute to the development of the professional skills necessary to be good at what we do.

Good communication skills won’t get you very far in the tax biz if your technical skills aren’t there.  But top-notch technical skills combined with communication, writing, counseling, leadership, time management, technology and other skills that the State is now promoting?  That’s where it’s at!

For entities with a calendar year-end, it’s that time of year – time to calculate the second quarter income tax provision.  Income tax expense for interim periods is based on an estimated annual effective income tax rate multiplied by the year-to-date ordinary pretax book income.  To get your interim provision right the first time, remember the following:

• Ordinary pretax book income does not include significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect.  Such items include, but are not limited to, discontinued operations or the cumulative effect of a change in accounting principle. 
• Certain items are not included in the estimated annual effective tax rate.  Instead, these items are allocated 100% to the quarter in which they occur.  Such items include, but are not limited to, certain releases of a valuation allowance, certain changes in a liability for uncertain tax positions, the impact of a change in tax law and the true-up of the tax provision from the prior year.
• Just like the annual tax provision, the interim tax provision is based on enacted tax law.  As of June 30, 2010, the American Jobs and Closing Tax Loopholes Act of 2010 (a.k.a. the Extenders Bill) has not been signed into law by the President.   As such, it is not appropriate to include in the second quarter provision any benefit for Research Credits generated during 2010.   
• Jurisdictions in which a company is unable to recognize a tax benefit for losses (i.e. a full valuation allowance has been recorded) are excluded from the estimated annual effective income tax rate calculation.