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)

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.

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.

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.

“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.

• Result in new therapies to treat areas of unmet medical need or prevent, detect or treat chronic or acute diseases and conditions,
• Reduce the long-term growth of health care costs in the United States, or
• Significantly advance the goal of curing cancer within 30 years.

There are some limitations, such as the credit is only available to taxpayers with no more than 250 employees.  To apply, applicants must complete Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program, which was just released by the Internal Revenue Service.  Follow this link for additional information, and a link to the application form:  http://grants.nih.gov/grants/funding/QTDP_PIM/index.htm

Current Research Credit situation:        

The Research Credit currently expires after 12/31/2009.  So, no taxpayer can file for the Research Credit for a period beyond 12/31/2009.  Furthermore, no company can take the financial benefit (i.e. inclusion in tax provision) for any Research Credit beyond 12/31/2009.   If a company has a fiscal year ending in 2010, they can include the credit for the period within 2009 (and adjust their base accordingly).  But, they cannot qualify or include anything for 2010.

 Status on Extension:

The House passed the Extenders Bill of which the Research Credit is part of, called “the American Jobs and Closing Tax Loopholes Act of 2010” on May 28^th.  This Bill is currently being considered in the Senate, with a vote likely coming the week of June 14, 2010.   As part of the bill, the Research Credit would be extended exactly like it is currently in place for 2009 and the credit would be extended for just 12 months.

 Note: Upon Congress (both the House and the Senate) passing the Bill, the bill doesn’t become law until it is signed by the President of the United States.

For more information please see the previous blog titled “What happened to the extenders bill”.

 On June 8, the Senate began its consideration of its substitute amendment to the bill and is expected to vote this week on its version of the extenders package (technically the Senate substitute amendment to the House amendment to the Senate amendment), and Senator Charles Schumer (D-NY) has predicted that the measure will pass.

 The bill before the Senate is very similar to the bill passed by the House. Both bills would retroactively reinstate and extend for one year a host of important tax breaks for businesses and individuals. And they both include many revenue raisers, such as a crackdown on carried interest, a crackdown on using certain S corporations as a way to minimize Medicare and Social Security taxes, and another assault on “foreign tax loopholes.” However, the Senate bill makes several important modifications to the tax provisions in the House-passed bill.  

• The Senate bill drops the House bill’s new rules for defined contribution plan fee disclosure requirements.
• The Senate bill keeps the House’s carried interest crackdown but modifies it to soften the blow
• The Senate bill would increase the Oil Spill Liability Trust Fund financing rate to 41 cents per barrel (up from 34 cents in the House version).

 We’ll update with all the details when the bill is passed.

 LMSB revenue agents will review the publication with taxpayers at the start of most new tax examinations. The publication outlines the LMSB examination process from start to finish, explaining that the new guidelines emphasize the importance of ongoing dialogue between the exam team and taxpayer throughout execution of the exam plan. IRS says timely, clear, and consistent communication between its examiners and the taxpayer during the process can directly influence the scope of the examination and the depth of the analysis for issues under audit.

Information on the new LMSB examination process can be found on the IRS website (http://www.irs.gov/businesses/article/0,,id=224139,00.html)