At a time when legislators are considering tax reform that includes a drop in corporate rates, news that more “small businesses” may fall under corporate tax rates formerly reserved for C corps could mean an effective tax hike for all but the smallest businesses.

Treasury Department deliberations on a new definition are contained in an August 9 Treasury report. There is currently no size limit on what constitutes a small business for purposes of tax policy discussions. The Treasury Department is considering a $10 million income cap for small businesses, raising concerns that some closely held companies earning more than that could end up paying corporate tax rates.

The move could also affect larger flow-through entities such as partnerships, S corporations and limited liability companies, whose owners currently pay income tax but not corporate taxes on the companies’ earnings. More than 90 percent of businesses are structured as flow-through entities and their owners pay about 43 percent of all U.S. business taxes on their individual tax returns, according to the S Corporation trade group.

President Barack Obama is looking to businesses and high-income individuals to bring the federal deficit down. In a plan submitted on September 19 to the Joint Select Committee on Deficit Reduction, known as the “supercommittee,” the President offered details for a plan to cut the federal deficit by $3.2 trillion (net) over the next decade.

The plan outlines a variety of proposals that increase corporate tax payments at a time when businesses are struggling to avoid the threat of a double-dip recession. The proposal also includes offsets for the cost of the President’s previously released job creation and infrastructure spending bill, the American Jobs Act (AJA).

The Administration’s push for an increase in business revenues is evident throughout its deficit reduction plan. In summary, the plan includes $1.5 trillion in revenue provisions that:

• Increase taxes on high-income individuals;
• Tighten international tax rules;
• Change rules affecting life insurance companies and their products;
• Eliminate tax provisions that benefit the oil and gas and coal industries; and
• Repeal certain longstanding tax accounting methods.

Less clear is the Administration’s broader view of corporate tax reform. Instead of specifics, the deficit reduction plan sets out five guiding principles for corporate tax reform efforts: 

1. Lower individual and corporate tax rates;

2. Broaden the tax base by eliminating “inefficient and unfair” tax breaks;

3. Contribute $1.5 trillion toward deficit reduction over the next decade;

4. Spur economic growth and job creation; and

5. Observe the “Buffett Rule” – a principle rooted in the tenet that households with annual income in excess of $1 million should not have a lower effective tax rate than a typical middle-class family.

The details of the debt-busting plan demonstrate the Administration’s intent of leaning heavily on business to get a handle on the deficit. Partnerships with flow-through income should be aware that the President’s most recent plan allows the 2001 and 2003 ordinary income tax rates to expire for high-income individuals beginning in 2013. With the President’s plan, the expiration of upper-income tax rates is also likely to include reinstating the personal exemption phase-out and itemized deduction limitation to those with “household income above $250,000 per year” (and likely to singles earning above $200,000).

Two big tickets items outlined in the Administration’s plan are expected to fetch  $467 billion, enough to fully offset incentives offered in the AJA – a payroll tax holiday for employees and employers, various credits to encourage hiring of veterans and the long-term unemployed, and a delay in the implementation of a 3 percent withholding on payments to government contractors. The deficit reduction offsets are deduction and exclusion limitations and changes in the tax treatment of carried interest.

Itemized deductions and exclusions – The administration would limit to 28 percent the tax rate at which itemized deductions reduce tax liability for high-income taxpayers, effective January 1, 2013. This provision would include certain above-the-line deductions, exclusions for tax-exempt municipal bond interest and foreign-earned income, and the aggregate cost of employer-sponsored group health plan coverage.

Carried interest changes – Under the deficit reduction plan’s carried interest provisions, 100 percent of the income derived from “investment services partnership interests” would be subject to ordinary income treatment for tax years beginning after December 31, 2012. Carried interest income would also be excluded from qualifying income for purposes of determining whether a publicly traded partnership is treated as a corporation, although this provision would not be effective for 10 years. Some partnerships – those owned by real estate investment trusts or other publicly traded partnerships – would receive a permanent carve-out from the rules. Penalties for underpayments would be doubled from 20 percent to 40 percent when property is transferred for investment management services, and reasonable cause exceptions to underpayment penalties for investment management services would be curtailed.

Other proposed tax changes that would impact U.S. businesses are listed below.

• A permanent unemployment insurance tax hike of 0.2 percent.
• Worker reclassification guidance under common law standards.
• International tax rules regarding deferral and pooling of foreign tax credits.
• Current deduction restrictions for interest expenses that are allocated and apportioned to foreign-source income that is not currently subject to U.S. tax.
• Deemed-paid foreign tax credits calculated on consolidated basis for earnings and profits of the foreign subsidiaries that are repatriated to the taxpayer in the current taxable year.
• Excess income from intangible property transfers by U.S. persons to a related controlled foreign corporation subject to a low foreign effective tax rate would be treated as subpart F income. It is not clear if “intangible property” will include workforce in place, goodwill, and going concern value.
• Section 163(j) earnings stripping rules would be changed to prevent inverted companies from using foreign related-party and guaranteed debt to reduce U.S. tax on income from U.S. operations.
• Dual-capacity taxpayers subject to a foreign levy that receive a specific economic benefit from the levying country would lose foreign tax credit claim for the portion of the foreign levy paid for the specific economic benefit.
• Repeal of various tax provisions that benefit oil and gas companies and elimination of certain tax preferences for the coal industry.
• Reinstatement of superfund taxes that include an excise tax of 9.7 cents per barrel on crude oil received at a U.S. refinery and imported; an excise tax on hazardous chemicals sold and imported in substances in to the United States; an excise tax on imported substances that use listed hazardous chemicals as a feedstock; and an environmental tax of 0.12 percent on the amount by which the modified alternative minimum taxable income of a corporation exceeds $2 million.

For questions regarding these proposed changes, or other corporate tax reform issues, please contact Dan DeLau at 720-227-0065 or delau@taxops.com.

The Internal Revenue Service push to end offshore tax evasion is netting tax offenders of their own free will. On September 15, the IRS announced receipt of a total of 12,000 new applications under its 2011 voluntary disclosure program of offshore bank accounts. With these additional applications, the IRS has received a total of 30,000 disclosures since 2009, when the agency began offering U.S. taxpayers the means to voluntarily disclose their foreign bank accounts.

The applications were the result of the 2011 Offshore Voluntary Disclosure Initiative, which ended on Sept. 9. The 2011 initiative served up stricter penalties to those taxpayers that failed to step forward under the original program, the 2009 Offshore Voluntary Disclosure Program that ended on Oct. 15, 2009. Combined, the programs gave U.S. taxpayers with undisclosed assets or offshore income multiple chances to lawfully re-enter the U.S. tax system and avoid potential criminal charges.

The IRS sees the voluntary disclosures as proof positive of the efficacy of ramped up agency efforts to clamp down on secret bank accounts. The IRS collected $2.2 billion so far on 80 percent of taxpayer cases originating from the 2009 voluntary disclosure program. IRS Commissioner Douglas H. Shulman announced that the IRS has received $500 million in down payments for back taxes and interest owed on hidden accounts from the 2011 offshore disclosure program. Shulman also noted that the voluntary programs are just one piece of the agency’s broader efforts to create a dent in offshore tax evasion. Additional global tax enforcement initiatives include international tax agreements, increased foreign government cooperation, and joint efforts with the Justice department in the criminal prosecution of tax evaders.

For more information, please contact Mike Abramovitz at 720-227-0423 or mabramovitz@taxops.com.

The IRS has taken employer-issued cell phones off its list of employee fringe benefits with tax implications. Prior to the IRS guidance issued earlier this week, the IRS classified employer-issued cell phones as a taxable benefit. Employers were required to report the value of these phones as they would compensation, the value of which had to be included in the employee’s gross income, unless an exclusion applies. Employees that received employer-issued cell phones had to keep detailed records of all calls made on these cell phones, indicating which calls were business-related and which were personal, to minimize tax implications of the benefit.

The IRS reversed its cell phone position on September 14. New IRS guidance says employer-provided cell phones that are provided primarily for non-compensatory business reasons (i.e. work-related reasons), yet are used by employees for both business and personal use, are generally nontaxable to the employee. As such, the employee is no longer required to maintain detailed records of business and personal use in order to receive tax-free treatment.

The rules in Notice 2011-72 apply to any use of an employer-provided cell phone occurring after December 31, 2009. The guidance is available in Notice 2011-72. Additional questions on this guidance can be directed to John Monahan, at 720-227-0060 or jmonahan@taxops.com.

Putting Americans to work is the goal of President Barack Obama’s American Jobs Act (Jobs Act) presented to Congress on Monday. In presenting the Jobs Act, President Obama asked the U.S. Congress to approve a $447 billion package of tax cuts and new spending to prop up the ailing economy and spur on greater employment.

Among the Act’s provisions are a number of tax items, including a temporary payroll tax cut, a limit on itemized deductions for certain high-income taxpayers, and a proposal to tax carried interests as ordinary income rather than capital gains. A summary of the provisions of the Jobs Act from the AICPA’s Tax Advisor includes the following tax breaks for businesses.

Temporary payroll tax cut for employers, employees, and the self-employed: The current temporary reduction in payroll taxes would be expanded. For 2012, the employee’s portion of Social Security tax would be 3.1%; the employer’s portion would also be 3.1%, up to the first $5 million of wages paid by the employer. The tax on self-employed workers would be reduced to 6.2%.

Temporary tax credit for increased payroll: From Oct. 1, 2011, through Dec. 31, 2012, the proposed bill would provide a payroll tax credit to offset the employer portion of Social Security tax due to wage increases over the corresponding period in the prior year.

Extension of temporary 100% bonus depreciation for certain business assets: The proposal would extend 100% bonus depreciation under IRC § 168(k) through the end of 2012.

Delay in application of withholding on government contractors: The measure would delay the effective date of the 3% withholding requirement on payments to government contractors until after 2013.

Returning heroes and wounded warriors work opportunity tax credits: The measure would double the section 51(b) credit available for hiring certain unemployed, disabled veterans. It also would create two new credits: One for hiring veterans who have been unemployed for at least four weeks and another for hiring veterans who have been unemployed for at least six months.

Long-term unemployed workers work opportunity tax credits: Another credit would be available for employers who hire individuals who have been unemployed for at least six months.

The Jobs Act also proposes a number of new taxes for taxpayers.

28% limitation on certain deductions and exclusions: This provision would limit the value of deductions and exclusions to 28% of the taxpayer’s taxable income. This would apply to joint filers with adjusted gross income over $250,000 and single filers with adjusted gross income over $200,000.

Tax carried interest in investment partnerships as ordinary income: This provision would change the rules regarding partnership interests transferred in connection with performance of services and would add a new Code section with special rules for partners providing investment management services to partnerships. The effect would be to tax carried interests at ordinary income rates instead of as capital gains.

Change corporate jet depreciation: Under this provision, corporate jets would be depreciated over the same seven-year period as other aircraft.

Repeal oil subsidies: Various deductions and credits available to oil and gas producers would be repealed.

Source: AICPA Tax Advisor http://www.aicpa.org/interestareas/tax/newsandpublications/taxnews/pages/20110912.aspx?action

Separately, the White House release of the Jobs Act proposal can be found at http://www.whitehouse.gov/the-press-office/2011/09/08/fact-sheet-american-jobs-act.

Accounting Today editor-in-chief Michael Cohn highlighted the hefty burden of tax change in an article dated August 8, 2011. Based on the ONESOURCE Indirect Tax Report from Thomson Reuters, multinational tax functions had a particularly busy second quarter 2011 dealing with 270 domestic and international tax changes. Of those, 184 were U.S. changes related to both income and sales and use taxes, most of which were either tax increases or new taxes. In addition, there were 86 changes internationally in value-added taxes – 13 of which were tax increases, one tax decrease, six new taxes and 64 product taxability changes.

The sheer number of changes makes it especially difficult for companies that operate in a large number of state and foreign jurisdictions to adjust internally, and creates an increased operational burden. From a sales and use tax perspective, a company that does not timely adjust to the new law changes could collect excessive sales tax or overpay use tax. Conversely, underpayment of sales and use tax could be creating a growing tax exposure for the company that could result in penalties and interest.

There were a total of over 2,000 tax changes for the first and second quarters of 2011 combined, according to Thomson Reuters. For more on the ONESOURCE tax study, see http://www.accountingtoday.com/news/Companies-Cope-270-Tax-Changes-Q2-59499-1.html. John Monahan can be reached at 720-227-0060 or jmonahan@taxops.com.

The IRS has issued final regulations on the election to deduct startup expenses (Code Sec. 195), corporate organization expenses (Code Sec. 248), or partnership organization expenses (Code Sec. 709). The regulations reflect changes made to these provisions by the American Jobs Creation Act of 2004 (P.L. 108-357), and increases to allowable deductions found in the Tax and Pension Provisions of the Small Business Jobs Act of 2010 (P.L. 111-240, 9/27/2010). The Small Business Jobs Act doubled the amount of start-up expenses that a taxpayer could elect to deduct for a tax year beginning in 2010 from $5,000 to $10,000 in the tax year in which the business begins. The new law has also increased the deduction phase-out threshold from $50,000 to $60,000 where the deduction is phased out dollar for dollar over the amount of the threshold. Any amounts over the maximum amount as calculated will be amortized ratably over a 15 year period.

A notable change in the final regulations is how taxpayers elect deductions. The final regulations clarify that a taxpayer wishing to make an election to capitalize start-up and organizational costs must “affirmatively elect to capitalize” the costs on a timely filed Federal income tax return. (Reg. § 1.195-1(b), Reg. § 1.248-1(c), Reg. § 1.709-1(b)(2)). If electing to capitalize, the amount of start-up expenses will be amortized ratably over 15 years.

These deductions are a tax opportunity for taxpayers that use cost-segregation to optimize the costs that can be identified as start-up expenses and deduct all or a portion currently.. The final regulations are effective for expenses paid or incurred after Aug. 16, 2011. However, taxpayers may apply all the provisions of the final regulations to expenses paid or incurred after Oct. 22, 2004, under the separate guidelines provided by the American Jobs Creation Act of 2004.

For more information on the final regulations and start-up deductions, please call John Monahan at 720-227-0060 or jmonahan@taxops.com.

The R&D tax credit is among the largest and most broadly available federal and state tax credits. State competition to attract jobs has resulted in more attractive R&D credits, creating a veritable benefit bonanza for businesses. Job hungry states know that R&D fuels high-tech and manufacturing job growth. With more credits available, the thinking goes, companies can expand R&D work, generating new, typically high-tech jobs in the state.

Some states are upping the amount available for R&D credits to lure new companies state-side and keep others around.

• Take Louisiana and Minnesota, for example, which offer a refund for small businesses that haven’t even made a profit. A refund to a start-up that expects no profits in the near future is akin to cash flow that could keep a company in business through the difficult start-up phase.
• Iowa, Virginia and Arizona have refundable R&D tax credits. In some cases, though, the credits are capped.
• Although California does not have a refundable credit, the Golden state often matches the federal R&D credit. This is especially valuable in years that California does not allow for state net operating losses to be used.

When state credits are combined with federal funds, even companies with fewer than 50 employees can see tens of thousands of dollars in credits. Federal support of R&D credits is necessary to keep U.S. technological development on U.S. soil. With the size of R&D credits in the U.S. lower than a number of other developed and developing nations, the global pressure to increase R&D credits in the U.S. is growing. So too is pressure to expand the type of development eligible for R&D credit. Certain European countries, such as the U.K., are now considering tax breaks to companies that develop successful processes from general R&D work. Overall, such incentives could make the nation more attractive a place to perform R&D and keep intellectual property from straying abroad.

Healthy state and federal funding for R&D should make all businesses engaged in improving products, processes, and designs take a closer look at whether they qualify. Software, energy, pharmaceutical, environmental, and medical device companies and manufacturers are among those that can qualify.

For more information on R&D credits, call Mark Dunning at 720-227-0420 or mdunning@taxops.com.

The Senate recently voted to kill 30 year-old ethanol subsidies. The energy-related cuts have groups that support wind, solar, and other renewable energy sources concerned that their preferred tax breaks will be eliminated to lower government costs.

In the name of a balanced budget, Washington has put all tax credits and deductions under the microscope of tax reform. But these “subsidies” are by no means equal. Credits that are not producing intended results fast enough are at particular risk for being cut. Renewables accounted for just over 10 percent of the country’s energy production in 2009 while receiving roughly three-quarters of the federal energy tax incentives. Fossil fuels, on the other hand, received 13 percent of the incentives while providing close to 80 percent of production.

Because renewable energy is such a small percentage of energy production today, it represents what some consider the low-lying fruit, ripe for the Congressional chopping block. But eliminating wind, biofuel, and solar supports, among others, may not be in the best interest of the nation. Renewable energy is an up-and-coming industry. While forward momentum has been slowed by the economic meltdown, investment in renewable energy sources continues to outpace other industries.

The U.S. as a nation may already be falling behind. The largest and fastest growing sustainable energy technology industries are in China, India, South Korea and Brazil – countries that support an increase in sustainable energy and green jobs. At least 83 countries have some type of policy to promote renewable energy production. Clean energy supports support deployment of sustainable technology and represent a means to wean countries off of harmful fossil fuel dependencies. To keep research and development of clean energy on U.S. soil, Washington’s continued support of sustainable energy tax breaks and deductions is needed.

In addition to federal incentives, state and local governments, and individual companies, continue to provide incentives for renewable energy development and use. The non-profit Colorado Renewable Energy Society (CRES) tracks renewable energy news and projects in Colorado (CRES-energy.org), such as Jefferson County’s high visibility wind and solar energy project. CRES advocates for renewable energy projects and innovations that can meet a steadily increasing percentage of Colorado’s energy needs.

At TaxOps, we work with clients in the renewable energy space that have complex tax needs. In addition, TaxOps Minimization helps clients capitalize on current credits, grants, tax holidays, and accelerated depreciation schedules for renewable energy before they expire. For more information, please contact Mike Abramovitz at 720-227-0423 or mabramovitz@taxops.com.

Filers of the Report of Foreign Bank and Financial Accounts (known as the “FBAR”) now have the option to file Form TD F 90-22.1 electronically, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced on July 18. Previously, the FBAR could only be filed on a paper return. After initial setup, electronic filing is expected to make the process easier and less costly for filers, especially since FBARs must be filed separately from federal income tax returns.

United States persons are required to file FBARs if they have a financial interest in or signature authority over at least one financial account located outside of the United States; and the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported. With some exceptions, the FBAR must be received by the IRS on or before June 30 of the year following the calendar year being reported. (See separate TaxOps blogs for more information about filing extensions exceptions.)

Filers must apply for and obtain a FinCEN approved user ID before e-filing their FBARs. Check the e-filing platform operating system specifications and download a free forms viewer to prepare and transmit returns. Alternatively, FBARs may continue to be filed on paper until further notice.

For questions about FBAR filings, please contact Mike Abamovitz at 720-227-0423 or mabramovitz@taxops.com.

To read previous blogs on FBAR extensions, please click on the following links:

FBAR Deadlines Looming for Some; Others Receive Filing Reprieve
FBAR Filing Deadline Extended for Certain Financial Professionals
Mid-year deadline for FBAR reporting fast approaching; amnesty window closes in August