Copyright 1996 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536
Orphan Drug Credit. The orphan drug credit is extended for 11 months, for the period from July 1, 1996 through May 31, 1997. This credit has not been extended retroactively.
Health Care Continuation Rules. The Act amends Code Sec. 4980B to limit the continuation coverage under COBRA to no more than 36 months where the employee is also entitled to Medicare. The amendments apply to plan years beginning after 1989.
Puerto Rico and Possession Tax Credit. These tax credits are terminated for tax years beginning after December 31, 1995. There is a special phaseout rule for some credits.
Credit for Fuels from Nonconventional Sources. Certain fuels produced from nonconventional sources and sold to unrelated parties are eligible for an income tax credit. The new law extends the binding contract date for facilities producing synthetic fuels form coal and gas from biomass. The act does not extend the date on production qualifying for the credit.
Contributions of Stock to Private Foundations. Generally, the deduction for contributions of appreciated stock to a private foundation is limited to a taxpayer's basis. A special law that expired December 31, 1994 allowed a deduction equal to the fair market value of the stock. The provision has been revived, but only applies to contributions from July 1, 1996 through May 31, 1997.
Tax Tip--Contributions to a private foundation can generate significant tax savings, but require careful tax planning and are generally only applicable to high-income taxpayers with substantial net worth.Real Estate Reporting Costs. A person responsible for reporting a real estate transaction may now take into account the cost of reporting the transaction to the IRS when arriving at the amount to charge a customer. However, the fee cannot be separately stated.
Diesel Fuel on Recreational Motorboats. The 24.4 cent-per-gallon excise tax on diesel fuel used in recreational motorboats is suspended beginning 7 days after enactment through December 31, 1997.
Post-Death Qualification for Certain Trusts. Under prior law a grantor trust may remain an S corporation shareholder for 60 days after the death of the grantor. The 60-day period is extended to 2 years in certain situations. Effective for taxable years after December 31, 1996, the 2-year period applies to all testatmentary trusts.
S Corporation Earnings and Profits. The law makes a technical correction to the rules for computing the accumulated earnings and profits of an S corporation. It only affects S corporations that had accumulated earnings and profits before January 1, 1983. While the change probably affects few taxpayers, if you did business as an S corporation before that date, check with your tax advisor. You may be entitled to significant tax savings on any regular or liquidating distributions out of the corporation.
Carryovers of S Corporation Losses. Losses of an S corporation that are suspended under the at-risk rules (section 465) are carried forward to the S corporation's post-termination period. Thus, losses suspended by the at-risk rules are now treated the same as losses suspended as a result of the basis limitation.
Subdivided Real Estate and S Corporations. S corporations may now qualify for the benefits of Sec. 1237 allowing capital gain presumption for subdivided property if no substantial improvements have been made to the land, the land has been held for at least five years, and the parcel has not previously been held as ordinary income property and, if in the year of sale, the taxpayer did not hold other real property.
Credit for Diesel-Powered Autos, Vans and Light Trucks. The Act repeals the tax credit of $102 for diesel- powered autos and the $198 for diesel vans and light trucks, effective for vehicles purchased after August 20, 1996.
Tax Exempt Financing of Local Utilities. The new law restricts the ability of state or local governments to issue tax- exempt bonds to finance a facility for the furnishing of electric and gas by local utilities. Because tax-exempt funding reduces the interest cost for the issuer, some electric and gas utilities may be compelled to raise rates to counteract this change. However, the effect should be minor.
Public Utilities. The Act makes two changes to the law with respect to public utilities. First, the law restores the treatment of contributions in aid of construction for regulated public utilities that provide water or sewerage disposal services, effective for amounts received after June 12, 1996. Second, water utility property must be depreciated over 25 years, effective for property placed in service after June 12, 1996.
Salary reduction agreements in tax-sheltered annuities. Participants in tax-sheltered annuities (Code Sec. 403(b)) may now enter into salary reduction agreements with the same frequency and revoke such agreements the same way participants in other cash or deferred arrangements (401(k)) can. This provision is effective for taxable years beginning after December 31, 1995.
Elective deferral limits to 403(b) contracts. Each tax-sheltered annuity contract, not the plan, must now provide that elective deferrals made under the contract may not exceed the annual limit on elective deferrals. This provision is effective for years beginning after December 31, 1995, except that any annuity contract doesn't have to meet this change for 90 days from the date of enactment.
Unrecovered Investment in Annuity Contract. The law makes a technical correction by modifying the definition of the unrecovered investment in an annuity contract, in the case of a contract with a refund feature, so that the entire investment in the contract can be recovered tax-free. This provision is effective as of the enactment of the Tax Reform Act of 1986.
Tax Tip--Check with your tax advisor if this provision affects you. You may want to file an amended return.Excise Tax on Prohibited Transactions Increased. The new law raises the excise tax on prohibited transactions from 5 to 10% of the amount involved in the transaction. The 10% rate applies to prohibited transactions occurring on or after August 21, 1996.
Example--Madison Inc.'s profit sharing-plan purchases real property from a disqualified person for $200,000 at the time the fair market value of the property is $150,000. The excise tax is $20,000 (10% of $200,000).Prohibited Transaction Rules. The Act changes the language to conform to legislative intent by providing that transactions that are exempt from the prohibited transaction rules of ERISA (by reason of ERISA section 408(b)(12)) are also exempt from the prohibited transaction rules of the Code.
;f3Penalty Waiver. The Act waives any penalties for underpaid estimated taxes for individuals or corporations that might result from changes in the law from the Small Business Act.
Electronic Federal Tax Payment System (EFTPS). Businesses that paid more than $50,000 in tax deposits in 1995 would have to make deposits electronically beginning January 1, 1997. The new law postpones that requirement till June 1, 1997.
Retirement Benefits of Ministers. Effective for years beginning on or after December 31, 1994, retirement benefits of ministers, including the value or allowance of a parsonage, are no longer subject to self-employment taxes.
Foreign Gift Reporting. U.S. persons (individuals, corporations, partnerships, etc., but not tax-exempt organizations) who receive a gift or bequest from foreign sources that total more than $10,000 during the taxpayer year must report the gift to the IRS. If the gift is not reported, the IRS is authorized to determine the tax treatment of the gift (i.e., a gift, income, etc.). In addition, there is a penalty of 5% of the amount of the gift for each month the failure to report continues, with the total penalty capped at 25%. The provision applies to amounts received after the date of enactment.
Pension Reporting Penalties. Under the Act, the failure to provide information reports relating to pension payments are now the same as for other information reports (e.g., 1099s).
Airport and Airway Trust Fund Excise Taxes. These expired excise taxes are reinstated during the period beginning 7 days after enactment (August 20, 1996) and ending after December 31, 1996. The taxes apply to domestic passenger tickets, international air departures, domestic air freight waybills, and jet fuel and gasoline used for noncommercial purposes.
Comment--Note that the taxes expire at the end of 1996. You've missed your chance to purchase tickets without the tax, but you may have another opportunity to do so beginning January 1, 1997 unless Congress extends the tax.Estate Tax Credit. The Act changes the rules for decedents dying with property in more than one country. Now, when determining the pro rata unified credit required by treaty, property exempted by the treaty from U.S. estate tax is not treated as situated in the U.S.
Foreign Taxpayers. The Act has a number of provisions that affect foreign taxpayers and U.S. taxpayers with foreign operations. Affected areas include:
Tax-Exempt Organizations. The new law makes several specialized changes to the rules for tax exempt organizations.