Small Business Taxes & ManagementTM--Copyright 2009, A/N Group, Inc.
The U.S. Treasury Department has released the General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals (Greenbook) to provide details of plans to cut taxes for small businesses and middle class families and close unfair corporate tax loopholes. For small businesses, the proposals would expand the net operating loss carryback benefit, and eliminate capital gains taxation on investments in small business stock (C corporations). The proposals would provide relief to low income taxpayers, but would increase taxes for high-income individuals by reinstating the 39.6- and 36-percent tax rates and make the 36-percent rate applicable for taxpayers with income over $250,000 less the standard deduction and two personal exemptions (married filing joint; the 33-percent rate currently applies to taxable income over $208,000). The proposal would also reinstate the personal exemption phaseout (at $250,000; married, joint) and increase the tax on capital gains and dividends to 20 percent for taxpayers with income over $250,000 (married, joint; $200,000 for single). The proposals assume the 2001 and 2003 tax cuts are generally extended after 2010.
The proposals contain a number of loophole closers including requiring minimum terms for grantor retained annuity trusts, foreign bank accounts, and information reporting.
Clearly, there's a long way between proposals and signed legislation, but the fact that Democrats control both houses and the presidency bodes well for at least a portion of the proposals becoming law.
Please note we've only included the provisions of interest to most taxpayers, and only the highlights of the included provisions. The full text of the Greenbook is available at www.treas.gov/offices/tax-policy/library/grnbk09.pdf
Tax Cuts for Families and Individuals
Making Work Pay Credit. The $400 ($800 for married filing joint) credit currently in effect for 2009 and 2010 would be made permanent, indexed for inflation and the phase-out rate would be reduced.
Expand the Earned Income Tax Credit. The proposal would make permanent the $5,000 (indexed) increase in the beginning of the phase-out range for joint filers relative to other individuals. The proposal would make permanent the expansion of the EITC for workers with three or more qualifying children.
Expand the Refundability of the Child Tax Credit. The proposal would make permanent the $3,000 earnings threshold for refundability of the child credit. In addition the earnings threshold would no longer be indexed for inflation. The proposal would be effective for tax years beginning after December 31, 2010.
Expand the Saver's Credit and Provide Automatic Enrollment in IRAs. The proposal would make the saver's credit fully refundable and would provide for the credit to be deposited automatically in the qualified retirement plan account or IRA to which the eligible individual contributed. In place of the current 10-percent/20-percent/50-percent credit for qualified retirement savings contributions up to $2,000 per individual, the proposal would match 50-percent of such contributions up to $500 per individual (indexed annually for inflation beginning in taxable year 2011). The eligibility income threshold would be increased to $65,000 for married couples filing jointly, $48,750 for heads of households, and $32,500 for singles and married individuals filing separately, with the amount of savings eligible for the credit phased out at a 5-percent rate for AGI exceeding those levels. The proposal would be effective December 31, 2010.
Employers in business for at least two years that have 10 or more employees would be required to offer an automatic IRA option to employees on a payroll-deduction basis, under which regular payroll-deduction contributions would be made to an IRA. If the employer sponsored a qualified retirement plan or SIMPLE for its employees, it would not be required to provide an automatic IRA option for any employee. The employer offering automatic IRAs would give employees a standard notice and election form informing them of the automatic IRA option and allowing them to elect to participate or opt out. The proposal would become effective January 1, 2012.
Provide the American Opportunity Tax Credit. The proposal would make the AOTC a permanent replacement for the Hope Scholarship credit. To preserve the value of the AOTC, the proposal would index the $2,000 tuition and expense amounts, as well as the phase-out thresholds, for inflation. This proposal would be effective for taxable years beginning after December 31, 2010.
Tax Cuts for Business
Eliminate Capital Gains Tax on Investments in Small Business Stock. Under the proposal the percentage exclusion for qualified small business stock sold by an individual or other non-corporate taxpayer would be increased to 100 percent and the AMT preference item for gain excluded under this provision would be eliminated. The stock would have to be held for at least five years and other provisions applying to the Section 1202 exclusion would also apply. The proposal would include additional documentation requirements to assure compliance with the statute. The proposal would be effective for qualified small business stock issued after February 17, 2009.
Make the Research and Experimentation Tax Credit Permanent.
Expand Net Operating Loss Carryback.
Continue Certain Expiring Provisions Through Calendar Year 2010
The existing tax code includes a number of provisions that are scheduled to expire before December 31, 2010. These provisions include the optional deduction for State and local general sales taxes, Subpart F "active financing" and "look-through" exceptions, the exclusion from unrelated business income of certain payments to controlling exempt organizations, the new markets tax credit, the modified recovery period for qualified leasehold improvements and qualified restaurant property, incentives for empowerment and community renewal zones, credits for biodiesel and renewable diesel fuels, and several trade agreements, including the Generalized System of Preferences and the Caribbean Basin Initiative. This proposal would extend these provisions through December 31, 2010.
Other Revenue Changes and Loophole Closers
Miscellaneous.
Reform U.S. International Tax System.
Combat Under-Reporting of Income Through Use of Accounts and Entities in Offshore Jurisdictions.
Eliminate Oil and Gas Company Preferences.
Upper-Income Tax Provisions Dedicated to Deficit Reduction
Reinstate the 39.6-percent Rate. Prior to the enactment of EGTRRA, the highest individual income tax rate was 39.6-percent. EGTRRA reduced the 39.6-percent tax rate temporarily to 35 percent. For 2009, it applies to taxable income over $372,950 ($186,475 if married filing separately). The 35-percent tax rate sunsets after 2010. The Administration's tax receipts baseline would permanently extend the EGTRRA tax rates. This proposal would permit the EGTRRA reduction in the highest income tax rate to sunset after 2010. Thus, beginning in 2011, the highest income tax rate would be 39.6 percent. The taxable income levels at which this rate begins to apply would vary by filing status and would be indexed annually for inflation.
Reinstate the 36-percent Rate for Taxpayers with Income Over $250,000. beginning in 2011, the second highest tax rate would be 36 percent. The taxable income levels at which that rate begins to apply would vary by filing status and would be indexed annually for inflation. The 36-percent tax rate would apply to taxable income above the following amounts but less than the income levels at which the 39.6-percent rate would apply: $250,000 less the standard deduction and two personal exemptions, indexed from 2009, for married taxpayers filing jointly; $200,000 less the standard deduction and one personal exemption, indexed from 2009, for single filers. The 28-percent tax rate bracket would be expanded so that taxpayers earning less than these amounts would not see their taxes rise as a result of the increased tax rate brackets.
Reinstate the Limitation on Itemized Deductions for Taxpayers with Income over $250,000. The Administration's tax receipts baseline would permanently extend the EGTRRA repeal of the limitation on itemized deductions. This proposal would allow the elimination of the limitation on itemized deduction enacted in EGTRRA to sunset after 2010. Thus, itemized deductions (other than medical expenses, investment interest, theft and casualty losses, and gambling losses) would be reduced by 3 percent of the amount by which AGI exceeds statutory floors which are higher than under current law, but not by more than 80 percent of the otherwise allowable deductions. The floors would be indexed annually for inflation. For 2011, the AGI floors would be adjusted for inflation starting with a value of $250,000 in 2009 for married taxpayers filing jointly and $200,000 in 2009 for single taxpayers.
Reinstate the Personal Exemption Phase Out for Taxpayers with Income over $250,000. The Administration's tax receipts baseline would permanently extend the EGTRRA repeal of the personal exemption phase-out. This proposal would allow the elimination of the personal exemption phase-out enacted in EGTRRA to sunset after 2010. The AGI levels at which the phase-out begins would be adjusted. For 2011, the AGI floors would be adjusted for inflation starting with a value of $250,000 in 2009 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 in 2009 for single taxpayers.
Impose a 20-Percent Rate on Dividends and Capital Gains for Taxpayers with Income over $250,000. The Administration's tax receipts baseline would permanently extend the zero- and 15-percent tax rates for dividends and capital gains. The zero- and 15-percent tax rates for capital gains and qualified dividends would be extended permanently for taxpayers with incomes up to $250,000 for joint returns and $200,000 for single taxpayers. The 20-percent tax rate on long-term capital gains and qualified dividends would apply for married taxpayers filing jointly with income over $250,000 less the standard deduction and two personal exemptions (indexed from 2009) and for single taxpayers with income over $200,000 less the standard deduction and one personal exemption (indexed from 2009). The reduced rates on gains on assets held over 5 years would be repealed. This proposal is effective on the date of enactment for taxable years beginning after December 31, 2010.
Other Initiatives
Implement Unemployment Insurance Integrity Legislation.
Restructure Assistance to New York City.
Levy Payments to Federal Contractors with Delinquent Tax Debt.
Increase Levy Authority to 100 Percent for Vendor Payments.
Limit the Tax Rate at which Itemized Deductions Reduce Tax Liability to 28 Percent. The proposal would limit the value of all itemized deductions by limiting the tax value of those deductions to 28 percent whenever they would otherwise reduce taxable income in the 36 or 39.6 percent tax brackets. A similar limitation also would apply under the AMT.
This proposal would apply to itemized deductions after they have been reduced under a separate budget proposal that would reinstate the pre-EGTRRA limitation on certain itemized deductions, but with adjusted AGI thresholds in 2011 of $250,000 (indexed from 2009) for married taxpayers filing jointly and $200,000 (indexed from 2009) for other taxpayers. After 2011, these thresholds would be indexed. The proposal is effective for taxable years beginning after December 31, 2010.
Expand Information Reporting
Require Information Reporting for Private Separate Accounts of Life Insurance Companies. The proposal would require life insurance companies to report to the IRS, for each contract whose cash value is partially or wholly invested in a private separate account for any portion of the taxable year, the policyholder's taxpayer identification number, the policy number, the amount of accumulated untaxed income, the total contract account value, and the portion of that value that was invested in one or more private separate accounts. For this purpose, a private separate account would be defined as any account with respect to which a related group of persons owned policies whose cash values, in the aggregate, represented at least 10 percent of the value of the separate account. The proposal would be effective for taxable years beginning after December 31, 2010.
Require Information Reporting on Payments to Corporations. Under current law, generally, a taxpayer making payments to a recipient aggregating to $600 or more for services or determinable gains in the course of a trade or business in a calendar year is required to send an information return to the IRS setting forth the amount, as well as name and address of the recipient of the payment (generally on Form 1099). Under a longstanding regulatory regime, there are certain exceptions for payments to corporations, as well as tax-exempt and government entities.
Under the proposal, a business would be required to file an information return for payments aggregating to $600 or more in a calendar year to a corporation (except a tax-exempt corporation). The proposal would be effective for payments made to corporations after December 31, 2009.
Required a Certified Taxpayer Identification Number from Contractors and Allow Certain Withholding. A contractor receiving payments of $600 or more in a calendar year from a particular business would be required to furnish to the business (on Form W-9) the contractor's certified TIN. A business would be required to verify the contractor's TIN with the IRS, which would be authorized to disclose, solely for this purpose, whether the certified TIN-name combination matches IRS records. If a contractor failed to furnish an accurate certified TIN, the business would be required to withhold a flat-rate percentage of gross payments. Contractors receiving payments of $600 or more in a calendar year from a particular business could require the business to withhold a flat-rate percentage of their gross payments, with the flat-rate percentage of 15, 25, 30, or 35 percent being selected by the contractor. The proposal would be effective for payments made to contractors after December 31, 2009.
Require Increased Information Reporting for Certain Government Payments for Property and Services. The IRS and Treasury Department would be authorized to promulgate regulations requiring information reporting on all non-wage payments by Federal, State and local governments to procure property or services. It is expected that certain categories of payments would be excluded from the new information reporting requirements, including payments of interest, payments for real property, payments to tax-exempt entities or foreign governments, intergovernmental payments, and payments made pursuant to a classified or confidential contract. The proposal would be effective for payments made after December 31, 2009.
Increase Information Return Penalties. The first-tier penalty would be increased from $15 to $30, and the calendar year maximum would be increased from $75,000 to $250,000. The second-tier penalty would be increased from $30 to $60, and the calendar year maximum would be increased from $150,000 to $500,000. The third-tier penalty would be increased from $50 to $100, and the calendar year maximum would be increased from $250,000 to $1,500,000. For small filers, the calendar year maximum would be increased from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard would be increased from $100 to $250. The proposal would also provide that every five years the penalty amounts would be adjusted to account for inflation. The proposal would be effective for information returns required to be filed after December 31, 2010.
Improve Compliance by Business
Require E-Filing by Certain Large Organizations. All corporations and partnerships required to file Schedule M-3 would be required to file their tax returns electronically. In the case of certain other large taxpayers not required to file Schedule M-3 (such as exempt organizations), the regulatory authority to require electronic filing would be expanded to allow reduction of the current threshold of filing 250 or more returns during a calendar year. Nevertheless, any new regulations would balance the benefits of electronic filing against any burden that might be imposed on taxpayers, and implementation would take place incrementally to afford adequate time for transition to electronic filing. Taxpayers would be able to request waivers of this requirement if they cannot meet the requirement due to technological constraints, if compliance with the requirement would result in undue financial burden, or if other criteria specified in regulations are met. The proposal would be effective for tax years ending after December 31, 2009.
Implement Standards Clarifying when Employee Leasing Companies can be Held Liable for Their Clients' Federal Employment Taxes. The proposal would set forth standards for holding employee leasing companies jointly and severally liable with their clients for Federal employment taxes. The proposal would also provide standards for holding employee leasing companies solely liable for such taxes if they meet specified requirements. The provision would be effective for employment tax returns required to be filed with respect to wages paid after December 31, 2009.
Strengthen Tax Administration
Allow Assessment of Criminal Restitution as Tax. The proposal would allow the IRS and the Treasury Department to immediately assess, without issuing a statutory notice of deficiency, and collect as a tax debt court-ordered restitution. The taxpayer would not be able to collaterally attack the amount of restitution ordered by the court, but would retain the ability to challenge the method of collection. The proposal would be effective after December 31, 2010.
Reverse Offer-In Compromise Application Rules. The proposal would eliminate the requirements that an initial offer-in-compromise include a nonrefundable payment of any portion of the taxpayer's offer. The proposal would be for offers-in-compromise submitted after the date of enactment.
Expand IRS Access to Information in the National Directory of New Hires for Tax Administration Purposes. The Social Security Act would be amended to expand IRS access to NDNH data for general tax administration purposes, including data matching, verification of taxpayer claims during return processing, preparation of substitute returns for non-compliant taxpayers, and identification of levy sources. Data obtained by the IRS from the NDNH would be protected by existing taxpayer privacy law, including civil and criminal sanctions. The proposal would be effective upon enactment.
Make Repeated Willful Failure to File a Tax Return a Felony. Any person who willfully fails to file tax returns in any three years within any five consecutive year period, if the aggregated tax liability for such period is at least $50,000, would be subject to a new aggravated failure to file criminal penalty. The proposal would classify such failure as a felony and, upon conviction, impose a fine of not more than $250,000 ($500,000 in the case of a corporation) or imprisonment for not more than five years, or both. The proposal would be effective for returns required to be filed after December 31, 2009.
Facilitate Tax Compliance with Local Jurisdictions. Indian Tribal Governments (ITGs) that impose alcohol, tobacco, or fuel excise or income or wage taxes would be treated as States for purposes of information sharing to the extent necessary for ITG tax administration. An ITG that receives FTI would be required to safeguard it according to prescribed protocols. The criminal and civil sanctions would apply. The proposal would be effective for disclosures made after enactment.
Extension of Statute of Limitations where State Tax Adjustment Affects Federal Tax Liability. The proposal would create an additional exception to the general three-year statute of limitations for assessment of Federal tax liability resulting from adjustments to State or local tax liability. The statute of limitations would be extended the greater of: (1) one year from the date the taxpayer first files an amended tax return with the IRS reflecting adjustments to the State or local tax return; or (2) two years from the date the IRS first receives information from the State or local revenue agency under an information sharing agreement in place between the IRS and a State or local revenue agency. The statute of limitations would be extended only with respect to the increase in Federal tax attributable to the State or local tax adjustment. The statute of limitations would not be further extended if the taxpayer files additional amended returns for the same tax periods as the initial amended return or if the IRS receives additional information from the State or local revenue agency under an information sharing agreement. The statute of limitations on claims for refund would be extended correspondingly so that any overall increase in tax assessed by the IRS as a result of the State or local examination report would take into account agreed-upon tax decreases or reductions attributable to a refund or credit. The proposal would be effective for returns required to be filed after December 31, 2009.
Improve Investigative Disclosure Statute. The taxpayer privacy law would be clarified by stating that it does not prohibit Treasury and IRS officers and employees from identifying themselves, their organizational affiliation, and the nature and subject of an investigation, when contacting third parties in connection with a civil or criminal tax investigation. The proposal would be effective for disclosure made after enactment.
Expand Required Electronic Filing by Tax Return Preparers. The proposal generally would maintain the current rule that regulations may not require any person to file electronically unless the person files at least 250 tax returns during the calendar year. But the proposal also would provide an exception to this rule under which regulations may require electronic filing by tax return preparers (as currently defined in the Internal Revenue Code) who file more than 100 tax returns in a calendar year. The proposal also would allow regulations requiring tax return preparers who file more than 100 returns (or any other person who files more than 250 returns) to file electronically tax returns for individuals, estates, or trusts. The proposal would be effective for tax returns required to be filed after December 31, 2010.
Expand Penalties
Clarify Bad Check Penalty Applies to Electronic Checks and other Payments.
Impose a Penalty on Failure to Comply with Electronic Filing Requirements. The proposal would establish an assessable penalty would be established for a failure to comply with a requirement of electronic (or other machine-readable) format for a return that is filed. The amount of the penalty would be $25,000 for a corporation or $5,000 for a tax-exempt organization. For failure to file in any format, the existing penalty would remain, and the proposed penalty would not apply. The proposal would be effective for returns required to be electronically filed after December 31, 2010.
Tax Accounting Methods
Deny Deduction for Punitive Damages No deduction would be allowed for punitive damages paid or incurred by the taxpayer, whether upon a judgment or in settlement of a claim. Where the liability for punitive damages is covered by insurance, such damages paid or incurred by the insurer would be included in the gross income of the insured person. The insurer would be required to report such payments to the insured person and to the IRS. The proposal would apply to damages paid or incurred after December 31, 2010.
Repeal Lower-of-Cost-or-Market Inventory Accounting Method. The proposal would statutorily prohibit the use of the LCM and subnormal goods methods. Appropriate wash-sale rules also would be included to prevent taxpayers from circumventing the prohibition. The retail method would be allowed only if the taxpayer employs the method for purposes of financial accounting. The proposal would be treated as a change in the method of accounting for inventories, and any resulting Section 481(a) adjustment generally would be included in income ratably over a four-year period beginning with the year of change. The proposal would be effective for taxable years beginning after 12 months from the date of enactment.
Modify Estate and Gift Tax Valuation Discounts and Other Reforms
Require Consistency in Value for Transfer and Income Tax Purposes. This proposal would require both consistency and a reporting requirement. The basis of property received by reason of death under section 1014 would have to equal the value of that property for estate tax purposes. The basis of property received by gift during the life of the donor would have to equal the donor's basis determined under section 1015. This proposal would require that the basis of the property in the hands of the recipient be no greater than the value of that property as determined for estate or gift tax purposes (subject to subsequent adjustments). A reporting requirement would be imposed on the executor of the decedent's estate and on the donor of a lifetime gift to provide the necessary information to both the recipient and the IRS. A grant of regulatory authority would be included to provide details about the implementation and administration of these requirements, including rules for situations in which no estate tax return is required to be filed or gifts are excluded from gift tax under section 2503, for situations in which the surviving joint tenant or other recipient may have better information than the executor, and for the timing of the required reporting in the event of adjustments to the reported value subsequent to the filing of an estate or gift tax return. The proposal would be effective as of the date of enactment.
Modify Rules on Valuation Discounts. This proposal would create an additional category of restrictions ("disregarded restrictions") that would be ignored in valuing an interest in a family-controlled entity transferred to a member of the family if, after the transfer, the restriction will lapse or may be removed by the transferor and/or the transfer's family. Specifically, the transferred interest would be valued by substituting for the disregarded restrictions certain assumptions to be specified in regulations. Disregarded restrictions would include limitations on a holder's right to liquidate that holder's interest that are more restrictive than a standard identified in regulations. A disregarded restriction also would include any limitation on a transferee's ability to be admitted as a full partner or holder of an equity interest in the entity. For purposes of determining whether a restriction may be removed by member(s) of the family after the transfer, certain interests (to be identified in regulations) held by charities or others who are not family members of the transferor would be deemed to be held by the family. Regulatory authority would be granted, including the ability to create safe harbors to permit taxpayers to draft the governing documents of a family-controlled entity so as to avoid the application of Section 2704 if certain standards are met. This proposal would make conforming clarifications with regard to the interaction of this proposal with the transfer tax marital and charitable deductions. This proposal would apply to transfers after the date of enactment of property subject to restrictions created after October 8, 1990 (the effective date of Section 2704).
Require Minimum Term for Grantor Retained Annuity Trusts (GRATs). This proposal would require, in effect, some downside risk in the use of this technique by imposing the requirement that a GRAT have a minimum term of 10 years.5 Although a minimum term would not prevent "zeroing-out" the gift tax value of the remainder interest, it would increase the risk of the grantor's death during the GRAT term and the resulting loss of any anticipated transfer tax benefit. This proposal would apply to trusts created after the date of enactment.
Copyright 2009 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. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 05/13/09