tax
Net operating loss carryback deadlines loom
Thursday, July 15th, 2010 | tax | No Comments
If your business suffered a net operating loss (NOL) in 2008 or 2009 (or a 2007 fiscal year), you may elect to carry back that loss up to 5 years and recover taxes previously paid. You must make the election on a timely filed return, including extensions. The deadline for electing the extended net operating loss carryback is September 15, 2010 for calendar-year corporations. It is October 15, 2010 for individuals. If you do not elect to apply the extended carryback, the original two-year carryback rule applies. In either case, any unused loss may be carried forward up to 20 years. Complicated enough yet? It gets worse - and better.
Here’s the better part: The original extended NOL carryback provision, part of the American Reinvestment and Recovery Act (ARRA) of 2009, applied only to an ‘eligible small business’ (under $15 million average gross receipts). The Worker, Home Ownership, and Business Assistance Act (WHOBA) of 2009 allows taxpayers of any size to make the election.
The other better part: The extended carryback election is generally available for only one of the tax years ending after 2007 and beginning before 2010. However, if you already made a timely election under the provisions of the ARRA, you may make an additional election for another year’s NOL under WHOBA. Even if you have already timely filed your 2009 return, you may be able to make the election before the extended deadlines.
The worse part: These rules are extremely complicated, so you need the help of a professional who is familiar with them.
By applying a net operating loss to profitable tax years, you can give your company a cash stimulus through a refund of previously paid taxes.
Steinbrenner’s estate tax feat
Wednesday, July 14th, 2010 | tax | No Comments
Yankees owner George Steinbrenner’s death this week is a sad occasion for his family and friends. But because it happened this year, it resulted in a huge tax savings for his heirs. As explained in this Wall Street Journal article, the 2001 Bush tax cuts left a quirky Federal estate tax repeal for this year only. Congress did nothing to fix this anomaly.
With Mr. Steinbrenner’s estate estimated at $1.1 billion, that means his heirs will inherit as much as $600 million that would have gone into the Federal treasury, based on the rate when the estate tax resumes in 2011 (55% maximum on estates over $1 million). He joins another high-profile billionaire whose passing we wrote about a few weeks ago.
Here’s a morbid thought: Will death become the ultimate tax-planning tool this year? I shudder at the thought.
Payroll tax credit
Wednesday, July 7th, 2010 | tax | No Comments
It is time to prepare your second quarter payroll tax returns, due August 2, 2010 (July 31 falls on Saturday). If your company or tax-exempt organization has hired employees this year, you may be eligible for the HIRE Act new hire tax credit. You should check before filing Form 941. We previously posted about this and other tax credits in the spring.
Here is a checklist (but consult your tax adviser for specifics related to your situation):
- Was the new worker hired to fill a new position, or to replace someone who quit voluntarily or who was terminated for cause? The new worker may not be related to you or to another owner of the business.
- Was he/she hired after February 3, 2010, and before January 1, 2011?
- Did he/she work less than 40 hours during the 60 days ending on the hire date?
- Did he/she sign and give you the required Form W-11 certifying these facts? (Do not send this form to the IRS.)
If all of the above conditions are met, you qualify for an exemption of 6.2% (the employer share of Social Security tax) of wages paid between March 19 and December 31, 2010. This reduces the amount of your tax deposits for this year. It does not affect amounts withheld from the employee’s pay.
Form 941 has been modified to report wages to qualified employees starting with the second quarter. The IRS has provided more information in the instructions to the forms, and in a question-and-answer format at their website.
Congress helps homebuyers
Friday, July 2nd, 2010 | tax | No Comments
Homebuyers who were unable to close before July 1 have been granted a reprieve to claim the homebuyer credit. If the contract on their house was signed before May 1, they now have until September 30 to close on the purchase.
The homebuyer credit in its present form (it’s been amended three times now) is a tax credit of 10% of the home’s purchase price, up to a limit of $8,000. It is available to buyers who have not owned a principal residence in the last three years. A similar credit, limited to $6,500, is available to “long-time residents” who have lived in their old house for 5 consecutive years in the last eight before buying their new house.
In order to claim the credit, the buyers must have bought the house or signed a binding contract before May 1, 2010. The deadline to close the deal was June 30, but many buyers could not meet the deadline because of backlogs at lenders and federal agencies, construction delays, and difficulties working out terms of short sales. The extension of the closing deadline allows three more months to settle and close those deals, but it does not change the April 30 deadline for signing contracts.
There are limits and prcoedural rules to claiming the homebuyer credit. It is reduced or eliminated as income rises, and it cannot be claimed for homes whose purchase price exceeds $800,000. Dependents and purchasers under 18 cannot claim the credit, and it is not available if the house was purchased from certain relatives. Proper documentation must accompany Form 5405. Consult your tax advisor (our number is 865-523-8700) to make sure you follow all the rules to get your credit.
Tax code as cash flow tool
Thursday, July 1st, 2010 | consulting, tax | No Comments
Has your business suffered a net loss during the recession? A tax refund may give you a needed cash infusion. The federal tax code provides a means to smooth out the business cycle. If your company reports a net operating loss on this year’s tax return, you can recover tax paid in prior (or future) years when the company reported a net profit.
The technique is called a net operating loss carryback. You must elect to carry a loss back on a timely filed return, otherwise the loss may be carried forward to as many as twenty future tax years to reduce taxable income. Normally, the loss may be carried back two years. For either 2008 or 2009 (not both), a loss may be carried back up to five years. If the loss is not used up in the prior years, it may be carried forward.
The IRS provides a method to quickly recover taxes to be refunded because of the loss carryback. By properly filing an Application for Tentative Refund (Form 1139 for corporations, Form 1045 for individuals, estates, and trusts), you can recieve a refund within ninety days of filing. This can provide a relatively quick cash infusion to help pull your company through the rough patch.
If a coroporation expects a loss this year and has not yet filed its return for last year, it can apply on Form 1138 for an extension to pay last year’s tax. When the net loss for this year is calculated, the company will pay last year’s tax (plus interest) after applying the net operating loss.
A corporation that has paid more estimated tax than necessary in light of adjusted income or loss projactions may apply for a quick refund of those payments on Form 4466.
These techniques can return cash to the company for daily operations rather than tying it up until after the year’s tax return is filed. Other types of carrybacks are also available, such as casualty and theft loss, farming loss, foreign tax credit, and loss attributable to a federally declared disaster.
As usual, there are technical details and caveats to the use of these techniques. Some of these details are discussed in this article. You should consult your tax advisor to determine the most appropriate action for your situation. We will be happy to help you with these tools, and to find other ways to improve your cash flow.
Renting to relatives
Monday, June 28th, 2010 | consulting, tax | No Comments
Renting property to your relatives can be a good thing. You know them, and you probably have a good idea of how they will take care of the property. You may consider renting to your retired parents or to your children attending college. You must play by IRS rules to retain the tax advantages of renting out property. If you don’t, the deductions will be disallowed while the income is taxed - a double tax hit. You may also suffer unfavorable tax consequences when you sell the property.
Special rules apply to rental of a residence (rental house or apartment) and to vacation home rental.
You must charge a fair rent to your relative on a residence to avoid having that property reclassified as a second home (and losing rental deductions).
- Prove fair rent by collecting third-party documentation about rents for similar properties in the area from the want ads and craigslist. Letters from property managers and independent appraisals are good evidence to support fair rent.
- Do not make gifts to help your tenant pay the rent. The gift will be deemed to reduce the rent, putting it below fair value and jeopardizing the rental claim.
- One alternative for your relative who needs rent money is gifting business assets and having your company lease them back so that your tenant receives rental income. Another option is to hire your relative, although that generates payroll taxes.
- You may consider a good-tenant discount of no more than 10%. One justification for this discount is that there is no need for a rental management company, passing the savings to the tenant.
- If you wish to set up a rent-to-own situation, you must follow the rules for a shared-equity financing agreement for the rental to stand.
- Your relative must use the rental property as a principal residence.
If you have a vacation home that you rent for part of the year and also use personally, the tax code provides a break on rental income. Your personal use of the vacation home must not exceed the greater of 14 days or 10% of rental days per year. If your relatives use the vacation home, their use counts toward these limits even if you charge fair rent. If your combined use exceeds these limits, the property becomes a second home, which makes the rent income taxable while eliminating the usual rent expense deductions.
If you are considering renting to relatives, a call to us will help ensure that everything is done in a way that secures the greatest tax advantages and best financial outcome for your family.
Death, But No Taxes
Tuesday, June 22nd, 2010 | tax | No Comments
Even though the federal estate tax only affected about 5500 decedents in 2009 before it was repealed for one year, Congress’s inaction in reversing the repeal has cost the government big money, even by their standards. In this New York Times story, we learned that Houston’s richest man died last spring. Dan L. Duncan was a natural gas tycoon (EPCO, Dan Duncan L.L.P., Enterprise GP Holdings) whose fortune was estimated by Forbes at $9 billion, ranking him number 74 among the wealthiest in the world. If he had died in 2009, his estate would have paid up to $4 billion in taxes; in 2011, that amount might have risen to $5 billion. This year, his estate passes tax-free to his wife, children, grandchildren, and various charities.
If and when his heirs were to sell some of the assets, the substantial gains would be taxed at rates ranging from the current 15% capital gains rate to the maximum income tax rate, which is still lower than the estate tax rate. But that could be many years in the future. In the meantime, the federal government has missed out on perhaps as much as $25 billion of revenue (the estate tax take in 2008).
There are strong and valid arguments on both sides of the estate tax issue, from political, economic, and humanitarian points of view. The plain fact is that this is one revenue stream for the federal budget that dried up for this year. Care to guess who they will tap to make that up?
The federal estate tax returns in 2011 for estates valued at $1 million, if Congress leaves current law intact. (The cutoff in Tennessee has been $1 million for several years, and was unaffected by the federal law.)
Savvy estate planning can help your family keep more of its assets and minimize the tax liability. We were part of a team of professionals who reduced a family’s taxable estate through good planning from about $8 million to about $2 million, saving them a $3 million tax hit that would have forced them to sell all of their real estate holdings into a depressed market.
IRS gives some solace in a sad story
Friday, June 18th, 2010 | tax | No Comments
About five years ago, a police officer and his wife decided to use their retirement money to build their dream home in the Smokies. They bought a pretty lot and a log home kit, and contracted with a local builder to erect it. From the beginning, the construction process went terribly wrong. Errors compounded so much that they stopped work and had the unfinished house inspected. The inspection revealed that if the house was finished, it would be so unsafe that it would not receive a certificate of occupancy. The only solution would be to tear it down and start over, which the couple could not afford to do. It was a total loss.
They came to us for help. We calculated the casualty loss on the structure and reported it on their tax return, which created a net operating loss for the year. We took their story all the way to the appeals level, where the deduction was allowed. Having won that battle, we carried the net operating loss back to the years prior to the casualty loss. Last week, we received word that the carrybacks were allowed on appeal.
Our clients had to go back to work to make the mortgage payments on their shattered dream, but we were able to recover over $38,000 in taxes to help ease the pain of their experience. For all the horror stories you hear about the IRS, sometimes they do right by the taxpayer.
Tax audits winding down
Friday, June 4th, 2010 | tax | No Comments
We are winding down a year of tax audits of sole proprietors - that’s folks who have unincorporated businesses. Next coming from an IRS auditor near you will be audits of corporations. June 15th- the 14 new IRS auditors in the Knoxville office are going to training school in corporations. I expect to see a big push on corporate IRS audits. Can’t wait to see what nasty adjustments they try to make in the coming year.
Our track record for taxpayers we have represented in examinations has been good. Beyond the technical details, there’s an art to handling an audit to prevent the IRS from overrunning the taxpayer. We hope our success rate will be just as good with corporations later this year.
Small Business Tax Incentives
Wednesday, June 2nd, 2010 | tax | No Comments
Recent legislation provides incentives for businesses to hire unemployed workers and provide health insurance.
If your company hires a worker after February 3, 2010 through year-end, the HIRE Act allows a credit equivalent to the employer’s share of Social Security tax (6.2%). If the employee stays with you for a year, your company gets a $1,000 tax credit. The new hire must not have worked more than forty hours in the prior sixty days, and generally must be hired into a new position. There are important details and procedures, and a new Form W-11 for the new worker to fill out.
Some provisions of the Affordable Care Act (healthcare reform) take effect this year. The small business health care credit is generally available to small employers that pay at least half the cost of single coverage for their employees in 2010. There are complicated rules regarding such definitions as full-time equivalents and compensation-based phase-out ranges. But if you offer health insurance coverage to your employees, the tax savings could be significant. For more information, read the IRS release. Then find out what you need to do to qualify for the credits.