©2010 larsonallen llp 2011 federal income tax update the hkfs professional financial services...

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2011 Federal Income Tax Update

The HKFS Professional Financial

Services Conference

May 25, 2011

Andy Biebl, CPA

LarsonAllen LLP

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2011 Federal Income Tax Update

Agenda• Individual Income Developments• Individual Deductions• Individual Tax Calculations and Credits• Business Developments• Compliance Matters• Estates, Gifts and Trusts

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Insurance Company Demutualization

• Going public: Stock issued to mutual policyholders– IRS position: Zero basis– Fisher decisions: Stock basis = FMV at issue

• IRS holding amended return refund claims– Awaiting Dorrance Fed. Dist. Ct. decision

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Parsonage Exclusion

• Sec. 107: Gross income exclusion for housing/rental allowance paid to minister by employer

• Driscoll: Tax Court allows exclusion for two residences

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Qualified Plan Rollovers to Roth

• Effective >9/27/10, elective deferral plans with Roth feature may allow In-Plan Roth Rollovers (IPRR)– Plan must allow Roth contributions– Employee elective deferrals for IPRR only if age 59½,

separated, etc. (i.e., limited opportunity)– Employer funds OK for IPRR after 2 yrs.– No 10% early distrib. penalty after 5 yrs.– But no recharacterization back to pre-tax status

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• Election to group multiple activities – Important for measuring material participation– Permitted if an “appropriate economic unit”– Five factors given greatest weight

• Grouping a rental and a business– One insubstantial compared to other, or– Each owner has same proportionate ownership

Passive Activity Grouping

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Grouping a Rental and Business

Sched. E. p. 1Bldg.

Rental

Sched. E. p. 2K-1

Active Business

Grouping election– if identical ownership or 1 is insubstantial

(Result: rental = business loss)

(Loss) Income

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• Final grouping guidance per Rev. Proc. 2010-13– Effective for 2011 Form 1040– Written statement required for new groupings, addition

of activity, regroupings– No statement for grandfathered groupings,

dispositions, or for pass-through entity– Caution: Watch supplemental K-1 data– Default to separate status if no grouping stmt.


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• Preparation Tip: Add written grouping stmt. • Grouping restrictions

– C corp. and rental prop. may not be grouped– Beware of ltd. partner status in farming– Rentals of realty and TPP, unless provided

together

• Sample grouping election


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Professional Gambler Business Expenses

• Report gambling income and loss on Sched. C– Losses ltd. to wagering income– Prior cases: Expenses also subject to income limit

• Mayo case: Business exp. not subject to income limit– Amended TRs?

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SE Health Insurance Deduction

• 2010 only: Offsets income and SE tax– But does not reduce SE income for qual. retirement

plan funding, EIC, health ins. deduction

• Premiums OK for nondependent child <age 27• Medicare premiums OK, per 2010 IRS guidance

– Medicare B and D– Amended return opportunities!

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Charitable Deductions

• Rolfs case: No deduction for fire dept. burn-down– Quid pro quo value of demolition– Appraisal flawed; overlooked numerous restrictions

• Failure to obtain proper receipt (Schrimsher case)

• Faulty appraisal on conservation easement (Bolton case)– Defective paperwork = $0 charitable ded.

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Employee Business Expenses

• School administrator fails to seek employer reimbursement (DeWerff case)

• News anchor: No deduction for business and professional clothing (Hamper case)– Both assessed penalties

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IRA Wrap Fees

• Use of outside funds for pmt. not an additional IRA contribution– Fees = % of account value

• Strategy: Outside (nondeductible) for Roth and pay inside for traditional IRA

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Tax Rates Extended Thru 2012

• Two-year extension for all brackets (10% to 35%)– Cap. gains and dividends at 0% - 15% – No phase-out of exemptions or Sched. A – All through December 31, 2012

• Roth conversions: Better in 2010 at 28% AMT vs. 2011-2012 at 35% AMT exemption phase-out?– Joint AMTI phase-out: $150K - $440K– Single AMTI phase-out: $112K - $302K

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AMT Exemption

• AMT exemption adjusted Single Joint– 2010 $47,450 $72,450– 2011 $48,450 $74,450

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2011 2% Cut in Social Security Tax

• Employee share of OASDI cut from 6.2% to 4.2% for 2011 (Tax Relief Act of 2010)

• No high income phase-out; max. savings of $2,136 (2% x $106,800)

• SE tax rate also cut (15.3% to 13.3%)• Replaces $400/$800 Making Work Pay credit

– Result: FWH up and Soc. Sec. down on paychecks

• Income tax deduction of 50% of SE tax unchanged at full 7.65% (= employer share)

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Extension of Principal Residence Energy Credit • 30% credit/$1,500 max. expired 12/31/10• 2011: One yr. extension of pre-2009 credit

– $500 credit max., but reduced by ‘06-’10 credits– $200 credit max. for windows– 10% credit rate or specific credit amount

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Business Acquisition Fees

• Prior: Success-based fees capitalized to the acquisition

• New safe-harbor election– 70% of success-based fee deductible; 30%

capitalized– Election is per transaction [Rev. Proc. 2011-29]

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Controlled Group Definition

• Sec. 1563(a): Controlled group def. (parent-sub., bro.-sister, etc.)

• Sec. 1563(b): Component member def. (excludes S corps.)

• Final regs.: S corps. are within Sec. 1563(a) controlled group definition– Affects commonly controlled S corps., or S and C

combination – But not applicable for Sec. 179, as it aggregates only

component members of a controlled group

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Section 1202 Cap Gain Exclusion Extension

• 0% capital gain rate on newly-issued C corp. stock– Issued after 9/27/2010 and through 2011– 0% AMT rate also– Requires stock sale at exit

• “Small businesses”– Gross assets less than $50 million after issuance of

stock– Must hold stock at least five years

• Includes additional investments in existing corp.

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Section 1202 Excluded Businesses

• Hospitality (hotels, restaurants)• Professional services• Banking, insurance, financing, leasing, investing,

similar businesses• Farming business including raising of trees• Extraction (mining, timber)

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Section 1202 Qualifying Businesses

• Manufacturing• Construction• Retail• Wholesale

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -The issue: Pursuing Sec. 1202 by forming new C corps. in

these industries is risky:

1. Ability to sell stock after 5 yrs. (vs. buyer forcing an asset sale at 35% C tax)

2. Inefficiency of W-2 to extract cash flow while a C

3. Trapped NOLs if business unsuccessful

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Deferral on Stock Sale to ESOP

• Defer gain if sell C corp. stock to ESOP and reinvest in securities of a U.S. corp., if ESOP owns >30% of stock after sale [Sec. 1042(a)]

• Sollberger case: Stock rollover followed by loan treated as a taxable sale– Substance over form

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Partnership Special Allocations

• Law firm: 10% profits interest owned by S corp./ESOP, but specially allocated 87% of income per agreement

• Tax Court: Allocate based on profits interest– No written agreement– SE tax also imposed on individual partners

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Section 179 Provisions

Sec. 179 Asset Addn.Tax yr. beginning in Limit Phase-out Range

2009 $250,000 $800K - $1.05M

2010 $500,000 $2M - $2.5M

2011 $500,000 $2M - $2.5M

2012 $125,000 $500K - $625K

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Sec. 179 for 15 Yr. Qualified Real Estate

• Up to $250,000 of $500,000 limit, eff. for tax yrs. beginning ’10 & ’11

• Qualified leasehold improvement– Interior improvements, >3 yrs. in service, no related

parties (but using 80% or more definition)

• Restaurant property: Any• Retail improvement

– >3 yrs. in service, TPP retailing, interior improvement

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• Example• Eligible: Acquired by purchase and depreciable• Ineligible:

– AC and heating units– Property used outside U.S., and by tax-exempts and

gov’t. – Property used to furnish lodging, except hotels– Caution: Beware of leases for an ineligible use

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• May elect to exclude 15 yr. realty from Section 179 eligibility

• 2010 Sec. 179 election on RE > business income carries only to 2011– Excess back to depreciation sched. at 1/1/2011

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Bonus Depreciation

Acquired & Placed in Service Bonus %

1/1/08 – 9/8/10 50%

9/9/10 – 12/31/11 100%

1/1/12 – 12/31/12 50%

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Bonus Depreciation

• Overview of eligibility– Original use with taxpayer (i.e., new not used)– Qualified property (< 20 yr. recovery period)– Acquired & placed in service in eligible period

• Leasehold improvements OK; not restaurants and retail improvements– Example/Chart– Restaurant & retail prop. OK for bonus if leasehold

improvement

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2011 Vehicle Depreciation: 1st Year

New Used• Car/light truck

(<6,000 lb. GVW) $11,000 $ 3,000

• SUV/truck All $25,000(>6,000 lb. GVW) (100% bonus) (Sec. 179)

• Trade Boot & old Boot only

basis

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Bonus Depreciation

• Election out: Per class of property, per year– By due date, including extensions– 2010: If elect out, applies to 50%/100% for entire year

• Retroactive 50% bonus for fiscal ‘09-’10 tax return– May amend to elect (by due date of ‘10-’11 TR)– Or file 3115 for ’10-’11 or ‘11-’12 year– Or elect out (but for entire ‘09-’10 yr.)

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50% to 100% Bonus Depr. Transition

• Purchase: Acquired & placed in service >9/8/10– Acquired = Pay or incur cost

• Self-constructed: Construction begins >9/8/10– But <10% of cost before 9/9/10 is OK– Binding contract after 9/8/10 OK– Example

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• Self-constructed property with component election– Bldg. construction began before 9/9/10, but

component began after: Elect 100% for component– Elect by extended due date of TR for yr. when bldg.

placed in service– Example

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• Corrections of 2010 for 50% vs. 100%– Amend 2010 or file Form 3115 in 2011

• May elect to claim 50% for entire 2010 year– Elect by extended due date of TR that includes 9/9/10

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Sec. 179 vs. 100%-50% Bonus

100%-50% Bonus Sec. 179• Timeframe Specific dates Tax yr. beginning• Phase-out None >$2M addns.• New vs. used New only Both• Trades Entire basis Boot only• 15 yr. realty L.I. only All 3 to $250K

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HIRE Act: 2010 Payroll Tax Waiver

• Payroll tax forgiveness on employer’s 6.2% OASDI for hiring unemployeds– No waiver of employee’s 6.2% share– No waiver of 1.45% Medicare (either share)

• Qualified employer includes non-profits and businesses – Governments ineligible, except higher ed institutions – Household employers ineligible

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Qualified new hire:• Begins work >2/3/10 and <12/31/10• Certifies on Form W-11 that had not been

employed >40 hrs. in 60 days prior to hire,• Does not replace a worker, unless former

employee separated for cause, lack of work or voluntarily separated

• Is not a related party to the employer

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• Only wages paid >3/18/10 exempt• 941-X opportunities: Late W-11 certification OK,

and then amend payroll tax reports

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HIRE Act Employee Retention Credit

• $1,000 tax credit for retaining new hires– Same new hire as per payroll tax waiver– Retained for 52 consecutive weeks– Wages during last 26 weeks must be >80% of wages

in first 26 weeks of 52 week period

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HIRE Act Employee Retention Credit

• Credit is lesser of:– $1,000 or– 6.2% of wages in first 52 weeks– Need $16,129 wages to reach $1,000 max.

• Credit earned between Feb.-Dec. 2011• Business credit: Does not offset AMT• No carryback from 2011 to 2010 • IRS issues Form 5884-B, New Hire Retention

Credit

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Credit for Small Employer Health Insurance

• Effective for tax years beginning in 2010 thru 2015 – Includes tax-exempts, but not gov’t. entities

• Eligibility– No more than 25 FTEs– Ave. annual wages <$50,000 (excluding owners &

seasonals)– Employer pays uniform % of premium of >50%

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• Credit amount

Employer

Tax Yr. Beginning Taxable Exempt 501(c)

2010-2013 35% 25%

2014-2015 50% 35%

Offset: Income tax Payroll Tax

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• Employer offers a qualified health plan– Definition of qualified plan – Insured plans only; no self-ins. MRP

• Calculate qualified health premiums– Limit premium state ave. for small group mkt. (Rev.

Rul. 2010-13)– Comparison of actual vs. state ave. is in total, not per

employee– Exclude amts. paid for owners, family (but not

seasonals)

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Phase-out of credit

UpperFull Credit Limit

• Number of FTEs <10 25• Ave. annual payroll per FTE <$25,000 $50,000

• Each phase-out pro-rata and applied separately• Related businesses are aggregated• Examples

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Strategies:• Use “weeks-worked” equivalency to increase

FTEs (if <10), to decrease ave. wages for phase-out

• Employer decreases wage/increases health prem. pmt.

• Liberalized uniform premium requirement– Example

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Accounting Method Changes

• New Rev. Proc. 2011-14 for guidance on automatic consent changes– Use Appendix for scope/eligibility of each automatic

change

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Repeal of Expanded 1099 Reporting

• Prior expansion of 1099 requirements:– Rental real estate owners: Services >$600, eff. 2011– Purchases of property >$600, eff. 2012– Pmts. for prop. or services >$600 to a corp., eff. 2012

• All three repealed, as if never enacted (P.L. 112-9)

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Broker Basis Reporting

New requirements:• Sec. 6045(g): Basis reporting with stock if acquired in

2011 and later (2012 and later for mutual funds)• Sec. 6045A: Basis notification to receiving broker in a

transfer, eff. in 2011• Sec. 6045B: Corp. reorg. requires basis info. to

shareholders, eff. in 2011• Final regs.: Delays Sec. 6045A transfer penalty until

2012 • Form 1099-B to be modified for 2011 to report basis and

LT-ST status

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Basis Overstatement & Statute of Limitations• 6 yr. statute (vs. 3 yr.) if omit >25% gross income• IRS temp. regs.: Overstatement of basis =

omission of gross income• Unanimous Tax Court finds IRS regs. invalid

(Intermountain 2, TC, 2010)• IRS issues final regs. with same position (TD

9511, 12/14/10)

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Basis Overstatement & Statute of Limitations• Subsequent court decisions

– CA-7 and CA-FC side with IRS– Taxpayer victories: CA-4, CA-5 and TC

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Estate and Gift Tax

• Federal estate tax reinstated to 1/1/10– Exemption to $5 million per person– Flat rate of 35%

• Effective in 2011, gift exemption unified to $5 million– Gifts in 2010 at $1 million exemption, but 35% rate

applies to excess

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Estate and Gift Tax

• Deaths in 2010: Pers. Repr. may elect out of estate tax and apply modified carryover basis system– Smaller estates: Apply $5M exemption and step-up

basis of assets to FMV– Larger taxable estates: Elect out of estate tax & file

Form 8939 to report c/o basis (still awaiting IRS guidance)

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Estate and Gift Tax

• Effective in 2011, unused portion of $5M exemption may transfer to surviving spouse (“portability”)– Will require 706 filing for some estates under $5

million (to document excess to survivor)

• Expiration of $5M/35% rate/portability, etc. 12/31/12

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Deductibility of Bundled Trustee Fees

• Sup. Ct. (Rudkin): Investment advisory fees of estate/trust subject to 2% limit

• Bundled fees: Partially investment advisory and partially trust admin. and tax prep.– IRS: Continue to fully deduct until final regs.

©2010 larsonallen llp 2011 federal income tax update the hkfs professional financial services...

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