2011 Federal Income
Tax Update
The HKFS Professional Financial
Services Conference
©2010 LarsonAllen LLP
May 25, 2011
Andy Biebl, CPA
LarsonAllen LLP
2011 Federal Income Tax Update
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©2010 LarsonAllen LLP
Agenda
• Individual Income Developments
• Individual Deductions
• Individual Tax Calculations and Credits
• Business Developments
• Compliance Matters
• Estates, Gifts and Trusts
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
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– Awaiting Dorrance Fed. Dist. Ct. decision
Parsonage Exclusion
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• Sec. 107: Gross income exclusion for
housing/rental allowance paid to minister by
employer
• Driscoll: Tax Court allows exclusion for two
residences
Qualified Plan Rollovers to Roth
• Effective >9/27/10, elective deferral plans with
Roth feature may allow In-Plan Roth Rollovers
(IPRR)
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– 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
Passive Activity Grouping
• 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
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– One insubstantial compared to other, or
– Each owner has same proportionate ownership
Grouping a Rental and Business
Sched. E. p. 1
Bldg.
Rental
(Loss)
Sched. E. p. 2
K-1
Active Business
Income
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Grouping election
– if identical ownership or 1 is insubstantial
(Result: rental = business loss)
Passive Activity Grouping
• Final grouping guidance per Rev. Proc. 2010-13
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– 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.
Passive Activity Grouping
• 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
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• Sample grouping election
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
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– Amended TRs?
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
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– Medicare B and D
– Amended return opportunities!
Charitable Deductions
• Rolfs case: No deduction for fire dept. burndown
– 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)
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– Defective paperwork = $0 charitable ded.
Employee Business Expenses
• School administrator fails to seek employer
reimbursement (DeWerff case)
• News anchor: No deduction for business and
professional clothing (Hamper case)
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– Both assessed penalties
IRA Wrap Fees
• Use of outside funds for pmt. not an additional
IRA contribution
– Fees = % of account value
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• Strategy: Outside (nondeductible) for Roth and
pay inside for traditional IRA
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
– Joint AMTI phase-out: $150K - $440K
– Single AMTI phase-out: $112K - $302K
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• Roth conversions: Better in 2010 at 28% AMT
vs. 2011-2012 at 35% AMT exemption phaseout?
AMT Exemption
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Single
Joint
$47,450 $72,450
$48,450 $74,450
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• AMT exemption adjusted
– 2010
– 2011
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
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• Income tax deduction of 50% of SE tax
unchanged at full 7.65% (= employer share)
Extension of Principal Residence Energy
Credit
• 30% credit/$1,500 max. expired 12/31/10
• 2011: One yr. extension of pre-2009 credit
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– $500 credit max., but reduced by ‘06-’10 credits
– $200 credit max. for windows
– 10% credit rate or specific credit amount
Business Acquisition Fees
• Prior: Success-based fees capitalized to the
acquisition
• New safe-harbor election
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– 70% of success-based fee deductible; 30%
capitalized
– Election is per transaction [Rev. Proc. 2011-29]
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
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– 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
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”
• Includes additional investments in existing corp.
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– Gross assets less than $50 million after issuance of
stock
– Must hold stock at least five years
Section 1202 Excluded Businesses
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• Hospitality (hotels, restaurants)
• Professional services
• Banking, insurance, financing, leasing, investing,
similar businesses
• Farming business including raising of trees
• Extraction (mining, timber)
Section 1202 Qualifying Businesses
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•
•
•
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
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– Substance over form
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
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– No written agreement
– SE tax also imposed on individual partners
Section 179 Provisions
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Asset Addn.
Phase-out Range
$800K - $1.05M
$2M - $2.5M
$2M - $2.5M
$500K - $625K
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Tax yr. beginning in
2009
2010
2011
2012
Sec. 179
Limit
$250,000
$500,000
$500,000
$125,000
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
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– >3 yrs. in service, TPP retailing, interior improvement
Sec. 179 for 15 Yr. Qualified Real Estate
• Example
• Eligible: Acquired by purchase and depreciable
• Ineligible:
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– 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
Sec. 179 for 15 Yr. Qualified Real Estate
• May elect to exclude 15 yr. realty from
Section 179 eligibility
• 2010 Sec. 179 election on RE > business
income carries only to 2011
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– Excess back to depreciation sched. at 1/1/2011
Bonus Depreciation
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Bonus %
50%
100%
50%
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Acquired & Placed in Service
1/1/08 – 9/8/10
9/9/10 – 12/31/11
1/1/12 – 12/31/12
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
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– Example/Chart
– Restaurant & retail prop. OK for bonus if leasehold
improvement
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New
Used
• Car/light truck
(<6,000 lb. GVW)
$11,000
$ 3,000
• SUV/truck
(>6,000 lb. GVW)
All
(100% bonus)
$25,000
(Sec. 179)
• Trade
Boot & old
basis
Boot only
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2011 Vehicle Depreciation: 1st Year
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
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– 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.)
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
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– But <10% of cost before 9/9/10 is OK
– Binding contract after 9/8/10 OK
– Example
50% to 100% Bonus Depr. Transition
• Self-constructed property with component
election
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– 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
50% to 100% Bonus Depr. Transition
• Corrections of 2010 for 50% vs. 100%
– Amend 2010 or file Form 3115 in 2011
• May elect to claim 50% for entire 2010 year
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– Elect by extended due date of TR that includes 9/9/10
Sec. 179 vs. 100%-50% Bonus
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Sec. 179
Tax yr. beginning
>$2M addns.
Both
Boot only
All 3 to $250K
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•
•
•
•
100%-50% Bonus
Timeframe
Specific dates
Phase-out
None
New vs. used New only
Trades
Entire basis
15 yr. realty
L.I. only
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
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– Governments ineligible, except higher ed institutions
– Household employers ineligible
HIRE Act: 2010 Payroll Tax Waiver
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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
HIRE Act: 2010 Payroll Tax Waiver
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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
HIRE Act Employee Retention Credit
• $1,000 tax credit for retaining new hires
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– 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
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.
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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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•
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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
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– No more than 25 FTEs
– Ave. annual wages <$50,000 (excluding owners &
seasonals)
– Employer pays uniform % of premium of >50%
Credit for Small Employer Health Insurance
• Credit amount
Offset:
Income tax
Payroll Tax
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Tax Yr. Beginning
2010-2013
2014-2015
Employer
Taxable
Exempt 501(c)
35%
25%
50%
35%
Credit for Small Employer Health Insurance
• Employer offers a qualified health plan
– Definition of qualified plan
– Insured plans only; no self-ins. MRP
• Calculate qualified health premiums
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– 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)
Credit for Small Employer Health Insurance
Phase-out of credit
Upper
Full Credit Limit
• Number of FTEs
<10
25
• Ave. annual payroll per FTE <$25,000 $50,000
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• Each phase-out pro-rata and applied separately
• Related businesses are aggregated
• Examples
Credit for Small Employer Health Insurance
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
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– Example
Accounting Method Changes
• New Rev. Proc. 2011-14 for guidance on
automatic consent changes
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– Use Appendix for scope/eligibility of each automatic
change
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
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• All three repealed, as if never enacted
(P.L. 112-9)
Broker Basis Reporting
• 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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New requirements:
Basis Overstatement & Statute of
Limitations
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• 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)
Basis Overstatement & Statute of
Limitations
• Subsequent court decisions
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– CA-7 and CA-FC side with IRS
– Taxpayer victories: CA-4, CA-5 and TC
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
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– Gifts in 2010 at $1 million exemption, but 35% rate
applies to excess
Estate and Gift Tax
• Deaths in 2010: Pers. Repr. may elect out of
estate tax and apply modified carryover basis
system
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– 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)
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)
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• Expiration of $5M/35% rate/portability, etc.
12/31/12
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.
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– IRS: Continue to fully deduct until final regs.
Wrap-Up
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• Thanks for participating
• Questions?