Breaking News
M&K TAX FLASH
TAX PROVISIONS WITHIN THE "BAILOUT" BILL-WHAT DOES THE NEW EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 HAVE IN STORE FOR TAXPAYERS?
BY THE MARCUM & KLIEGMAN TAX PARTNERS
On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008, more commonly called the "Bailout Bill" (The Act). The new law authorizes the government to make direct purchases of troubled assets within the financial markets. While the bill's original purpose was to reduce uncertainty and restore confidence within the credit industries, the Act contains numerous tax provisions accounting for its final 451 pages.
Some of the key tax provisions within the Act include:
PROVISIONS AFFECTING INDIVIDUALS
Alternative Minimum Tax (AMT) Relief- The Act raises the AMT exemption for individuals in 2008. The 2008 exemption will be higher than they were in 2007. (See chart). As enacted, the patch will only be for 2008. This is not a permanent solution. Individual AMT exemption amounts
|
|
2008
(w/o patch) |
2008
(w/ patch) |
|
Married filing jointly |
$45,000 |
$69,950 |
|
Single, head of household |
$33,750 |
$46,200 |
|
Married filing separately |
$22,500 |
$34,975 |
In addition to increasing exemption amounts, the Act permits personal credits, including the dependent care credit and educational tax credits to offset both regular tax and AMT. Previously, personal credits such as the child care credit and the adoption credit were allowed to reduce the AMT.
Incentive Stock Option (ISO) relief- The Act provides relief to stockholders who were subject to AMT as a result of the exercise of ISOs. The Act abates all unpaid AMT liabilities associated with the exercise of incentive stock options before 2008. The law allows all individuals, including those who paid AMT on ISO exercises, to accelerate the refund of the minimum tax credit over two years instead of five, and also removes the adjusted gross income limitations.
Mortgage Debt Forgiveness- The Act extends the temporary provision allowing the exclusion of qualified principal residence mortgage debt forgiveness from income before 2013.
Child Tax Credits- The new law enhances the child tax credit by lowering the income floor to $8,500. The refundable credit is now 15% of earned income in excess of $8,500 instead of $12,050.
The Act provides key extender provisions affecting individuals, including:
- Election to deduct state and local sales taxes;
- Above-the-line higher education tuition deduction;
- $250 above-the-line teacher expenses deduction;
- Standard deduction for real property taxes for non-itemizers;
- Tax-free charitable distributions from individual retirement (IRA) plans.
PROVISIONS AFFECTING BUSINESSES
Limits to Deduction for Executive Compensation- As noted, the primary purpose of the Act is to allow the Treasury the ability acquires troubled debt. The Act includes a number of executive compensation limits for companies that participate in this Treasury program, known as TARP. Institutions that sell covered assets to Treasury must meet executive compensation standards that prohibit golden parachute payments and bonuses. Participants in Treasury auctions, who sell at least $300 million in assets, will be subject to a deductible limit of executive compensation of $500,000.
Research Credit(R&D)- The research credit, which expired as of 2007, is extended in its current form through 2008 and then extended in 2009. For 2009, the Act repeals the alternate incremental credit but increases the alternative simplified method rate from 12 to 14 percent.
Owners of Fannie Mae and Freddie Mac preferred stock- When the government took over these two companies, their preferred stock became worthless. Banks and equivalent financial institutions will be allowed to treat their losses as ordinary instead of capital losses if the preferred stock was either sold between January 1, 2008 and September 6, 2008 or held as of September 6, 2008. This provision is only available to certain eligible financial institutions.
Leasehold Improvement Depreciation- The Act extends the special 15-year depreciable life for restaurant and leasehold improvements to include property placed in service in 2008 and 2009.
The Act provides key extender provisions affecting businesses through 2009, including:
- New Markets Tax Credit;
- Basis adjustment to stock of S corporations making charitable property contributions;
- Section 199 deductions for Puerto Rican production activities;
- Accelerated depreciation for business property on Indian reservations; and
- Expensing of environmental remediation costs.
ENERGY PROVISIONS
Most of the Energy provisions Congress was considering made it into this Act as follows:
- 1-year extension through 2009 of the production credit for wind and refined coal property;
- 8-year extension through 2016 of the tax credit for solar and fuel cell property;
- 8-year extension through 2016 of the residential energy-efficient property credit,
- 5-year extension through 2013 of the energy-efficient building deduction;
- Various "clean coal" initiatives; and
- Expansion of the nontaxable transportation fringe benefit rules to include a $20 per month bicycle commuter reimbursement, effective in 2009.
DISASTER RELIEF PROVISIONS
The Act contains substantial tax relief for areas affected by flooding and/or Hurricane Ike. The relief includes:
- Increase in Section 179 expensing from $250,000 to $350,000 for businesses with property damage for qualifying expenditures made in the defined disaster areas through 2011;
- Increase in bonus depreciation of up to 50 percent of computer software, leasehold improvements and real estate expenditures in defined disaster areas;
- Extension of net operating loss carries back period to five years for qualified disaster losses;
- Qualified Disaster losses can offset 100% of alternative minimum taxable income; and
- Expensing allowed for 50 percent of general demolition and clean-up costs.
OTHER TAX PROVISIONS
The Act changes the return preparer penalty standard.
Under the Act, preparers generally will not be subject to penalty if there is substantial authority for a position, or the position is disclosed and has a reasonable basis. The preparer will need to meet the "more likely than not" standard for tax shelters, whether or not the position is disclosed, effective for returns prepared for taxable years ending after the date of enactment.
REVENUE RAISERS
Domestic production deduction limit for oil and gas production- The Section 199 deduction for any oil-related qualified production activities (defined broadly as income attributable to the production, refining, processing, transportation or distribution of oil or gas or any primary product of oil and gas) will be permanently limited to six percent. The deduction was otherwise scheduled to increase from six to nine percent in 2010.
Limitations on foreign tax credits for gas and oil extraction income tightened- The Act eliminates the distinction between foreign oil and gas extraction income and foreign oil-related income for purposes of limiting foreign tax credits for gas and oil extraction income.
Require broker basis reporting on securities sales- Starting in 2011, brokers handling the purchase and sale of publicly traded securities will be required to report the adjusted basis to the IRS, and whether gain or loss is long-term or short-term, provided the broker has access to adequate information.
Tax deferred compensation paid by offshore entities- Nonqualified deferred compensation plans by foreign corporations will generally become taxable, unless the compensation is deferred 12 months or less after the end of the taxable year in which it vests. This provision also applies to nonqualified deferred compensation plans maintained by any partnership allocating investment income to foreign persons or tax-exempt organizations. This rule relates to years ending after 2008.
Oil spill tax- The Act extends the oil spill tax through 2017 and increases it from five cents per barrel to eight cents per barrel through 2016 and to nine cents in 2017.
Federal Unemployment Tax Act(FUTA)- The bill extends for one year through 2009 the 0.2 percent surtax on the permanent 6.2 percent FUTA tax.
If you have any questions related to the provisions of the ACT, kindly contact your M&K Tax Professional:
Joseph Perry Maury Cartine Diane Giordano
Tax Partner Tax Partner Tax Partner
631-414-4510 212-981-3000 631-414-4532
M&K TAX FLASH
HOUSING AND ECONOMIC RECOVERY ACT OF 2008
During the last days of July 2008, President Bush signed into law the Housing and Economic Recovery Act of 2008. This legislative update is in part a reaction to the slump in US housing sales and rising unemployment. The Act's provisions are aimed at both businesses and individuals and will have a significant impact on many taxpayers. Some of the Act's highlights are presented below in this M&K Tax Flash:
First Time Homebuyer Credit
The bill creates a temporary refundable credit for first time homebuyers of 10% of the purchase price of a principal residence, up to $7,500. This is by far, the biggest tax break in the new law. However, unlike other tax credits, this credit must be paid back in the manner of an interest free loan over the next 15 years in equal installments. The credit is available for property purchased after April 9, 2008 and before July 1, 2009. The credit phases out for taxpayers with adjusted gross income between $75,000 and $95,000 for single filers and between $150,000 and $170,000 for joint filers. The credit is claimed with the filing of the 2008 or 2009 income tax returns. Repayments start two years after the residence is purchased.
Property Tax Deduction for Non Itemizers
The law allows property owners who do not itemize their deductions to claim a property tax deduction of up to $500 for individuals and $1,000 for joint filers. The deduction is available only for 2008 and will be in addition to the standard deduction allowed for 2008, presently $10,900 for married individuals and $5,450 for single individuals.
Low Income Housing Tax Credit
The Low Income Housing Tax Credit (LIHTC) program gives state and local housing agencies authority to issue tax credits for the acquisition, rehabilitation or construction of lower income rental housing. The credits are awarded to developers of qualified projects. The developers sell the credits to investors to raise capital for the projects. Under the current program, the credit is capped at a per resident rate. The new program increases the cap per resident to $2.20. In addition to this increase, many provisions in this very technical law have been simplified.
Tax Exempt Housing Bonds
The Act will introduce an additional $11 billion in tax exempt bonds in 2008. The Act will also remove the AMT limitations for tax-exempt housing bonds and will allow certain low income housing credits and rehabilitation credits to offset the AMT.
Mortgage Revenue Bonds
Currently proceeds from the sale of mortgage revenue bonds are used to finance below market mortgages for qualifying first time homebuyers. The new law expands the mortgage revenue bond program to permit the refinancing of existing subprime loans at a lower interest rate.
REIT Reforms
Many of the restrictions and rules governing Real Estate Investment Trusts (REITS) will be eased by the new Act. REITS realizing net income from a prohibited transaction are subject to a 100% tax. However, a safe harbor currently exists for the sale of property if the property is held for sale to customers and among other things, has been held for a minimum of four years. The new law shortens this period from four to two years.
AMT/R&D Credits
The Act allows businesses to cash out some of their older AMT and Research & Development (R&D) credits in lieu of claiming bonus depreciation on property placed in service during the last nine months of 2008. Under a separate bill passed earlier in 2008, The Economic Stimulus Act allowed taxpayers the opportunity to claim a special 50% bonus depreciation for property placed in service in 2008. In lieu of claiming the additional depreciation, the unused credit amounts can be cashed out as a refundable credit which will be limited to the lesser of:
- $30 million;
- 6% of total credits accumulated prior to 2006;
- 20% of the additional depreciation that would have resulted from applying the bonus depreciation to eligible property during the last nine months of 2008.
The election is available for taxable years after March 31, 2008. Taxpayers making this election must use the straight line method with respect to property otherwise eligible for bonus depreciation.
GO ZONE Provision
After Hurricane Katrina, Congress passed a package of tax incentives to help individuals and businesses rebuild. These provisions, known as GO ZONE, have been expanded and extended by the Act in order to continue to provide incentives for the redevelopment of the region.
Credit Card Information Reporting
Under the new law, processors of merchant payment card transactions, such as debit and credit cards, will be required to report a merchant's annual gross payment card receipts to the IRS for sales effective after January 1, 2011. The effect of this provision is to create a paper trail for the IRS for payment cards which is presently unavailable.
Reduced Homesale Exclusion
Under current law, all gain on a home up to $250,000 for an individual and $500,000 for joint filers is excluded from income if the home is used as a principal residence for two of the five years preceeding the year of sale. New provisions under the Act will eliminate the gain exclusion for the portion of time after 2008 that the home is not used as a principal residence.
Worldwide Interest Allocation
Implementation of a new rule allowing the allocation of interest expense on a worldwide basis will be delayed two years. This election would allow affiliated groups to determine foreign source taxable income of the group by allocating interest expense among the companies as if all members were a single corporation. The new rule was scheduled to become effective in years beginning after 2008 and will now become effective for years beginning after 2010. The global interest allocation would have resulted in more interest being allocated to US source income under the foreign tax credit formula resulting in an increase to the credit formula.
Corporate Estimated Tax Payments
The new law accelerates corporate estimated tax payments for corporations with assets in excess of $1 billion. Payments due in year 2013 will be increased by 16.75%. Accelerated payments scheduled for 2012 by prior legislation have been repealed.
The above summary has been drafted by Diane Giordano CPA, Senior Tax Manager in the Long Island Office. If you have any further questions related to the provisions of this new Act, contact your M&K Tax Professional.
Joe Perry - 631.414.4510 - jperry@mkllp.com
Diane Giordano - 631.414.4532 - dgiordano@mkllp.com
Ron Finkelstein - 631.414.4370 - rfinkelstein@mkllp.com
Carolyn Mazzenga - 631.414.4540 - cmazzenga@mkllp.com
M&K TAX FLASH
NEW RULES RELATED TO REPORTING OF MANAGEMENT FEES
BY FUND OF FUND PARTNERSHIPS
The IRS has recently issued guidance for fund of fund partnerships regarding tax return reporting of management fees incurred by the funds themselves, as well as management fees incurred by lower tier trading partnerships.
A fund of fund structure generally consists of one partnership, an upper tier partnership (UTP), which invests in one or more partnerships, known as lower tier partnerships (LTP). The lower tier partnerships are often trading partnerships, engaged in the business of trading securities for their own accounts, while the upper tier partnership’s activities consist of managing its investments in the lower tier partnerships.
The issue addressed in the IRS guidance (known as a Revenue Ruling) is whether the UTP, in reporting the management fees incurred by itself and the LTPs should report the fees as investment expenses or as trade or business expenses. The distinction is material to UTP’s limited partners because investment expenses would generally be reported by individual partners on their personal tax returns as miscellaneous itemized deductions subject to a 2% of adjusted gross income limitation (and also nondeductible for alternative minimum tax purposes), whereas trade or business expenses would be a direct reduction of the partnership income without such limitations
The recently issued Revenue Ruling concludes that the management fees incurred under the above circumstances should be bifurcated, and reported to the UTP’s limited partners in a manner consistent with the underlying activities to which they relate. The portion of the fees incurred by theLTP’s and passed through to the UTP’s are reportable to UTP’s limited partners as trade or business expenses deductible in arriving at adjusted gross income. The management fees incurred by the UTP’s in connection with managing its investments in the lower tier partnerships are reportable to UTP’s limited partners as investment expenses subject to the 2% of AGI limitation.
Please contact your M&K Tax Adviser if you have any questions relating to this correspondence.
Joseph Perry
Partner-in-Charge Firm-Wide Tax Services
Carolyn Mazzenga
Partner-in-Charge Family Wealth Services Group
Jean Paul Schwarz
Partner, Hedge Fund/Investment Partnership Group
Marcum & Kliegman Merges with Largest Forensic Accounting Firm in the New York Area
Marcum & Kliegman LLP, Certified Public Accountants and Consultants, has closed on its merger with RosenfarbWinters LLC, the largest forensic accounting firm in the New York metropolitan area. RosenfarbWinters will now be known as M&K Rosenfarb LLC (MKR). “This merger fits our strategic growth plans,” states Sam Rosenfarb, Managing Director of MKR. “Our clients will benefit from Marcum & Kliegman’s technical expertise in tax, audit, litigation support, and investment services.”
“This exciting business venture presents us with a tremendous opportunity to build out our accounting practice in New Jersey and expand our forensic practice in New York,” states Marcum & Kliegman’s Managing Partner Jeffrey M. Weiner. “As one of the fastest growing accounting and professional services firms in the nation, our diversely-skilled team of experts remains committed to delivering the highest level of personal service.”
In spite of an overall downturn in the economy and unfavorable job numbers, the accounting industry is still growing. “There is absolutely no shortage of available positions at M&K,” states Weiner. With offices in New York City, New Jersey, and on Long Island, Marcum & Kliegman looks to grow from approximately 500 employees to more than 1,000 within the next 3 years. This is the second major transaction that Marcum & Kliegman has completed in the past year. Last July, the Firm acquired the CBIZ/Mayer Hoffman McCann New York City accounting and tax practice.
In addition to its core accounting, audit, and tax services, Marcum & Kliegman offers a multitude of comprehensive services including SEC compliance, information technology solutions, trust and estate planning and administration, financial and investment advisement, network security, back office support, personal financial management, litigation support and forensic accounting. The Firm ranks 22nd in the nation and 5th largest firm in the Northeast by Accounting Today and 1st on Long Island, according to Newsday and Long Island Business News.
M&K Rosenfarb has unique expertise in forensic accounting, valuation, litigation, as well as dispute consulting, divorce accounting, expert testimony, fraud investigation, and government services. In addition to its headquarters in New York City and Marcum & Kliegman’s Melville office, M&K Rosenfarb has offices in Tinton Falls and Roseland, New Jersey.
SALT ALERT
THE U.S. SUPREME COURT UPHOLDS KENTUCKY’S INCOME TAX EXEMPTION OF IN-STATE MUNICIPAL BOND INTEREST
May 20, 2008
The United States Supreme Court (“SC”) has upheld Kentucky’s income tax laws regarding the taxation of municipal bond interest. The Court concluded that Kentucky’s (“KY”) existing exemption for interest income derived from bonds issued by KY and its political subdivisions (hereafter, “in-state bonds”) and its taxation of interest income earned from bonds issued by other states and their political subdivisions did not violate the Commerce Clause and therefore was constitutional. See Department of Revenue of Kentucky v. George W. Davis, ET UX.; No. 06-666; decided May 19, 2008.
In summary, George and Catherine Davis, KY residents, paid income tax on interest from out-of-state municipal bond income, and then sued the tax collector in state court for a refund claim. The Davis’ suit stated that KY’s differential taxation of municipal bond income “impermissibly discriminates” against interstate commerce in violation of the Commerce Clause of the U.S. Constitution. The trial court decided in favor of the State. The KY Appeals Court reversed the lower court’s decision in favor of the Davis’. The case was appealed to the SC and certiorari was granted.
In yesterday’s 7-2 decision, the SC upheld the long standing practice by 41 states that provide favorable income tax treatment for in-state bond interest. Justice David Souter wrote the main opinion for the Court. In the opinion he relied on a previous SC decision (United Haulers Assn., Inc. v. Oneida-Herkimer Solid Waste Management Authority ) where the court explained that “a government function is not susceptible to standard dormant Commerce Clause scrutiny owing to its likely motivation by legitimate objectives distinct from the simple economic protectionism the Commerce Clause abhors.”
Justice Kennedy wrote the dissenting opinion where he stated “Differential taxation favoring local trade over interstate commerce poses serious threats to the national free market because the taxing power is at once so flexible and so potent.”
Taxpayers that filed protective refund claims with any of the 41 states affected by this decision, will likely have their refund claims denied Taxpayers that filed refund claims and received the refund will likely be notified by the state that the refund, plus interest, is due back to the state. For taxpayers that filed state income tax returns with a disclosure of the pending Davis case, and did not pay tax on the out-of-state muni interest recognized, the state will likely assess the tax on such interest income plus interest as a result of this decision.
If you have any questions, please feel free to contact Steven P. Bryde, J.D., SALT Partner, at 212-981-3071 or any member of the Marcum & Kliegman LLP SALT Consulting Group.
M&K TAX FLASH
CONGRESS AGREES ON STIMULUS BILL
In February 2008, Congress passedthe Economic Stimulus Act of 2008, which is designed to jumpstart the US economy. The President has agreed to sign the bill which passed by an overwhelming bi-partisan vote. Highlights of the package include the following:
- REBATES
A rebate refund check will be issued to qualified individuals starting in May. Generally, the rebate will be $600 for single taxpayers and $1,200 for married couples filing a joint return. The rebate will not exceed the net tax liability reported on the 2007 tax return. However, a special rule provides for a $300 to $600 rebate to those individuals with at least $3,000 of combined income, Social Security and disability benefits. The rebate is reduced as adjusted gross income exceeds $75,000 for single filers and $150,000 for those married filing jointly.
Individuals eligible for the rebate may also be eligible for rebates of $300 per qualifying child. A qualifying child must be under age 17 and qualify for the dependency exemption.
It is the lawmakers’ intent in issuing rebates in the form of a check, rather than as an offset to tax liability, that recipients will promptly spend the funds and stimulate the economy.
- ENHANCED SECTION 179 EXPENSING
The new law temporarily increases the amount of Section 179 expensing for 2008 to $250,000 and increases the threshold for reducing the deduction to $800,000 of property purchased. The new rules apply to property purchased in years beginning in 2008. The enhanced expensing will enable companies to write off a greater amount of their investments in business use property, thus encouraging acceleration of capital expenditures.
- BONUS DEPRECIATION
In an effort to further encourage business investment, the legislation includes 50% bonus depreciation on new equipment acquired or placed in service in 2008. This will allow for half of the cost of the property to be recovered in the year placed in service, with the remaining cost depreciated using normal depreciation rules. Property eligible for bonus depreciation includes most tangible business property with a life of less than 20 years, water utility property, off-the-shelf computer software and certain leasehold improvements. Bonus depreciation is only applicable for assets placed in service during 2008, unless a binding contract existed prior to January 1, 2009. (The placed in service date is extended one year, through December 31, 2009 for property with a recovery period of 10 years or longer, transportation property and certain aircraft.)
- LUXURY AUTO LIMITATIONS
The first year limitation under the luxury auto rules is increased to $8,000 for 2008 to reflect the new bonus depreciation. The previous first year limit on depreciation was $2,650.
If you have any questions related to the new legislation, please contact your M&K Tax Adviser.
Joseph Perry Carolyn Mazzenga Robert Spielman
631-414-4510 631-414-4540 631-414-4756
The IRS has just released two new publications- Compliance Guide for Private Foundations and Compliance Guide for Public Charities. You may view these documents by clicking the appropriate links below:
Compliance Guide for 501(c)(3) Private Foundations
Compliance Guide for 501(c)(3) Public Charities
M&K TAX FLASH
FASB DEFERS EFFECTIVE DATE OF FIN 48
FOR NONPUBLIC COMPANIES
REQUIREMENTS FOR FINANCIAL STATEMENT
DISCLOSURES WILL CHANGE
In November 2007, the Financial Accounting Standards Board (FASB) agreed to grant a one year deferral on implementation of FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes for nonpublic . FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, Accounting for Income Taxes.
As a result of the deferral, FIN 48 will now be effective for periods beginning after December 15, 2007. Companies requiring calendar year financial statements will need to adopt this provision for their 2008 financial statements.
The adoption of FIN 48 requires a company to assess all of its income tax positions taken in any tax year in which the statute of limitations remains open. All federal, state and foreign filing positions are subject to analysis. As a result of the adoption of FIN 48, companies are required to disclose tax reserves for financial reporting purposes assuming that any governmental taxing authority successfully challenges any tax positions. FIN 48 requires a company to determine whether its tax positions are more-likely-than-not sustainable under current laws. The disclosures require implementing a process of determining the level of risk involved related to tax positions taken and the potential for disagreements upon evaluation by taxing authorities.
The decision behind extending these requirements is a result of many private companies being unaware of the guidance and provisions. The provisions apply to all entities, including partnerships and S Corporations.
If you have any questions about the above Tax Flash, please contact your M&K tax or audit professional or
Joseph Perry, Partner-in-Charge Tax Practice at (631)414-4510 or
Greg Giugliano, Partner-in-Charge Assurance Practice at (631)414-4222.
We have also set up a FIN 48 Q&A email to assist companies and Banking professionals:
Contact M&K at FIN48@MKLLP.com if you would like to be included on the distribution list.
|
|
Services
