Gambling winnings or losses?

Mike Habib, EA

As a US taxpayer, you can deduct gambling losses only if you itemize your deductions on form 1040. You can claim your gambling losses as a miscellaneous deduction on IRS Form 1040, Schedule A. However, the amount of losses you deduct can not total more than the amount of gambling income you’ve reported on your return. It’s important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

The IRS provides the following guidelines for proving gambling winnings and losses:

An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation usually is acceptable evidence for substantiation of wagering winnings and losses. In general, the diary should contain at least the following information

• Date and type of specific wager or wagering activity
• Name of gambling establishment
• Address or location of gambling establishment
• Name(s) of other person(s) present with you at gambling establishment
• Amount(s) won or lost

Verifiable documentation includes, but is not limited to:

• Wagering tickets
• Canceled checks
• Credit records
• Bank withdrawals
• Statements of actual winnings or payment slips provided by the gambling establishment

When possible, the diary and available documentation of the placement and settlement of a wager should be supported by such documentation as:

• Hotel bills
• Airline tickets
• Gasoline credit cards
• Affidavits or testimony from responsible gambling officials regarding the wagering activity

Refer to IRS Publication 529, Miscellaneous Deductions, for information on record keeping. For additional information, refer to IRS Publication 525, Taxable and Nontaxable Income.

For tax help, contact our office today.

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Estate not taxed on transfer of decedent’s pension to charitable beneficiary PLR 200845029

IRS has privately ruled that an estate will not be taxed on a distribution of the decedent’s pension benefits to a charitable beneficiary of the estate.

Facts. An individual, whom we’ll call, Smith, died owning an interest in a defined benefit pension plan (the Plan Interest) of which his estate (Estate) was the beneficiary. His will (Will) named Charity as a residuary beneficiary. The executor of Estate proposes to assign the benefit of the Plan Interest to Charity in partial satisfaction of Charity’s share of the residue. The Will gave the executor the power to distribute property in kind and state law further allows distributions in kind without any requirement that they be made on a pro-rata basis.

Background. Income earned by an individual before death that isn’t included on his final return because of his accounting method (usually income that has been earned or accrued but hasn’t been actually or constructively received by a cash method taxpayer) is known as income in respect of a decedent or IRD. A decedent’s IRD must be reported, for the tax year when received, by:

• • the decedent’s estate, if it acquired the right to receive the item of income from the decedent;
  • the person who, by reason of the decedent’s death, acquires the right to the income whenever this right isn’t acquired by the decedent’s estate from the decedent; or
  • the person who acquires the right from the decedent by bequest, devise or inheritance, if the amount is received after distribution by the decedent’s estate of the right to the income. (Code Sec. 691(a)(1))

A transfer of a right to receive IRD is taxable to the transferor in the year of the transfer in an amount equal to the fair market value of the right or the amount received for it, whichever is greater. For this purpose, a transfer includes a sale, exchange, or other disposition, or the satisfaction of an installment obligation at other than face value, but does not include transmission at death to the estate of the decedent or a transfer to a person pursuant to the person’s right to receive the amount by reason of the decedent’s death or by bequest, devise, or inheritance from the decedent. (Code Sec. 691(a)(2))

If the estate of a decedent or any person transmits the right to IRD to another who would be required by Code Sec. 691(a)(1) to include such income when received in his gross income, only the transferee will include such income when received in his gross income. In this situation, a transfer within the meaning of Code Sec. 691(a)(2) has not occurred. (Reg. § 1.691(a)-4(b))

Under Reg. § 1.691(a)-4(b), if a right to IRD is transferred by an estate to a specific or residuary legatee, only the specific or residuary legatee must include such income in gross income when received.

Favorable ruling. The ruling concluded that the assignment of the Plan Interest to Charity in partial satisfaction of its share of the residue of Estate won’t be a transfer within the meaning of Code Sec. 691(a)(2). Thus, only Charity will include the amounts of IRD in the Plan Interest in its gross income when the distribution or distributions from the Plan Interest are received by Charity.

Observation: Thus, while the pension benefits are included in Charity’s income, as a practical matter, since Charity is a tax-exempt entity, this means the pension benefits will escape tax.

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Year-end tax planning client letter with checklist

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill this year and possibly the next. Factors that compound the challenge include the stock market’s swoon, the difficult economic climate we’re in right now, and the strong possibility that there will be tax changes in the works next year. In fact, there might even be another economic stimulus package carrying tax changes enacted before the end of this year.

The indisputably good news we are certain of is that Congress has acted to “patch” the AMT problem for 2008, has retroactively reinstated a number of tax breaks (such as the option to deduct state and local general sales tax instead of state and local income tax and the above-the-line deduction for higher education expenses), and has created new tax breaks that go into effect for the 2008 tax year (including a tax credit for first-time homebuyers, a nonitemizers’ deduction for state and local property tax and a nonitemizers’ deduction for certain disaster losses). For 2008, businesses enjoy tax breaks such as a beefed-up expensing option and a 50% bonus first-year depreciation write-off for most machinery and equipment placed into service this year and a reinstated research credit.

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax saving moves to make:

• • Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. Don’t forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
  • If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2008.
  • Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, and then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
  • Postpone income until 2009 and accelerate deductions into 2008 to lower your 2008 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2008 that are phased out over varying levels of adjusted gross income (AGI). These include IRA and Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2008. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year.
  • If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into Roth IRAs if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2008.
  • It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2009.
  • If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.
  • Consider using a credit card to prepay expenses that can generate deductions for this year.
  • If you expect to owe state and local income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2008.
  • Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding.
  • You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
  • Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2008, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. This includes the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.
  • If you are thinking of making energy saving improvements to your home, such as putting in extra insulation or installing energy saving windows, postpone your move until 2009. A credit of up to $500 may be available for such improvements if made next year (but not this year).
  • Substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home. The credits are available whether you spend the money this year or next, but if you’re installing solar electric property, and will be spending more than $6,667, the credit will be larger for expenses made in 2009 rather than 2008.
  • If you are thinking of buying a hybrid vehicle eligible for a tax credit, check to see if it’s eligible for the credit, and, if so, purchase it before year-end.
  • You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
  • Businesses should consider making expenditures that qualify for the up to $250,000 business property expensing option for assets bought and placed in service this year; the maximum expensing amount will drop to $133,000 for assets bought and placed in service next year (higher expensing amounts apply to certain specialized assets). Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus write-off generally won’t be available next year (some exceptions apply, such as for businesses affected by Presidentially declared disasters).
  • You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
  • If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.
  • You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $12,000 in 2008 to an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next.
  • If you’re thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.
  • If you are age 70 1/2 or older, own IRAs (or Roth IRAs), and are thinking of making a charitable gift before year-end, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer can achieve important tax savings.
  • If you are receiving Social Security benefits, there are a number of steps you can take to reduce or eliminate tax on your benefits.
  • Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2008 miscellaneous itemized deductions subject to the 2%-of-AGI floor.
  • Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2009, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

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How businesses are affected by tax changes in the Emergency Economic Stabilization Act of 2008

As I’m sure you’re aware, on Oct. 3, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). Although virtually all of the press coverage of this law has concentrated on its hotly debated $700 billion financial industry bailout plan, the legislation also contains scores of mostly beneficial tax changes for business.

Most of the new law’s tax changes for business fall into one of these categories: tax changes that apply to a wide range of businesses; special tax breaks for disaster areas; and tax changes for specialized industries (there are numerous tax breaks relating to alternative energy production, but they are highly specialized and so not covered in this letter).

Tax breaks that apply to a wide range of businesses. The major news for business is that the research tax credit has been extended through 2009. The new law also makes a number of important changes in the way the research credit is calculated, effective for tax years beginning after 2008.

Other, widely applicable tax breaks for business include the following:

• • The FUTA (Federal Unemployment Tax Act) tax rate had been scheduled to drop to 6% after 2008, but under the new law it will remain at 6.2% through 2009 and will drop to 6% for 2010 and later.
  • For property placed in service after Aug. 31, 2008, the new law permits 50% first year bonus depreciation for qualified reuse and recycling property. In general, this is machinery and equipment (not including buildings or real estate), along with associated property, including software necessary to operate the equipment, which is used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials. This break is not limited to businesses in the recycling industry.
  • A two year extension through 2009 of enhanced charitable contribution deduction rules for gifts of certain types of food inventory, and corporate gifts of book inventory or computer equipment to schools.
  • A two year extension through 2009 for the tax break that allows expensing of qualified environmental remediation expenses, namely cleanup of hazardous substances (including petroleum products) at qualified contaminated sites.
  • The deduction for energy efficient commercial building property has been extended so that it applies through 2013.
  • For purchases after 2008 and before 2015, taxpayers will be able to claim a tax credit for electric drive motor vehicles.
  • After 2008, companies will be able to give employees who commute by bicycle a $20 per month tax-free reimbursement for reasonable bicycle related expenses.

Tax breaks for businesses in disaster areas. The new law creates a new set of tax relief provisions for businesses hit by events such as storms, hurricanes, and floods anywhere in the U.S. that are declared to be federal disasters after 2007 and before 2010. These are of great importance to businesses because many federal disasters have already been declared in numerous states in 2008 and many others are likely to occur before the tax breaks sunset.

Here’s a summary of the new relief provisions:

• • Qualified disaster expenses, such as cleanup (removal of debris, demolition of structures) and repairs, may be expensed.
  • A 5-year net operating loss (NOL) carryback applies instead of the usual 2-year carryback.
  • The maximum amount of machinery and equipment that may be expensed under Section 179 is increased by up to $100,000 for qualifying assets, and the investment-based phaseout of the expensing deduction is increased by $600,000.
  • A 50% first-year bonus depreciation allowance applies to most types of machinery and equipment bought to rehabilitate or replace damaged property. A number of conditions must be met, and certain types of property are excluded (including property eligible for the more widely applicable 50% first-year bonus depreciation allowance enacted as part of the Economic Stimulus Act of 2008).

The new law also includes a number of specialized provisions for victims of a Midwest disaster area (counties in ten Midwest states declared to be a major disaster after May 19, 2008, and before Aug. 1, 2008).

Tax breaks for specialized industries. Tax breaks in the new law mainly benefiting specific industries include the following:

• • Financial institutions—may treat post-2007 losses on Fannie Mae and Freddie Mac preferred stock as ordinary losses instead of capital losses; for tax years ending after Oct. 2, 2008, the $1 million deduction cap on compensation paid to certain top officers is reduced to $500,000 if the company participates in the federal government’s “troubled assets relief program” (TARP); and the “golden parachute” deduction restrictions apply to severance payments to certain top executives of companies participating in TARP. Finally, for securities acquired after 2010 (later dates apply to some specialized securities), brokers will have to report the customer’s adjusted basis in the security sold, and whether any gain or loss is short- or long-term.
  • Farming—there’s a 5-year quick depreciation writeoff for most farm machinery and equipment placed in service after 2008 and before 2010.
  • Real estate, retailers, and restaurants—the 15-year depreciation writeoff for qualifying leasehold improvements and qualifying restaurant property has been extended through 2009. What’s more, for property placed in service after 2008 and before 2010, (a) buildings as well as building improvements may qualify for the quick writeoff for restaurant property; and (b) the 15–year depreciation writeoff also applies to qualifying retail improvement property.
  • Construction companies—the $2,000 tax credit for building energy efficient homes ($1 million for manufactured homes) has been extended to apply to homes acquired through 2009. Note that construction companies also may benefit indirectly from the extended and enhanced tax breaks for real estate, restaurants, and retailers.
  • Film and TV—the option to expense up to $15 million of qualifying film and TV productions ($20 million if produced in certain low-income areas) is extended so that it applies for productions beginning before 2010; also, the qualified domestic production activities deduction has been liberalized in several ways for this industry, effective for tax years beginning after 2007.
  • Motorsports racing—the short 7-year writeoff for land improvements and support facilities at motorsports entertainment complexes has been extended to apply for property placed in service before 2010.
  • Oil and gas—there are three significant changes: (1) the otherwise available domestic production activities deduction for companies that have oil-related income will be reduced after 2009 (a complex reduction formula will apply); (2) the rule providing that percentage depletion from marginal oil and gas wells isn’t limited to 100% of income from these properties is extended though 2009; and (3) the rules relating to foreign tax credits for the oil and gas industry have been revised for tax years beginning after 2008.
  • Mining—the tax credit for mine rescue training and the election to expense 50% of the cost of certain mine safety equipment both have been extended so that they apply through 2009.

Please keep in mind that I’ve described only the highlights of how the new law affects businesses. If you would like more details, please call me at your convenience.

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Timely reminder for small businesses to steer clear of trouble on payroll tax and retirement plan contributions IRS Employee Plan News (Fall 2008)

In these trying times, with cash scarce and credit hard to find, a small business might be tempted to “temporarily” use money it deducts for taxes and retirement plan contributions from employees’ wages. The Fall 2008 issue of IRS’s Employee Plans News [http://www.irs.gov/pub/irs-tege/fall08.pdf] suggests that practitioners remind clients that failing to remit payroll taxes and retirement plan contributions in a timely manner not only would violate an employer’s legal obligation, but also could subject them to heavy penalties.

Payroll taxes. IRS suggests that small business employers be reminded that when they deduct income and Social Security taxes from employees’ wages, the money is not theirs to use, even for a short period of time. Deducted amounts must be remitted, along with their portion of payroll taxes, by the next scheduled Federal Tax Deposit deadline. An employer that doesn’t deposit the money on time could be hit with:

• • penalties for making late deposits and for not depositing the proper amount; and
  • penalties for failing to file returns and pay taxes when due, for filing false returns, and for submitting bad checks.

The rate of these penalties increases with each passing day until deposits are made. Interest is also charged on the total unpaid tax and the penalty. These penalties and interest can add up quickly and lead to even bigger financial troubles for noncompliant businesses.

Observation: Perhaps the most compelling argument to make is that a company owner could be personally on the hook for unpaid payroll tax. Under Code Sec. 6672, when an employer fails to properly pay over its payroll taxes, IRS can seek to collect a penalty equal to 100% of the unpaid taxes from any “responsible person,” i.e., a person who (1) is responsible for collecting, accounting for and paying over payroll taxes and (2) willfully fails to perform this responsibility.

Employee elective deferrals. Businesses that maintain a retirement plan and allow employees to make elective deferrals might be tempted to “borrow” money they deduct from employees’ pay for plan contributions to pay other business expenses. IRS stresses that employers have fiduciary obligations under the Employee Retirement Income Security Act of 1974 (ERISA) to deposit the deducted amounts as soon as those amounts can be segregated from their own general assets, but no later than the 15th business day of the month immediately after the month in which they withheld the contributions. Under a proposed Dept. of Labor rule, plans with fewer than 100 participants are treated as meeting this deposit rule if such contributions are transferred to the plan within 7 business days from the date those amounts would otherwise have been payable to the employee in cash.

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IRS seeks to return $266 million in undeliverable refunds and economic stimulus payments to taxpayers [IR 2008-123]:

More than 383,000 regular refund and economic stimulus checks have been returned by the U.S. Postal Service as undeliverable, IRS said on Oct. 23. This figure included 279,000 economic stimulus checks totaling $163 million and 104,000 regular refund checks totaling $103 million.

The problem is more urgent for those who have not received their economic stimulus checks which, by law, must be sent out by Dec. 31, IRS said. The agency is urging individuals who have not received the stimulus payment to check on the status of their payment immediately and, if necessary, update their addresses by Nov. 28.

This can be done by going to the “Where’s My Stimulus Payment?” tool on the IRS Web site at http://www.irs.gov/individuals/article/0,,id=181665,00.html .

Individuals without Internet access should call (866) 234-2942.

Taxpayers who have not received their refund can check on its status by going to the “Where’s My Refund?” tool at http://www.irs.gov/individuals/article/0,,id=96596,00.html .

Telephone inquiries can be made by calling (800) 829-1954.

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As I’m sure you’re aware, on Oct. 3, 2008, the President signed into law the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). Although virtually all of the press coverage of this law has concentrated on its hotly debated $700 billion financial industry bailout plan, the legislation also contains scores of tax changes, mostly beneficial, for individuals and businesses alike.

Here’s a brief review of the tax provisions individuals need to know about right now.

AMT relief: In general terms, to find out if you owe alternative minimum tax (AMT), you start with regular taxable income, modify it with various adjustments and preferences (such as addbacks for property and income tax deductions and dependency exemptions), and then subtract an exemption amount (which phases out at higher levels of income). The result is multiplied by an AMT tax rate of 26% or 28% to arrive at the tentative minimum tax. You pay the AMT only if the tentative minimum tax exceeds your regular tax bill. Although it was originally enacted to make sure that wealthy individuals did not escape paying taxes, the AMT has wound up ensnaring many middle-income taxpayers. One reason is that many of the tax figures (such as the tax brackets, standard deductions, and personal exemptions) used to arrive at your regular tax bill are adjusted for inflation, but the tax figures used to arrive at the AMT are not.

For 2008 only, the new law provides some relief. It increases the maximum AMT exemption amount over its 2007 level by $3,700 for married taxpayers filing joint returns, and by $1,850 for unmarried individuals and married persons filing separately. However, after 2008 the maximum AMT exemption amount will drop precipitously to where it was in the year 2000 unless Congress provides yet another fix.

Another provision in the new law provides AMT relief for those individuals claiming certain “nonrefundable” personal tax credits (such as the credit for dependent care and the Scholarship and Lifetime Learning credits). For 2008, these credits may offset an individual’s regular tax and AMT. After 2008, unless Congress acts, these credits will be allowed only to the extent that an individual has regular income tax liability in excess of the tentative minimum tax.

The new law also liberalized the AMT refundable credit amount that was first enacted in 2006 to help taxpayers who were stung by the AMT as a result of exercising incentive stock options (ISOs). The changes are highly technical but their essence is that for tax years beginning after 2007: (1) eligible individuals may claim this credit more rapidly (i.e., over fewer years) than would have been the case without the change; and (2) the AMT refundable credit amount no longer phases out at higher levels of adjusted gross income (AGI). In addition, the new law wipes out any tax underpayments (plus interest & penalties) outstanding on Oct. 3, 2008, that are attributable to pre-2008 phantom ISO income under the AMT rules.

Retroactively resuscitated and extended tax breaks: All of the following tax breaks had expired at the end of last year. The new law retroactively resuscitates them so that they apply for 2008, and also extends them for one year so that they will apply for 2009 as well:

• • The option to claim an itemized deduction for state and local general sales taxes instead of the itemized deduction for state and local income taxes.
  • The above-the-line deduction for qualified tuition and related expenses for higher education paid during the tax year.
  • The up-to-$250 eligible educator’s above-the-line deduction for books, supplies, computer equipment, etc., used by him or her in the classroom.
  • The up-to-$100,000 annual exclusion from gross income for taxpayers age 70 1/2 or older who make direct transfers of otherwise taxable individual retirement account (IRA) distributions to qualified charitable organizations.

The new law also extends for one year the nonitemizers’ additional standard deduction for State and local property taxes paid. The deduction can’t exceed the lesser of state and local property taxes actually paid or $500 ($1,000 for joint return filers). This deduction was supposed to have been available only for 2008, but the new law makes it available for 2009 as well.

Deductions for energy saving home improvements extended and expanded: Two tax credits are available for taxpayers who make energy saving improvements to residences. They’ve both been extended by the new law and expanded as well:

(1) A generous tax credit is available to individuals who add solar energy equipment or fuel-cell equipment (new technology that converts fuel into electricity using electromechanical methods, and meets other detailed requirements) to their residences. The new law extends this credit through 2016. It also liberalizes the credit in an important way: For 2008, you can claim a tax credit of 30% of the cost of equipment that uses solar energy to generate electricity (photovoltaic property), up to a $2,000 maximum tax credit. After 2008, there’s no dollar limitation on the credit. For example, suppose you spend $8,000 buying and installing solar heating panels on your residence. If you make the improvement this year, you may claim a maximum credit of $2,000, but if you make the improvement next year, you may claim a credit of $2,400 (30% of $8,000).

Additionally, starting with 2008, the new law makes the credit available for more-exotic energy generating/retaining equipment: wind turbines; and geothermal heat pumps.

(2) For equipment installed before 2008, you could claim a credit for the cost of buying an assortment of energy saving improvements and installing them in your main home. The credit depends on the type of improvement (e.g., 10% of the cost of energy efficient building envelope components, such as insulation and windows, and an up to $150 credit for a natural gas, propane, or oil furnace or hot water boiler) and there’s an overall $500 lifetime dollar limit for all improvements.

The new law does not extend this credit for qualifying equipment bought and installed in 2008, but it does make it available once again for qualifying equipment bought and installed in 2009. Also, for 2009, the new law makes the credit available for certain types of energy efficient biomass fuel stoves and certain types of energy saving asphalt roofs.

New tax relief for victims of Presidentially declared disasters: Individuals may deduct personal casualty losses (e.g., unreimbursed damage to a car due to a storm) or personal theft losses only if they exceed a $100 limit per casualty or theft and only to the extent these losses in the aggregate exceed 10% of adjusted gross income (AGI). If the disaster occurs in a Presidentially declared disaster area, an individual may elect to take into account the casualty loss in the year immediately preceding the year in which the disaster occurs. Before 2008, only itemizers could deduct casualty losses.

The new law waives the 10%-of-AGI limit for victims of disasters declared to be federal disasters in 2008 and 2009, plus, for these years, permits nonitemizers to claim a deduction for federal disaster losses. However, for 2009 only, the new law boosts the $100 per casualty limit to $500 (which will have the effect of reducing deductions).

The new law also gives a number of extra tax breaks to victims of the storms and hurricanes that pummeled ten Midwest states during 2008.

More detailed reporting of securities transactions – after 2010: Stock brokers must file an information return (Form 1099-B) for securities transactions they handle. Currently, brokers report the name and address of the customer, when the sale took place, what was sold, and the gross proceeds of the sale. Starting with stocks (as well as bonds and several other financial instruments) bought after 2010 (a later date applies to some specialized securities), brokers will have to report the customer’s adjusted basis (essentially cost for tax purposes) and whether a gain or loss on the transaction was short- or long-term.

This new information reporting requirement is designed to boost IRS’s compliance efforts (e.g., help assure taxpayers properly report their gains and losses).

Please keep in mind that I’ve described only the highlights of how the new law affects you. If you would like more details, please call me at your convenience.

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Special refund procedures for coal producers and exporters on excise tax paid on exported coal Ann. 2008-103, 2008-46 IRB

In a new Announcement, IRS has advised taxpayers how to claim a refund of the excise tax on exported coal under the new procedures provided in Sec. 114 of the Energy and Extension Act of 2008 (2008 Energy Act, P.L. 110-343, 10/3/2008). The claim must be filed with IRS by Nov. 3, 2008.

Background. A manufacturers excise tax is imposed on coal mined from underground or surface mines located in the U.S. and sold or used by the producer. (Code Sec. 4121) In ‘98, a district court (Ranger Fuel Corp v. U.S., (DC VA 1998) 83 AFTR 2d 99-375 ) held that the coal excise tax is unconstitutional to the extent it applies to exported coal based on the blanket prohibition imposed by the Export Clause of the U.S. Constitution, and IRS acquiesced, in effect, in that decision by issuing guidance on how to claim a refund for coal excise tax imposed on exported coal. (Notice 2000-28, 2000-1 CB 1116)

The 2008 Energy Act creates a new procedure under which certain coal producers and exporters may claim a refund of excise taxes imposed on coal exported from the U.S.

New refund procedures. Notice 2008-103 provides guidance to domestic coal producers and exporters on the submission of claims for refund of the coal excise tax pursuant to Section 114 of the 2008 Energy Act, which provides the criteria for refunds of the coal excise tax on coal exported on or after Oct. 1, ‘90, and on or before Oct. 3, 2008. These claims must be filed by Nov. 3, 2008. All claims for a refund under the 2008 Energy Act must be filed on a paper Form 8849, Claim for Refund of Excise Taxes, Schedule 6, Other Claims, and can’t be filed electronically. “Exported Coal Claim” must be written at the top of Form 8849. The claims must be mailed to: IRS, Cincinnati, OH 45999-0002, and filed no later than Nov. 3, 2008. (Notice 2008-103, Sec. 3)

Notice 2008-103, Sec. 4, describes the information each claim by a coal producer under the 2008 Energy Act must contain. Notice 2008-103, Sec. 5, describes the information each claim by an exporter under the 2008 Energy Act must contain.

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Appeals Court reverses ruling that denied taxpayer Section 530 Relief

Trucker tax relief, trucking tax relief, trucking tax problem resolution.

Peno Trucking, Inc. v. Commissioner, CA6, 102 AFTR 2d ¶ 2008-5360

The U.S. Court of Appeals for the Sixth Circuit has affirmed a U.S. Tax Court ruling that a trucking company should have classified its drivers as employees, rather than independent contractors. However, the Sixth Circuit reversed the Tax Court ruling on whether the trucking company was entitled to employment tax relief under §530 of the Revenue Act of 1978.

Facts. Peno Trucking, Inc. (Peno) owned approximately 15 tractor-trailers (trucks), which it leased to the Ohio Transport Corporation. Under the lease agreements, Peno provided drivers to operate the trucks. Peno was responsible for all work performed by the drivers. Peno entered into an agreement with each of the drivers during the periods at issue which expressly provided that the drivers were independent contractors and not employees. Peno reported the income earned by the drivers on Forms 1099. IRS reclassified the workers as employees and issued an assessment against Peno. Peno appealed the IRS determination.

Employee versus independent contractor issue. In 2007, the Tax Court ruled in IRS’s favor on the employee versus independent contractor issue. In ruling that the payments to the drivers constituted wages that should have been subject to federal employment tax, the Tax Court noted that: (1) Peno oversaw the drivers’ responsibilities, determined the days they could work, and controlled which loads they would haul. (2) Peno made a substantial investment to acquire and maintain the fleet of approximately 15 trucks. (3) There was no opportunity for the drivers to assume a risk of loss. (4) Peno had the right to discharge its drivers. (5) The drivers performed a service that was essential to Peno’s operations. (6) The drivers worked in the course of Peno’s business rather than having a transitory relationship with Peno. (7) Although Peno and its drivers entered into written agreements which expressly provided that the drivers were independent contractors, the facts indicated otherwise.

The U.S. Court of Appeals for the Sixth Circuit has now affirmed the Tax Court’s decision on the employee versus independent contractor issue. It agreed with the Tax Court’s analysis of the seven factors above.

Reversal on Section 530 Relief. Under §530 of the Revenue Act of 1978, employers are protected from potentially large employment tax assessments if there was a reasonable basis for categorizing workers as independent contractors. A taxpayer can qualify for §530 relief if there is judicial precedent for treating the workers as independent contractors. Peno believed it was entitled to §530 relief because the Ohio Industrial Commission (OIC) and the Ohio Court of Common Pleas had previously ruled that two of its drivers were independent contractors.

The Tax Court, however, denied Peno’s request for §530 relief (see Federal Taxes Weekly Alert 05/24/2007). The Tax Court said that for a taxpayer to have a reasonable basis for not treating an individual as an employee, the judicial precedent must have evaluated the employment relationship at issue through the federal common law tests. There was no evidence presented to the Tax Court that the OIC or the Ohio Court of Common Pleas had evaluated the employment relationship between Peno and its drivers under these tests. There was also no indication that the judicial rulings had been relied upon by Peno at the time it decided to classify the drivers as independent contractors.

The U.S. Court of Appeals for the Sixth Circuit disagreed with the Tax Court’s decision. The Sixth Circuit noted that Peno had always treated the truckers in question as independent contractors, and that the company had always filed its tax returns in a manner consistent with this treatment. In addition, IRS had failed to submit any evidence to support Peno’s treatment of the workers as anything other than independent contractors. The Sixth Circuit also said that the OIC appeared to have employed a 20-factor common law test for determining whether the drivers were employees or independent contractors that was virtually identical to the 20-factor test outlined by the IRS for the years at issue. Therefore, the OIC had used judicial precedent in ruling that two of Peno’s drivers were independent contractors. Based on the above analysis, the Sixth Circuit reversed the Tax Court’s decision and ruled that Peno was eligible for §530 relief.

Trucker tax relief, trucking tax relief, trucking tax problem resolution.

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Charitable extenders and incentives in the 2008 Extenders Act

The Tax Extenders and Alternative Minimum Tax Relief Act of 2008, which was enacted on Oct. 3, 2008, extends several expired charitable giving tax breaks and provides several new tax incentives for charitable giving. Here is a brief overview of the charitable provisions in the new legislation.

Charitable giving provisions extended for two years. Several popular charitable incentives expired at the end of 2007 and would not have been available to taxpayers on their 2008 tax returns if Congress had not acted. The new law restores the provisions and extends them for two years (through 2009). The extended provisions include:

• • IRA charitable rollover. This provision allows individuals aged 70 1/2 and older to donate up to $100,000 from their individual retirement accounts (IRAs) and Roth IRAs to public charities without having to count the distributions as taxable income. This giving incentive is particularly beneficial to those individuals who do not itemize their tax deductions and would not otherwise receive any tax benefit for their charitable contributions.
  • Enhanced charitable deduction for food inventory. This provision allows businesses to claim an enhanced deduction for the contribution of food inventory. The new law also eliminates the percentage limitation for contributions made by certain farmers and ranchers after Dec. 31, 2007, but before Jan. 1, 2009.
  • Enhanced charitable deduction for contributions of book inventory to schools. This provision allows C corporations an enhanced charitable deduction for donations of books to schools, public libraries and literacy programs.
  • Enhanced charitable deduction for qualified computer contributions. This provision encourages businesses to contribute computer equipment and software to elementary, secondary, and post-secondary schools by allowing an enhanced deduction for such contributions.
  • Basis adjustment to stock of S corporations making charitable contributions of property. Under this provision, if an S corporation makes a contribution to a charity the amount of a shareholder’s basis reduction in the S corporation stock will be equal to the shareholder’s pro rata share of the adjusted basis of the contributed property (rather than the pro rata share of the fair market value of the contribution, as was the case under prior law).
    

New tax incentives for charitable giving. New incentives for charitable giving contained in the new legislation include:

• • Temporary suspension of limitations on charitable contributions. The amount allowed as a charitable deduction in any year may not exceed ten percent of the corporation’s taxable income or fifty percent of an individual’s adjusted gross income. The new law temporarily waives these limits regarding charitable cash contributions dedicated to Midwestern disaster relief efforts. The provision is effective for contributions paid during the period beginning on the earliest applicable disaster date for all States and ending on Dec. 31, 2008.
  • Increase in standard mileage rate for charitable use of vehicles. The mileage rate individuals may use to compute a tax deduction for personal vehicle expenses associated with charitable work is statutory and has not been increased since 1997 and is currently at 14 cents per mile. For a taxpayer assisting in relief efforts related to the Midwestern disaster, the new law sets the charitable mileage rate at seventy percent of the current standard business mileage rate, beginning on the applicable disaster date and ending on Dec. 31, 2008.
  • Exclusion from income of mileage reimbursements for charitable volunteers. In general, reimbursements received for operating expenses of a personal vehicle used in connection with charitable work in excess of the statutory charitable mileage rate are taxable income to the recipient. However, reimbursements for charitable mileage attributable to the Midwestern disaster up to the amount of the standard business mileage rate will not be considered taxable income through Dec. 31, 2008.
    

I hope this information is helpful. If you would like more details about these changes, or any other aspects of the new law, please do not hesitate to call.

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Mortgage debt relief extension, tax relief for community banks, and crackdown on some executive compensation in the 2008 Economic Stabilization Act

I am writing to provide details regarding three tax provisions in the Emergency Economic Stabilization Act of 2008: which was enacted Oct. 3, 2008. Those provisions are: (1) an extension for home mortgage debt forgiveness relief, (2) tax relief for community banks that invested in Fannie Mae and Freddie Mac preferred stock, and (3) a tax crackdown on compensation and severance pay for certain financial executives. Here are the key details regarding those provisions.

Two-year extension of home mortgage debt forgiveness relief provision. The new law provides assistance to homeowners who have been caught in the current mortgage crisis and are trying to save their homes. Under 2007 tax legislation, taxpayers are generally allowed to exclude up to $2 million of mortgage debt forgiveness on their principal residence. However, this relief provision was scheduled to expire at the end of 2008. Under the new law, this debt relief provision is extended through 2012. To understand the importance of this relief provision, one needs to know that for income tax purposes, a discharge of indebtedness—that is, a forgiveness of debt—is generally treated as giving rise to income that’s includible in gross income. Under pre-2007 tax law, there were no special rules applicable to discharges of acquisition debt on the taxpayer’s principal residence. For example, assume a taxpayer who wasn’t in bankruptcy and wasn’t insolvent owned a principal residence subject to a $200,000 mortgage debt for which the taxpayer had personal liability. The creditor foreclosed and the home was sold for $180,000 in satisfaction of the debt. Under pre-2007 tax law, the debtor had $20,000 of debt discharge income. The result was the same if the creditor restructured the loan and reduced the principal amount to $180,000. In 2007 the tax laws were temporarily changed to allow taxpayers to exclude up to $2 million of mortgage debt forgiveness on their principal residence. For example, assume the same facts as in the foregoing example except that the discharge occurs in 2008. In that case the debtor has no debt discharge income when the creditor (1) restructures the loan and reduces the principal amount to $180,000 or (2) forecloses with the result that the $200,000 debt is satisfied for $180,000. However, this debt relief provision was scheduled to expire at the end of 2009. The new legislation extends the provision through 2012. The relief is not extended to home equity loans.

Tax relief for community banks. Some 800 community banks had huge losses on their Fannie Mae and Freddie Mac preferred stock holdings which became worthless when the government bailed those companies out. Without a tax change, these community banks would have had capital losses on these holdings that they couldn’t utilize. The new legislation allows community bans to treat losses on their Fannie Mae and Freddie Mac preferred stock as ordinary losses that can offset ordinary income. Applying to any preferred stock that was owned on Sept. 6, 2008, or sold between Jan. 1, 2008, and Sept. 6, 2008, this provision allows banks to claim the book benefit of the loss on their tax returns, thereby reducing their need to obtain additional capital from the FDIC or investors.

Tax crackdown on compensation and severance pay for certain financial executives. Under the new law, when more than $300 million of a company’s assets are purchased by the Treasury through an auction, (1) “golden parachute” payments are banned for top executives hired while the Treasury rescue is in effect and (2) tax provisions kick in to strengthen the tax treatment of remaining executive compensation and severance packages. Specifically, the deductibility of executive compensation for companies will be cut in half from pre-Act levels, and companies will also lose deductions available under pre-Act law for excessively large severance packages. Executives receiving severance packages will continue to face a 20% excise tax on payments once they reach an excessive threshold, and that tax will be due if the executive leaves for reasons other than a standard retirement for which they are eligible—not just if the company changes hands, as in pre-Act law.

I hope this information is helpful. If you would like more details about these changes, or any other aspects of the new law, please do not hesitate to call.

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AMT relief in the 2008 Extenders Act

I am writing to provide details regarding three key provisions in the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008” (the 2008 Extenders Act), which was enacted on Oct. 3, 2008. The provisions extend partial relief to individual taxpayers from the alternative minimum tax, or AMT. Earlier temporary measures to deal with the unintended creep of the AMT’s reach expired at the end of 2007, meaning that more than 20 million additional taxpayers would have faced paying the tax on their 2008 returns without the new relief.

Brief overview of the AMT. The AMT is a parallel tax system which does not permit several of the deductions permissible under the regular tax system, such as state, local and property taxes. Taxpayers who may be subject to the AMT must calculate their tax liability under the regular federal tax system and under the AMT system taking into account certain “preferences” and “adjustments.” If their liability is found to be greater under the AMT system, that’s what they owe the federal government. Originally enacted to make sure that wealthy Americans did not escape paying taxes, the AMT has started to apply to more middle-income taxpayers, due in part to the fact that the AMT parameters are not indexed for inflation.

In recent years, Congress has provided a measure of relief from the AMT by raising the AMT “exemption amounts”—allowances that reduce the amount of alternative minimum taxable income (AMTI), reducing or eliminating AMT liability. (However, these exemption amounts are phased out for taxpayers whose AMTI exceeds specified amounts.) For 2007, the AMT exemption amounts were $66,250 for married couples filing jointly and surviving spouses; $44,350 for single taxpayers; and $33,125 for married filing separately. However, for 2008, those amounts were scheduled to fall back to the amounts that applied in 2000: $45,000, $33,750, and $22,500, respectively. This would have brought millions of additional middle-income Americans under the AMT system, resulting in higher federal tax bills for many of them, along with higher compliance costs associated with filling out and filing the complicated AMT tax form.

New law provides one-year stopgap fix. To prevent the unintended result of having millions of middle-income taxpayers fall prey to the AMT, Congress has once again relied on a temporary “patch” to the problem, this time a one-year extension of the 2007 exemption amounts, increased slightly. Under the new law, for tax years beginning in 2008, the AMT exemption amounts are increased to: (1) $69,950 in the case of married individuals filing a joint return and surviving spouses; (2) $46,200 in the case of unmarried individuals other than surviving spouses; and (3) $34,975 in the case of married individuals filing a separate return.

Personal credits may be used to offset AMT through 2008. Another provision in the new law provides AMT relief for taxpayers claiming personal tax credits. The tax liability limitation rules generally provide that certain nonrefundable personal credits (including the dependent care credit, the elderly and disabled credit, and the Hope Scholarship and Lifetime Learning credits) are allowed only to the extent that a taxpayer has regular income tax liability in excess of the tentative minimum tax, which has the effect of disallowing these credits against AMT. Temporary provisions had been enacted which permitted these credits to offset the entire regular and AMT liability through the end of 2007. The new law extends this temporary provision to tax years beginning in 2008.

Extension and modification of AMT credit allowance against incentive stock options (ISOs). A further provision in the new law liberalizes the AMT refundable credit amount that was first enacted in 2006 to help taxpayers who were stung by the AMT as a result of exercising incentive stock options (ISOs). Under the regular tax, ISOs are not taxed upon exercise. Under the AMT, however, a taxpayer must pay tax on the stock value when the option is exercised. The economic downturn in 2000 resulted in many individuals having to pay tax on “phantom income” because the stock prices dropped dramatically after the date of exercise. In 2006, Congress provided relief for these situations but did not correct the problem entirely. The new law provides additional relief to affected taxpayers by accelerating the refund of taxes paid on the phantom income and by stopping further IRS efforts to collect those taxes. Specifically, the new law allows 50% of long-term unused minimum tax credits to be refunded over each of two years (instead of 20% over each of five years as was allowed under pre-2008 Extenders Act law), eliminates a rule that limited the relief available to higher-income taxpayers, and abates any underpayment of tax outstanding on the date of enactment related to ISOs and the AMT including interest.

I hope this information is helpful. If you would like more details about these changes, or any other aspects of the new law, please do not hesitate to call.

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Individual and business extenders and other relief provisions in the 2008 Extenders Act

The “Tax Extenders and Alternative Minimum Tax Relief Act of 2008” (the 2008 Extenders Act), which was enacted on Oct. 3, 2008, provides extensions for several popular tax breaks and the addition of several new relief provisions, including disaster area tax relief. Here’s an overview of the key provisions in the new legislation:

Deduction of state and local general sales taxes. The option to deduct state and local general sales taxes is extended through 2009.

Qualified tuition deduction. The above-the-line tax deduction for qualified higher education expenses is extended through 2009.

Teacher expense deduction. The provision allowing teachers an above-the-line deduction for up to $250 for educational expenses is extended through 2009.

IRA rollover provision. The provision allowing qualified taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations is extended through 2009.

Additional standard deduction for real property taxes. The standard deduction for real property taxes for nonitemizers is extended through 2009.

Research and development credit. The research tax credit is extended through 2009. In addition, the alternative simplified credit is increased from 12% to 14% for the 2009 tax year, and the alternative incremental research is repealed for the 2009 tax year.

15-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvements. The 15-year writeoff for qualified leasehold, restaurant and retail improvements is extended through 2008.

Basis adjustment to stock of an S corporation making charitable contributions of property. Favorable Subchapter S basis rules for gifts of appreciated property are extended through 2009.

Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. The provision allowing a Section 199 domestic production activities deduction for activities in Puerto Rico is extended through 2009.

Other extended provisions. Other provisions extended through 2009 include:

• • Qualified zone academy bonds.
  • Indian employment credit.
  • Accelerated depreciation for business property on Indian reservation.
  • Tax credit for certain expenditures for maintaining railroad tracks.
  • 7-year recovery period for certain motorsports racetrack property.
  • Work opportunity tax credit for Hurricane Katrina employees.
  • New markets tax credit.
  • Increased rehabilitation credit for structures in the Gulf Opportunity Zone.
  • Enhanced charitable deduction for qualified computer contributions.
  • Tax incentives for investments in the District of Columbia.