John Williams is our director of tax services and recently was published on this topic.

Northern Nevada Weekly

The following are some of the key provisions of the 2010 Act:

• Section 179 Expense Election expanded: For tax years beginning in 2010 and 2011, expense limit is increased to $500,000 and phase-out threshold increased to $2 million;
• Section 179 for (some) real estate: For tax years beginning in 2010 and 2011, taxpayers can elect to treat certain real estate as Section 179-eligible. Qualifying real estate includes:
  • Qualified leasehold improvements;
  • Qualified restaurant property; and
  • Qualified retail improvement property.
• Bonus depreciation extended: Available for property purchased through December 31, 2010;
• Luxury auto depreciation increased: As a result of the extension of bonus depreciation, first-year depreciation of automobiles is bumped up $8,000;
• Deduction for start-up expenditures increased: Under Section 195, increased from $5,000 to $10,000 for taxable years beginning in 2010 (only);
• Exclusion for small business stock: For purchases made after the date of enactment and before January 1, 2011, the exclusion for small business stock under Section 1202 is increased to 100%;
• Five-year carryback for general business credits: Effective for credits determined in the taxpayer’s first taxable year beginning after December 31, 2009 (one year only), the carryback period for an “eligible small business” is increased from one to five years. In addition, the credit is not subject to the AMT limitation;
• Built-in gain period shortened to five years: For taxable years beginning in 2011 (only), the recognition period for the BIG tax is shortened to five years;
• Deduction for health insurance for SECA purposes: For 2010 (only), the deduction for self-employed health insurance is also a deduction for purposes of the SE tax;
• Cell phones removed from listed property: Permanent and effective for tax years ending after 2009;
• Information reporting required for rental property: Effective for payments made after December 31, 2010, rental real estate is treated as a trade or business for information reporting purposes. IRS to prescribe de minimis exceptions;
• Higher information return penalties: Penalties under Section 6721 are substantially increased beginning in 2011;
• Section 457 plans can include Roth accounts: For tax years beginning after December 31, 2010; and
• Rollovers from elective deferral plans to in-plan Roth accounts allowed: Effective on the date of enactment. Will allow a two-year deferral (2011 and 2012) for rollovers done in 2010.

If you would like to know how these new provisions may specifically impact your 2010 taxes, please contact us at Mark Bailey & Co.  The IRS has included the provisions of the 2010 Act on its website. To view, click here.

It should – especially if you’re a “U.S. person” (US citizen, Green Card holder and/or a non-resident alien if you are physically present in the US over a prescribed number of days and hold foreign assets with an aggregate value of $10,000 or more.

June 30th is the deadline for filing  “Form TD F 90-22.1″ for 2010;  this  “foreign bank account report” (FBAR) gives the Treasury a look at your  foreign “bank, brokerage, or ‘other’ financial accounts” you held during 2010 .  If you have a financial interest in, or signature or other authority over foreign bank, securities or “other” financial accounts with an aggregate value exceeding $10,000, you must file the FBAR. That’s true even if the account contains only precious metals or other non-cash assets, or generates no income.

The FBAR is not the only reporting obligation for your offshore investments.  Additionally, you must also report your foreign accounts each year on Schedule B of your Form 1040, federal income tax return. Moreover, the IRS has created a special reporting regime for Americans with more than $50,000 in non-U.S. assets.

FUBAR – ‘Fouled Up Beyond All Recognition’

The FBAR offshore reporting regime truly is FUBAR. The tax penalties for failing to file FBAR forms are draconian. You could end up paying a $10,000 fine per unreported account for each year you neglect to file the FBAR. Far worse, if you “willfully” fail to file the form, you face a fine up to $500,000, five years imprisonment . . . or both.  In addition, if you own more than 50% of the shares of a corporation (by value, U.S. or foreign) with a foreign account, the corporation must file a FBAR. You must also file a separate FBAR in your own name acknowledging the same account.  Similar rules apply to partnerships. Even a single-member LLC, taxed as a “disregarded entity,” is a “U.S. person” for FBAR purposes.

Offshore Voluntary Disclosure Initiative

If for whatever reason you failed to satisfy the FBAR requirements anytime during the past eight years – now is your chance!  A  new IRS initiative allows certain taxpayers to voluntarily disclose hidden offshore accounts (accounts outside of the US) without the risk of criminal prosecution and also provides for reduced civil penalties for prior noncompliance with offshore account reporting requirements. The initiative, known as the 2011 Offshore Voluntary Disclosure Initiative (OVDI), was announced by the IRS on February 8, 2011. Taxpayers participating in the 2011 OVDI must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by August 31, 2011.

Penalty Framework

The 2011 OVDI provides the following penalty framework during the eight-year look-back period:

• an “off-shore” penalty of 25% on the highest annual aggregate balance in the unreported accounts;
• an “accuracy-related” penalty of 20% for unpaid taxes; and
• late filing and/or late payment penalties in certain cases.

A taxpayer with offshore accounts or assets that, in the aggregate, did not exceed $75,000 in any calendar year during the look-back period will qualify for a reduced 12.5% rate instead of the standard 25% rate. A 5% rate (instead of the standard 25% rate) will apply in certain limited circumstances (e.g., in the case of foreign residents who were unaware that they were U.S. citizens).

Under the 2011 OVDI, taxpayers will not be required to pay a penalty greater than what they would otherwise be liable for under the maximum penalties imposed under existing statutes. The 2011 OVDI also offers a modified mark-to-market election for taxpayers with interests in passive foreign investment companies (e.g., foreign mutual funds) to determine the income from such investments.

Eligibility

Taxpayers, including entities such as corporations, trusts and partnerships, who have undisclosed offshore accounts or assets are eligible to apply for the 2011 OVDI. However, taxpayers under criminal or civil investigation by the IRS or who participated in the 2009 Offshore Voluntary Disclosure Program (predecessor to the 2011 OVDI) are ineligible.

Procedure

There is a fairly simple process to make a voluntary disclosure under the 2011 OVDI. A taxpayer may either submit basic personal information by fax letter to the IRS or submit a more detailed disclosure letter from the outset. Either way, a detailed package of information must ultimately be provided to the IRS to secure acceptance into the program. Mark Bailey & Co. has taken several clients through this process and can assist you.

Webpage

The IRS has launched a new webpage that includes the full terms and conditions of the 2011 OVDI, as well as the necessary forms and documents for making a disclosure.  Additionally, the webpage contains information regarding the procedure for making a voluntary disclosure and a comprehensive FAQ. For more information regarding the 2011 OVDI, click here .

The one-year repeal of the “death tax” was a typical congressional compromise. It involved the gradual decrease in marginal tax rates and increase in tax free amount (unified credit) through 2009 and the repeal of the tax for just one year in 2010. The current law reads that in 2011 the rates from 2001 will apply again (P.L. 107-16, 115 Stat 38 (June 7, 2001)).

What does this mean for taxpayers? Let’s assume Uncle Joseph’s taxable estate is valued at $5 million. If he died in 2001, $675,000 of the estate would have been tax free and the rest would have been taxed with a top marginal rate of 55%. Tax liability would have been about 2.17 million and effective tax rate about 43%. Had Uncle Joseph died in 2009, his tax due would have been $675,000 and his effective tax rate around 14% while a 2010 death would mean zero liability (see Table).

Questionable Policy Incentives

The stated policy reason for estate taxes has been that too much concentration of wealth is not good for a society. Aside from the fact that the estate tax has not done much in terms of reducing income and wealth inequality, the fact that Congress did not change the one-year repeal before January 1 of 2010, is an example of implementing quite questionable incentives. As the situation above shows, all else equal, the best year for Joseph to die is 2010. His heirs will receive the entire $5 million instead of only $4.3 million if he died in 2009 or $2.8 million if he dies in 2011. Of course, death of natural causes cannot be timed. What happens though if Joseph was in a serious accident in late 2009 without a DNR order in place? Would his heirs insist that he’d be kept alive until January 1 and then taken off life support? What if Joseph has an accident in December of 2010?

In order to prevent anybody of literally making life or death decisions in order to save taxes, Congress should have addressed the estate tax in 2009 before the repeal-year started. There were several proposals on the table. Considering the current budget shortfall and the Democratic majorities in both the House and the Senate it is not unlikely that the legislators will pass a law retroactively changing the 2010 repeal. Since tax returns are not due until nine months after the decedent’s death, a retroactive change is possible. For example, it may be possible that a “patch” (i.e., keeping rates and credit like it was in 2009) will pass for 2010. Thus, contemplating death in light of a possible tax free year would be unwise considering the irreversibility of such action.

Other Negative Consequences

During 2001–2011 inflation was relatively low (around 2.3% on average). Using consumer price index measures, the value of a dollar in 2001 is about 1.25 more than in 2011. Given that in 2001, over 108,000 estate tax returns were filed, compared to only 38,000 in 2008 , we can assume that reverting back to 2001 law would mean that at least 130,000 returns will be due in 2011. This is good news to tax accountants but bad news for many individuals who did not expect to be subject to estate taxes.

In addition, the repeal of the estate tax for 2010 means that assets transferred at death during this year do not get a stepped-up basis. Thus, beneficiaries will have to pay larger amounts in income taxes when they sell the inheritance.

Last, the one-year repeal is also bad news for estates below the exemption equivalent. For these estates, the tax savings are zero while the elimination of the step-up in basis increases beneficiaries’ income tax when they sell the assets received. One can make the argument that this is a rule against the middle class and upper middle class since presumably most of these individuals would have never paid estate tax anyway but their heirs would benefit from the step-up in basis. If the law reverts back to 2001 law in 2011, the step-up will be back next year. Thus, while individuals with large estates have an incentive to die in 2010, others (most middle and upper middle class taxpayers) who have an estate below the exemption equivalent should not die in 2010.

Accrual basis taxpayers are generally permitted to deduct accrued compensation if it’s paid out within 2 1/2 months after year end.  In a recent Chief Counsel Advice, the IRS announced that they would not permit deductions for accrued bonuses if payment is contingent upon continued employment at the date the bonus is actually paid.  If you haven’t finalized your year-end bonus plan and expect a deduction, you should ensure that employees are not required to be employed at the payment date.  This may be difficult for many companies, as bonus policies are usually established well in advance of the year-end, but there’s still time to change it if you can.