Say Goodbye to the Bonus

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.

Tax Help for All Businesses Great and Small

In February the normal two year carryback period for Net Operating Losses (NOL’s) was extended to 3, 4 or 5 years for electing small businesses. Earlier this month, the 3, 4 or 5 year NOL carryback election was extended to all business (except taxpayers receiving help from the Federal government under the Emergency Economic Stabilization Act). The carryback is valid for any years ending after December 31, 2007 and commencing before January 1, 2010 – you can even make the election if you previously elected to forego the 2 year carryback period.

What’s the catch? Well, you can only make the election once (qualifying small businesses who were previously eligible now get to make the election twice). Also, if you elect the 5 year carryback, you can only offset 50% of that year’s income with the NOL. Other guidelines, including details for how to elect the carryback were issued by the IRS last week.

Extended carryback periods have been used by the IRS before, and should help many businesses who were profitable by expediting the tax benefit from recent losses. We certainly hope it helps more businesses to keep going during tough economic times, and keep more people employed.

A Matter of Trust

A number of countries don’t allow foreign people (including foreign business entities) to own land in certain areas. The most well known of these countries is Mexico, but I have recently come across a similar situation in Canada, and know of cases in Great Britain. As a work-around, the land is usually held in trust for the foreign owner. This may not seem as though it creates any tax issues, but it does. Unfortunately foreign trusts have at times been used to try to shelter income off-shore in foreign tax havens, so the IRS has strict reporting requirements for foreign trusts… and the penalties for not filing the related forms are huge! (In some cases 35% of the trust assets per year).  Even if you don’t think of the trust as a “real trust” – the IRS probably will (they are commonly referred to as “Land Trusts” or “Mexican Land Trusts”). We recently enlisted the services of tax attorney, Jean Ryan at Sideman Bancroft, LLP, to analyze a Canadian land trust.  Although the client “never thought of it as being a real trust,” her answer was that it the IRS may treat it as trust, because of the language in the document. So if you own beachfront property in Mexico – lucky you, but in all seriousness, talk to your tax advisor to make sure that you don’t lose it all in penalties.