Double tax benefit for NOLs
The new “Worker, Homeownership and Business Assistance Act of 2009″ extends and expands the tax break for net operating losses (NOLs) created by the 2009 economic stimulus law. What’s more, some business owners may be able to realize a double tax benefit.
Here’s a quick recap: A business can normally carry back an NOL for two years and then forward for up to 20 years until the loss is exhausted. However, the 2009 economic stimulus law allowed a qualified small business to carry back NOLs for up to five years (either three, four or five years). This opportunity was only available for NOLs in tax years beginning or ending in 2008.
For this purpose, a “small business” was defined as a business with an average of no more than $15 million in gross receipts over the three-year period ending with the tax year of the NOL.
Other businesses could still carry back losses for two up to two years. The new law sweetens the deal in two ways.
- The election to carry back losses for up to five years is extended to businesses of all sizes, but the carryback to the fifth year is limited to 50% of the available taxable income for the year.
- The election to carry back losses for up to five years is extended to NOLs incurred in either 2008 or 2009, but generally not both tax years.
However, if an eligible small business elected to carry back a 2008 loss under the prior rules, it can make the election for an additional year. Therefore, your small business may benefit from extended carrybacks for NOLs in 2008 and 2009.
The new tax break for NOLs is available only for a short time. For more details about this new tax break, contact our office and one of our expert staff members will be glad to assist you.
New Rules for Children of Divorced or Separated Parents
Revocation of release of claim to an exemption. For tax years beginning after July 2, 2008 (the 2009 calendar year for most taxpayers), new rules apply to allow the custodial parent to revoke a release of claim to exemption that was previously released to the noncustodial parent on Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or similar form. The revocation is effective no earlier than the tax year following the year in which the custodial parent provides, or makes reasonable efforts to provide, the noncustodial parent with written notice of the revocation. Therefore, if the custodial parent provides notice of revocation to the noncustodial parent in 2009, the earliest tax year the revocation can be effective is the tax year beginning in 2010. You can use Part III of Form 8332 for this purpose. You must attach a copy of the revocation to your return for each tax year you claim the child as a dependent as a result of the revocation.
Post-1984 decree or agreement. If the divorce decree or separation agreement went into effect after 1984 and before 2009, the noncustodial parent can still attach certain pages from the decree or agreement instead of Form 8332 provided that these pages are substantially similar to Form 8332. For any decree or agreement executed after 2008, the noncustodial parent must attach Form 8332 or a similar statement signed by the custodial parent and whose only purpose is to release a claim to exemption.
Increase in Limit on Long-Term Care and Accelerated Death Benefits Exclusion
2009
The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increases for 2009 to $280 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.
Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts.
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The cost of qualified long-term care services during the period.
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The dollar amount for the period ($280 per day for any period in 2009).
2010
The limit on the exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract increases for 2010 to $290 per day. The limit applies to the total of these payments and any accelerated death benefits made on a per diem or other periodic basis under a life insurance contract because the insured is chronically ill.
Under this limit, the excludable amount for any period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts:
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The cost of qualified long-term care services during the period.
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The dollar amount for the period ($290 per day for any period in 2010)
IRS raises per diems for 2010
Keeping detailed records of employee travel expenses is a hassle. But there’s a way your business can simplify matters without any tax downside: Use the IRS-approved “per diem rates”. This way, employees don’t have to account for every last cup of coffee or cab ride. The reimbursements are tax-free to the employees up to certain prescribed limits.
Furthermore, your company can deduct the per-diem reimbursements in full. One exception: The usual 50% deduction limit on meal expenses still applies.
The per-diem allowances are actually the approved travel rates for U.S. government employees, but the IRS also allows companies to take advantage of them. However, the per diem rates cannot be used for an employee who owns more than 10% of the company.
Employers have a choice between two per diem rates. The first is based on the specific travel destination of the employee. The General Services Administration (GSA) sets the following each year:
- The per diem rates for the 48 states in the contiguous United States and the District of Columbia (the “CONUS” rates)
- The per diem rates for areas outside the contiguous United States such as Alaska, Hawaii, Puerto Rico and U.S. possessions (the “OCONUS” rates); and
- The per diem rates for areas in foreign countries.
The second method identifies each city as either a “high-cost” or “low-cost” area. The GSA adjusts the per diems for both areas each year. It recently announced the new rates and high-cost areas in effect for the government’s 2010 fiscal year.
Our expert staff can assist your firm in implementing the new per-diem rates. Keep in mind that the IRS often challenges deductions for business travel expenses, so it’s extremely important to meet all the requirements in this area, If you’re unsure of the obligations or opportunities, don’t hesitate to call our office at 562-868-6333 and we will be sure to streamline your recordkeeping procedures.
Income Averaging for Farmers and Fisherman
Exxon Valdez litigation. If you received qualified settlement income made up of interest and punitive damages in connection with the civil action In re Exxon Valdez, No. 89-095-CV (HRH) (Consolidated) (D. Alaska), you may treat this settlement payment as income from a fishing business for the purpose of income averaging. You are eligible to make this election only if you are a plaintiff in the civil action or you were a beneficiary of the estate of your spouse or a close relative who was such a plaintiff from whom you acquired the right to receive qualified settlement income.
New rules for averaging farming and fishing income. The four items discussed below are effective for tax years beginning after July 22, 2008. However, you may apply any of these provisions to tax years beginning after December 31, 2003, and before July 23, 2008, if those provisions are consistently applied in each tax year.
Farming and fishing business. If you operate both a farming and fishing business, you combine the income, gains, deductions, and losses from both businesses to figure the amount of income eligible for income averaging.
Lessors of fishing boats. You are treated as being in a fishing business if you lease a boat and your lease payments are based on a share of the catch (or a share of the proceeds from the sale of the catch) from the lessee’s use of the boat, but only if this manner of payment is determined under a written lease agreement entered into before the lessee begins significant fishing activities resulting in the catch.
Crew members on fishing boats. Crew members on a commercial fishing vessel are engaged in the fishing business for purposes of income averaging if their compensation is based on a share of the boat’s catch or a share of the proceeds from the sale of the catch. The compensation of such a crew member is treated as income from a fishing business, whether or not he or she is treated as an employee for employment tax purposes.
Merchant Marine Capital Construction Fund (CCF) deposits. If you reduced your taxable income on Form 1040, line 43, or Form 1040NR, line 40, by any amount deposited into a CCF account, take into account the CCF reduction in figuring taxable income for income averaging purposes. Also, the CCF reduction is generally treated as a deduction attributable to your fishing business in figuring elected farm income. However, if any taxable income (without regard to the carryback of any net operating or net capital loss) from the operation of agreement vessels in the fisheries of the United States or in the foreign or domestic commerce of the United States is not attributable to your fishing business, that amount does not reduce elected farm income.
Home/Residence-Related Tax Changes
Discharge of Qualified Principal Residence Indebtedness
The Emergency Economic Stabilization Act of 2008 extended the exclusion from gross income for the discharge of qualified principal residence indebtedness by an additional 3 years. The exclusion now applies to debt discharged after 2006 and before 2013.
First-Time Homebuyer Credit
First-Time Homebuyer Credit Extended to April 30, 2010; Some Current Homeowners Now Also Qualify:
WASHINGTON — A new law that went into effect Nov. 6 extends the first-time homebuyer credit five months and expands the eligibility requirements for purchasers.
The Worker, Homeownership, and Business Assistance Act of 2009 extends the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. Additionally, if a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase.
The maximum credit amount remains at $8,000 for a first-time homebuyer –– that is, a buyer who has not owned a primary residence during the three years up to the date of purchase.
But the new law also provides a “long-time resident” credit of up to $6,500 to others who do not qualify as “first-time homebuyers.” To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.
For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns.
A new version of Form 5405, First-Time Homebuyer Credit, will be available around late December, 2009. A taxpayer who purchases a home after Nov. 6 must use this new version of the form to claim the credit. Likewise, taxpayers claiming the credit on their 2009 returns, no matter when the house was purchased, must also use the new version of Form 5405. Taxpayers who claim the credit on their 2009 tax return will not be able to file electronically but instead will need to file a paper return.
A taxpayer who purchased a home on or before Nov. 6 and chooses to claim the credit on an original or amended 2008 return may continue to use the 2008 Form 5405.
Income Limits Rise
The new law raises the income limits for people who purchase homes after Nov. 6. The full credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.
For homes purchased prior to Nov. 7, 2009, existing MAGI limits remain in place. The full credit is available to taxpayers with MAGI up to $75,000, or $150,000 for joint filers. Those with MAGI between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.
New Requirements
Several new restrictions on purchases that occur after Nov. 6 go into effect with the new law:
- Dependents are not eligible to claim the credit.
- No credit is available if the purchase price of a home is more than $800,000.
- A purchaser must be at least 18 years of age on the date of purchase.
For Members of the Military
Members of the Armed Forces and certain federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and settle on the purchase by June 30, 2011.
Sale of Main Home
Gain from the sale or exchange of the main home is no longer excludable from income if allocable to periods of nonqualified use.
Generally, nonqualified use means any period after 2008 where neither you nor your spouse (or your former spouse) used the property as a main home (with certain exceptions).
A period of nonqualified use does not include:
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Any portion of the 5-year period ending on the date of the sale or exchange that is after the last date you (or your spouse) use the property as a main home;
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Any period (not to exceed an aggregate period of 10 years) during which you or your spouse is serving on qualified official extended duty:
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As a member of the uniformed services,
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As a member of the Foreign Service of the United States, or
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As an employee of the intelligence community; and
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Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS.
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To figure the portion of the gain that is allocated to the period of nonqualified use, multiply the gain by the following fraction:
total nonqualified use during period of ownership after 2008
total period of ownership
New mortgage interest break
The tax law permits generous deductions for mortgage interest paid in connection with “acquisition debt” and “home equity debt” of a qualified residence. Now a new ruling from the IRS says that you can combine these two breaks on an initial mortgage (IRS Chief Counsel Advice 200940030).
Under the tax law, “acquisition debt” is any debt incurred to acquire, construct or substantially improve a qualified residence. The residence may be the principal residence or one other home like a vacation home. But qualified acquisition debt can’t exceed $1 million ($500,000 for married taxpayers filing separately).
On the other hand, “home equity debt” is debt secured by the residence that is not acquisition debt, up to a limit of $100,000 ($50,000 for married taxpayers filing separately). Home equity debt can’t exceed the difference between the property’s fair market value and the amount of the acquisition debt. Unlike acquisition debt, home equity debt may be used for any purpose.
Generally, home equity debt is incurred after the original mortgage has been arranged. For instance, you may take out a home equity debt a few years after buying a home to pay for college, medical expenses or emergencies.
In the new ruling, a taxpayer purchased a principal residence for $1.5 million, paying $200,000 in cash and borrowing $1.3 million through a loan secured by the residence. After carefully examining the law, the IRS characterized an extra $100,000 above the $1 million threshold as home equity debt rather than acquisition debt. Therefore, the taxpayer can effectively deduct interest paid on up to $1.1 million of the initial mortgage debt.
Although this is an extreme example, there may be other tax-saving opportunities you are not aware of. Call our office to arrange a personal consultation. We may be able to find tax savings that have been overlooked.
Health/Medical-Related Tax Changes
Archer Medical Savings Accounts (MSAs)
2010 Changes
For Archer MSA purposes for 2010, the minimum annual deductible of a high deductible health plan increases to $2,000 ($4,050 for family coverage). The maximum annual deductible of a high deductible health plan increases to $3,000 ($6,050 for family coverage). The maximum out-of-pocket expenses limit increases to $4,050 ($7,400 for family coverage).
2009 Changes
For Archer MSA purposes for 2009, the minimum annual deductible of a high deductible health plan increases to $2,000 ($4,000 for family coverage). The maximum annual deductible of a high deductible health plan increases to $3,000 ($6,050 for family coverage). The maximum out-of-pocket expenses limit increases to $4,000 ($7,350 for family coverage).
Health Coverage Tax Credit
Increase in the amount of the health coverage tax credit (HCTC). For coverage months beginning after April 2009 and before 2011, the credit increases to 80%.
Payment for monthly premiums paid prior to commencement of advance payments. For coverage months beginning after 2008 and before 2011, newly-enrolled monthly participants will be able to receive a retroactive credit on their HCTC account for qualified health insurance payments they paid while enrolling in the monthly HCTC program.
Note. Although these payments will not begin until August 2009, the credits will apply to any coverage month beginning after 2008.
TAA recipients not enrolled in training programs eligible for credit. For coverage months beginning after February 2009 and before 2011, training and waiver requirements have changed for TAA recipients, making it easier for them to be eligible for the HCTC. Certain individuals who are receiving unemployment compensation (whether or not they meet TAA training requirements) and certain individuals who have a break from training, are now eligible for the HCTC.
Other changes. Effective as of February 17, 2009, qualified health insurance is expanded to include coverage under an employee benefit plan funded by a voluntary employees’ beneficiary association.
Individuals receiving COBRA premium assistance are not eligible for the credit for any month that assistance is provided.
Health Flexible Spending Arrangements (FSAs)
Qualified reservist distribution from a health FSA. A special rule allows amounts in a health FSA to be distributed to reservists ordered or called to active duty. This rule applies to distributions after June 17, 2008, if the plan has been amended to allow these distributions. A qualified reservist distribution is allowed if:
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The individual was, by reason of being a member of a reserve component, ordered or called to active duty for a period in excess of 179 days or for an indefinite period, and
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The distribution is made during the period beginning on the date of such order or call and ending on the last date that reimbursements could be made for the plan year which includes the date of such order or call.
Health Savings Accounts (HSAs)
2010
High Deductible Health Plan (HDHP). For HSA purposes, the minimum annual deductible of an HDHP increases to $1,200 ($2,400 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,950 ($11,900 for family coverage).
Limits on contributions. The maximum HSA contribution increases to $3,050 ($6,150 for family coverage).
2009
High Deductible Health Plan (HDHP). For HSA purposes, the minimum annual deductible of an HDHP increases to $1,150 ($2,300 for family coverage) and the maximum annual deductible and other out-of-pocket expenses limit increases to $5,800 ($11,600 for family coverage).
Limits on contributions. The maximum HSA contribution increases to $3,000 ($5,950 for family coverage). The maximum additional contribution for individuals age 55 or older increases to $1,000.
Long-Term Care Premiums
Increase in Deductible Limit for Long-Term Care Premiums
For 2009, the maximum amount of qualified long-term care premiums you can include as medical expenses has increased. You can include qualified long-term care premiums, up to the amounts shown below, as medical expenses on Schedule A (Form 1040).
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Age 40 or under - $320.
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Age 41 to 50 – $600.
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Age 51 to 60 - $1,190.
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Age 61 to 70 - $3,180.
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Age 71 or over – $3,980.
Simplified Employee Pension Plan
What is a SEP?
A SEP is a simplified employee pension plan. A SEP plan provides employers with a simplified method to make contributions toward their employees’ retirement and, if self-employed, their own retirement. Contributions are made directly to an Individual Retirement Account or Annuity (IRA) set up for each employee (a SEP-IRA).
Note: The IRS has a system of correction programs for sponsors of retirement plans, including SEPs, which are intended to satisfy Internal Revenue Code requirements but have not met the requirements for a period of time. This system, the Employee Plans Compliance Resolution System (EPCRS), permits employers to correct plan failures and thereby continue to provide their employees with retirement benefits on a tax-favored basis.
How is a SEP established?
A SEP is established by adopting a SEP agreement and having eligible employees establish SEP-IRAs. There are three basic steps in setting up a SEP, all of which must be satisfied.
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A formal written agreement must be executed. This written agreement may be satisfied by adopting an Internal Revenue Service (IRS) model SEP using Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement. A prototype SEP that was approved by the IRS may also be used. Approved prototype SEPs are offered by banks, insurance companies, and other qualified financial institutions. Finally, an individually designed SEP may be adopted.
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Each eligible employee must be given certain information about the SEP. If the SEP was established using the Form 5305-SEP, the information must include a copy of the Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. If a prototype SEP or individually designed SEP was used, similar information must be provided.
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A SEP-IRA must be set up for each eligible employee. SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. The SEP-IRA is owned and controlled by the employee and the employer sends the SEP contributions to the financial institution where the SEP-IRA is maintained.
What types of employers can establish a SEP?
Any employer can establish a SEP.
If an employer has a SEP, can it also have other retirement plans?
An employer can maintain both a SEP and another plan. However, unless the other plan is also a SEP, the employer cannot use Form 5305-SEP; the employer must adopt either a prototype SEP or an individually designed SEP.
If an employee participates in his or her employer’s retirement plan, can he or she set up a SEP for self-employment income?
Yes. A SEP can be set up for a person’s business even if he or she participates in another employer’s retirement plan.
Is there a deadline to set up a SEP?
A SEP can be set up for a year as late as the due date (including extensions) of the business’s income tax return for that year.
How is a SEP plan amended for EGTRRA?
If a prototype plan was used, the employer should have received an amended plan from the financial institution that provided it with the plan. If for some reason the employer didn’t receive a new plan document, the financial institution should be contacted.
While the financial institution provides many administrative services for the plan, it is the responsibility of the employer – the plan sponsor – to ensure that the plan is kept up-to-date with current law.
Education-Related Tax Changes
Student Loan Interest Deduction
2009
For 2009, the amount of the student loan interest deduction is phased out (gradually reduced) if your filing status is married filing jointly and your modified adjusted gross income (AGI) is between $120,000 and $150,000. You cannot take the deduction if your modified AGI is $150,000 or more.
For all other filing statuses, your student loan interest deduction is phased out if your modified AGI is between $60,000 and $75,000. You cannot take a deduction if your modified AGI is $75,000 or more. For more information, see chapter 5 in Publication 970 Tax Benefits for Education.
Hope and Lifetime Learning Credits
2009 and 2010 Changes
For tax years 2009 and 2010, there is a new education credit called the American opportunity tax credit (AOC). This is a modification of the Hope Credit.
- The maximum amount of the AOC is $2,500 per student. The credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). Exception. For 2009, if you claim a Hope credit for a student who attended a school in a Midwestern disaster area, you can choose to figure the amount of the credit using the previous rules. However, you must use the previous rules in figuring the credit for all students for which you claim the credit.
- The credit can be claimed for the first four years of post-secondary education. Previously the credit could be claimed for only the first two years of post-secondary education.
- Generally, 40% of the AOC is now a refundable credit for most taxpayers, which means that you can receive up to $1,000 even if you owe no taxes.
- The term “qualified tuition and related expenses” has been expanded to include expenditures for “course materials.” For this purpose, the term “course materials” means books, supplies, and equipment needed for a course of study whether or not the materials must be purchased from the educational institution as a condition of enrollment or attendance.
Income limits for Hope and lifetime learning credit reduction increased. For 2009, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). You cannot claim a Hope or lifetime learning credit if your modified AGI is $60,000 or more ($120,000 or more if you file a joint return). For more information, see chapters 3 and 4 in Publication 970.
Eligibility for the Hope credit. For 2009, you can claim a Hope credit only if at least one eligible student is attending an eligible educational institution in a Midwestern disaster area and you do not claim an American opportunity credit for any other student in the same year.
Education Savings Bond Exclusion
An individual who redeems qualified U.S. saving Bonds to pay for higher education expenses may be able to exclude interest income from gross income.
2009
For 2009, the amount of your interest exclusion is phased out (gradually reduced) if your filing status is married filing jointly or qualifying widow(er) and your modified adjusted gross income (AGI) is between $104,900 and $134,900. You cannot take the exclusion if your modified AGI is $134,900 or more.
For all other filing statuses, your interest exclusion is phased out if your modified AGI is between $69,950 and $84,950. You cannot take the exclusion if your modified AGI is $84,950 or more.
