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By Editor, December 20, 2011

Expiring Business Tax Provisions: According to a Congressional Research Service report dated 12/1/11, the following will expire on 12/31/11: (1) the research and development and the work opportunity tax credits; (2) the enhanced charitable deductions for contributions of food, books, and computer technology; (3) the special S corporation built-in gains tax suspension period; and (4) the 15-year recovery period for leasehold improvements, restaurant property, and retail improvements. Furthermore, the 100% bonus depreciation deduction will be scaled back to 50% in 2012, and the Section 179 deduction limit will fall from $500,000 this year to an inflation-adjusted $139,000 in 2012.

Expiring Individual Tax Provisions: According to the same Congressional Research Service report, the following deductions will expire on 12/31/11: (1) elementary and secondary school teacher expenses, (2) state and local sales taxes, (3) mortgage insurance premiums, and (4) qualified tuition and related expenses. The 2010 Tax Relief Act allowed a taxpayer’s nonrefundable personal credits to offset regular tax (net of any allowable foreign tax credit) and AMT for 2011, and also authorized a reduction in the employee’s share of the Social Security payroll tax to 4.2% for 2011. Congress may extend the payroll tax break, and presumably will pass another (one year) AMT patch. Finally, the tax-free treatment of distributions from IRAs for charitable purposes will expire at the end of 2011.

Recharacterizing S Corporation Distributions: S corporation taxable income passed through to a shareholder-employee and S corporation distributions paid to a shareholder-employee are not subject to federal employment taxes or self-employment tax. While this has tempted some shareholder-employees to reduce or even eliminate their salary to avoid employment taxes, the IRS can recharacterize distributions as disguised salary. In one recent case, the S corporation paid its sole shareholder an annual salary of $24,000, but also made distributions of $320,000 over a two-year period. In holding that $67,000 of each year’s distribution should be treated as salary (on top of the $24,000 salary already paid), the District Court noted that the shareholder was a highly qualified accountant with an advanced degree, and was a primary earner in a reputable firm with $5 million in gross revenue over the two-year period. Watson, P.C. v. U.S. , 107 AFTR 2d 2011-311 (DC Iowa).

Portability Election: Executors for the estates of decedents dying after 12/31/10 must file Form 706 , even if not otherwise required to do so, to make the portability election under IRC Sec. 2010(c)(5) allowing the surviving spouse to use the unused portion of the decedent’s exclusion ($5,000,000 in 2011 and $5,120,000 in 2012). This notice alerted taxpayers that the timely filing of Form 706, prepared in accordance with the instructions, will constitute the appropriate portability election for the unused exclusion. Estates not wanting to make the portability election whose gross value exceeds the applicable exclusion should follow the Form 706 instructions. [IRS Notice 2011-82, 2011-42 IRB 516.

Relief for 2010 Decedents: This notice provided estates of decedents who died in 2010 with additional time to file an estate tax return and to pay the estate tax due. The IRS will not impose late filing and late payment penalties on the estates of decedents who died after 12/31/09 and before 12/17/10 if the estate timely files Form 4768 [Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes], and then files Form 706 or Form 706-NA and pays the estate tax by 3/19/12. Similar relief is available to the estates of decedents who died after 12/16/10 and before 1/1/11 if the estate timely files Form 4768 and then files Form 706 or Form 706-NA and pays the estate tax within 15 months after the decedent’s death. Furthermore, the due date of Form 8939 (Allocation of Increase in Basis for Property Acquired from a Decedent) is delayed from 11/15/11 to 1/17/12. Finally, this notice provided penalty relief to certain persons who received property whose basis is determined under the Section 1022 carryover basis rules and then disposed of that property during 2010. Notice 2011-76, 2011-40 IRB 479.

Bonus Depreciation: In this revenue procedure, the IRS explained how the 100% bonus depreciation rules under IRC Sec. 168(k) will be applied. In part, the IRS (1) allowed 100% bonus depreciation for qualified restaurant or retail improvement property that also qualify as leasehold improvement property; (2) enabled taxpayers that placed qualified property in service in the tax year that includes 9/9/10 to elect out of bonus depreciation for any class of property, or default into bonus depreciation for the whole year, or claim 50% bonus depreciation for the whole year; and (3) provided a safe harbor method for handling post-year-of acquisition depreciation of autos subject to the Section 280F(a) luxury auto limits. Rev. Proc. 2011-26, 2011-16 IRB 664 .

Employer-provided Cell Phones: Almost a year after the removal of cell phones from the definition of listed property by the 2010 Small Business Jobs Act, the IRS issued guidance treating an employee’s use of a cell phone related to the employer’s business as an excludable working condition fringe benefit under IRC Sec. 132(d) when provided for substantial noncompensatory business reasons. Examples of substantial noncompensatory business reasons for providing a cell phone include the need to contact an employee at all times for work-related emergencies, and the need to speak with clients while away from the office or when the client is in another time zone. Notice 2011-72, 2011-38 IRB 407

Rental Real Estate Activities: Under IRC Sec. 469(c)(7)(A) and Reg. 1.469-9(g) , qualifying taxpayers can elect to treat all interests in rental real estate activities as a single activity. This can help them meet the material participation standard necessary to treat rental real estate losses as nonpassive (and so be used to offset wages, interest, and other nonpassive income). The IRS issued special procedures, in lieu of a letter ruling request, to obtain relief for late elections. To qualify, the taxpayer must have reasonable cause for failing to meet the election requirements, and must have filed all tax returns as if the election had been made. Rev. Proc. 2011-34, 2011-24 IRB 875.

Sale of Professional Practice: In this case, the 9th Circuit affirmed a District Court’s finding that amounts received by the taxpayer for personal goodwill from the sale of his dental practice represented the sale of a corporate asset and a subsequent dividend distribution. In the same year the taxpayer incorporated his dental practice, he entered into a covenant not to compete with the corporation. As an employee of the corporation with a covenant not to compete, any goodwill generated from his professional work belonged to the corporation. While the patient relationships were personal, the economic value of those relationships did not belong to the taxpayer. Howard v. U.S. , 108 AFTR 2d 2011-5993 (9th Cir.).

Standard Mileage Rates: The IRS raised the standard mileage rates for the last six months of 2011 to 55.5 cents per mile for business miles driven and 23.5 cents per mile for medical or moving expenses-both a 4.5 cent per mile increase over the rates in effect for the first six months of the year. The rates for 2012 will be 55.5 cents per mile for business miles (with 23 cents per mile treated as depreciation) and 23 cents per mile for medical or moving expenses. (This means the rate for business miles is unchanged from the midyear adjustment that took effect on 7/1/11.) The rate for providing services for a charity is set by statute and equals 14 cents per mile. IRS Ann. 2011-40, 2011-29 IRB 56 ; Notice 2012-1, 2012-1 IRB 1 .

If you would like to discuss these, or other matters, further,
please contact your Wilson Price accountant.

Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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By Editor, August 3, 2010

You can typically name beneficiaries for a variety of assets, including retirement plans, annuities and life insurance policies.  But naming a beneficiary is not as simple as putting a name on a form; it should involve careful consideration, as the repercussions for your loved ones could be significant.

Out-of-date

If you haven’t reviewed your beneficiary designations recently, it’s possible the designations are no longer appropriate.  Review your designations on a regular basis, ideally annually, and when major life events occur, such as marriage, divorce, birth or death.  The assets are passed outside of legal proceedings and the designation is absolutely binding.  The assignment of assets cannot be superseded, not even by a Will. 

Be Specific

Most beneficiary designation forms allow you to name more than one primary and contingent beneficiary with specified percentage of assets.  Be specific and name each versus naming one trusted relative or friend to distribute the assets for you.  If no beneficiary is named, the assets will be distributed through the probate process, which in the case of a retirement plan, can create adverse tax consequences.

Tax Consequences

With life insurance, the goal is to keep the proceeds out of your estate.  If your spouse doesn’t need the money after you are gone, policies (existing or new) can be structured in various ways to keep life insurance from increasing the value of your estate.  This will be even more apparent next year if the estate tax exemption falls to $1 million.  Life insurance may play a major role in creating taxable estates for those who wouldn’t normally have the issue. This estate tax issue can be avoided in many cases if structured properly. 

Regardless of the beneficiary designation, retirement plans, however, will be includable in the value of the estate.  It is important, though, to make sure the designation is not left blank or that “the estate” is not named as the beneficiary.  In these cases, the retirement assets must be distributed within 5 years or at least as fast as the decedent was receiving required minimum distributions (RMDs), thus triggering a quicker income taxability of the assets in addition to the estate taxability. If your family does not need the funds for living expenses, the goal here is to defer distributions as long as possible, “stretching” the assets over longer life expectancies.  This can be accomplished by naming an individual as beneficiary.

Other considerations

To avoid taxable distributions altogether, you could donate your retirement plan to a charity if other assets are available to provide for your family.  Not only will the organization receive the assets tax-free, but your estate will also be eligible for a charitable deduction.

You can name almost anyone as your beneficiary, including individuals, charities and trusts, but minor children, however, cannot be named beneficiaries of life insurance policies, retirement plans or annuities. Additionally, if you are considering designating a special-needs person as your beneficiary, it may hinder the individual’s eligibility for government provided benefits.

There are various ways to still provide for those you want to benefit after you are gone, but with careful planning with an accredited estate planner.