IRS Announces Date to Start Processing Delayed Returns

JANUARY 21, 2011

The IRS announced that it plans to be able to start processing tax returns delayed by the late enactment of the 2010 Tax Relief Act on Feb. 14.

On Dec. 23, the IRS warned that because of the late enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (PL 111-312), which extended various expired provisions, it would need time to reprogram its systems and update Schedule A. As a result, taxpayers who itemize deductions on Schedule A and those who take certain extended deductions would not be able to file their returns at the start of tax season. See “Tax Law Changes Will Delay Start of Filing Season for Some Taxpayers.”

The IRS announced that beginning Feb. 14, it will start processing both paper and e-filed returns claiming itemized deductions on Schedule A, the IRC § 222 higher education tuition and fees deduction on Form 8917, and the up to $250 deduction for elementary and secondary school teachers under IRC § 62(a)(2)(D).

However, in its announcement, the IRS says that “many major software providers have announced they will accept these impacted returns immediately.” The software vendors will hold onto affected returns and submit them once the IRS opens its system to accept them.

The IRS did not announce when it will start accepting other forms delayed due to changes made by the Small Business Jobs Act of 2010 (PL 111-240), including:
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Form 3800, General Business Credit;
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Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands (if certain credits are claimed);
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Form 5405, First-Time Homebuyer Credit and Repayment of the Credit (page 2 only);
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Form 6478, Alcohol and Cellulosic Biofuel Fuels Credit;
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Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands (if certain credits are claimed);
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Form 8834, Qualified Plug-In Electric and Electric Vehicle Credit;
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Form 8844, Empowerment Zone and Renewal Community Employment Credit;
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Form 8910, Alternative Motor Vehicle Credit; and
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Form 8936, Qualified Plug-In Electric Drive Motor Vehicle Credit.

House Republican Rule Changes Pave the Way For Major Deficit-Increasing Tax Cuts, Despite Anti-Deficit Rhetoric

By Robert Greenstein and James R. Horney,
Center on Budget and Policy Priorities

House Republican leaders yesterday unveiled major changes to House procedural rules that are clearly designed to pave the way for more deficit-increasing tax cuts in the next two years. These rules stand in sharp contrast to the strong anti-deficit rhetoric that many Republicans used on the campaign trail this fall. While changes in congressional rules rarely get much public attention, these new rules — which are expected to be adopted by party-line vote when the 112^th Congress convenes on January 5 — could have a substantial impact and risk making the nation’s fiscal problems significantly worse.

Current House rules include a pay-as-you-go requirement that any tax cut or spending increase for a mandatory (i.e., entitlement) program must be offset by cuts in other mandatory spending or increases in other taxes, in order to avoid increasing the deficit. [1] Current rules also bar the House from using budget “reconciliation” procedures — special rules that facilitate speedy action on specified budget legislation — to pass bills that would increase the deficit. The new rules would alter and greatly weaken these commonsense measures:

• The new rules announced December 22 would replace pay-as-you-go with a much weaker, one-sided “cut-as-you-go” rule, under which increases in mandatory spending would still have to be paid for but tax cuts would not.In addition, increases in mandatory spending could be offset only by reductions in other mandatory spending, not by any measure to raise revenues such as by closing unproductive special-interest tax loopholes. For example, the House would be barred from paying for continuation of a provision enacted in 2009 (and extended in the just-enacted tax compromise) that enables many minimum-wage families to receive a full, rather than a partial, Child Tax Credit by closing wasteful tax breaks for multinational corporations that shelter profits overseas. Use of such an offset would violate the new House rules because the provision expanding the Child Tax Credit for working-poor families counts as spending and hence could not be paid for by closing a tax loophole. Yet the same new rules would enable the House to expand tax loopholes for multinational corporations and wealthy investors without paying for those tax breaks at all, because any tax cut, no matter how costly or ill-advised, could now be deficit financed.
• The new rules would stand the reconciliation process on its head , by allowing the House to use reconciliation to push through bills that greatly increase deficits as long as the deficit increases result from tax cuts, while barring the use of reconciliation in the House for legislation that reduces the deficit if that legislation contains a net increase in spending (no matter how small) that is more than offset by revenue-raising provisions.

By itself, this change in the House rules governing reconciliation would have a limited effect. Reconciliation rules are most important in the Senate because they prohibit use of a filibuster to block a vote on reconciliation legislation, enabling such legislation to pass the Senate with a majority vote instead of the 60 votes needed to end a filibuster (filibusters cannot be used in the House on any legislation). This change in House rules would not affect the current Senate rule barring the use of reconciliation to pass deficit-increasing legislation. But, revising the House rules to allow use of reconciliation to push through deficit-financed tax cuts could well be the first step toward elimination of all rules restricting the use of reconciliation for that purpose. After all, the current bar on using the reconciliation process to pass budget-busting tax cuts (and budget-busting spending increases) was made part of House and Senate rules only in 2007, over GOP opposition.

Sadly, we’ve been here before. In the 1990s, when pay-as-you-go rules applied to both spending increases and tax cuts and Congress used reconciliation solely to enact deficit-reduction packages, the country went from large deficits to a balanced budget. (A strong economy obviously helped as well.) But in the early 2000s, with Republicans controlling Congress and President Bush in the White House, Congress set aside pay-as-you-go and turned reconciliation on its head, using it not to reduce deficits but instead to push through costly, unpaid-for tax cuts in both 2001 and 2003. Previously, reconciliation had only been used for deficit reduction.

The results are plain to see. The Bush-era tax cuts were a significant factor in the return to large deficits after 2001, contributing $2.6 trillion (including added interest costs on the national debt) to the budgetary deterioration between 2001 and 2010. House Republicans now plan to restore the very type of permissive budget rules that contributed markedly to that fiscal deterioration.

Moreover, measures to scuttle the current, even-handed pay-as-you-go rule and to allow use of the reconciliation process to increase the deficit are even more indefensible today than such steps were in 2001 — because now we already have deficits that exceed $1 trillion a year.

It should be recognized that the House rules unveiled December 22 go to great lengths to make clear the intent of the new Republican majority to pass an array of tax-cut measures that will significantly enlarge deficits. Not only do the new rules eliminate the pay-as-you-go restriction on tax cuts that are not paid for, but the rules also specifically authorize the Chairman of the House Budget Committee to ignore for purposes of budget enforcement rules all of the costs of:

• Extending or making permanent the 2001 and 2003 Bush tax cuts (including the tax cuts for the highest-income taxpayers) and relief from the Alternative Minimum Tax;
• Extending or making permanent the hollowing out of the estate tax included in the just-enacted tax-cut compromise legislation; and
• Legislation to provide a major, costly new tax cut — a deduction equal to 20 percent of gross income for “small businesses,” which Republican lawmakers typically have defined very expansively so the term covers a vast swath of firms and wealthy individuals that do not resemble what most Americans think of as a “small business.”

New Rules Allow Imposition of Spending and Revenue Limits that Members Have Not Been Allowed to See, Debate, or Vote On Another aspect of the proposed rules also seems at odds with promises made in the campaign about what a new Republican majority would do. There was much talk about increasing the transparency of the legislative process, and some proposals in the new rules package would do that. But the new rules also include a stunning and unprecedented provision authorizing the Chairman of the Budget Committee elected in the 112th Congress, expected to be Representative Paul Ryan of Wisconsin, to submit for publication in the Congressional Record total spending and revenue limits and allocations of spending to committees — and the rules provide that this submission “shall be considered as the completion of congressional action on a concurrent resolution on the budget for fiscal year 2011.” In other words, in the absence of a budget resolution agreement between the House and the Senate, it appears that Rep. Ryan (presumably with the concurrence of the Republican leadership) will be allowed to set enforceable spending and revenue limits, with any departure from those limits subject to being ruled “out of order.” This rule change has immediate, far-reaching implications. It means that by voting to adopt the proposed new rules on January 5, a vote on which party discipline will be strictly enforced, the House could effectively be adopting a budget resolution and limits for appropriations bills that it has never even seen, much less debated and had an opportunity to amend. (There is no requirement for Representative Ryan to make his proposed spending and revenue limits available to Members or the public before the vote on the new rules.) This would, among other things, facilitate the implementation of incoming Speaker John Boehner’s radical proposal to cut non-security discretionary funding for fiscal year 2011 by $101 billion (or 21.7 percent) below the level appropriated for 2010, as adjusted for inflation without any consideration or vote on that proposal. Once Rep. Ryan places in the Congressional Record discretionary funding limits set at the Boehner level, they will become binding on the House, and any attempt to provide funding levels that allow for less severe cuts will be out of order. This imposition of budget limits without debate or votes hardly seems consistent with the promised increase in transparency in the legislative process, much less with sound — or fair — budget practices.

The new rules also specifically empower the Budget Committee Chairman to exempt from budget enforcement rules the fiscal effects of repealing the health reform law. The Congressional Budget Office has estimated that the health reform law will reduce deficits by more than $100 billion over the first ten years and by roughly $1 trillion or more over the second ten years. Its repeal would increase deficits by those amounts.

Finally, the new rules would pave the way for a further widening of the already very large gap between rich and poor. While the new rules would allow the House to make permanent the Bush tax cuts for high-income families, continue the new estate-tax provisions that benefit only the top one-quarter of one percent of estates (those with a value in excess of $10 million for a couple, and create a big new tax break for “small businesses” — all without paying for the costs — they would prohibit the continuation of improvements for low-income working families in the child tax credit and earned income tax credit that were enacted in 2009 and extended in the recent tax-cut compromise legislation unless the cost of those extensions was fully offset. And, as noted above, the House would be barred from offsetting the cost of maintaining these low-income tax-credit provisions by curbing unwarranted tax loopholes, which will make the demise of these low-income tax-credit benefits more likely. To simultaneously pave the way for both deficit-financed extensions of massive tax cuts for the wealthiest Americans and termination of critical tax-credit measures that keep several million low-income working parents and their children out of poverty represents a set of priorities that can aptly be described as worthy of Ebenezer Scrooge.

At bottom, the new House GOP rules proposals make one other point abundantly clear — tax cuts for high-income taxpayers, not deficit reduction, is the top priority of the incoming House leadership.

Bush tax cuts: What you need to know

NEW YORK (CNNMoney.com) — There probably aren’t enough earbuds to go around to block out the confusing noise emanating from Washington over the expiring Bush tax cut

While we can’t quiet the partisan shouting, we’ll try to offer clarity on just what it is they’re debating.

What happens on Jan. 1 if Congress does nothing?

Everyone’s federal income and investment tax rates will go back up to where they were before the 2001 tax cuts were passed. In other words, your tax bill next year would increase.

If the tax cuts do expire and tax rates go up, you may notice the difference in your wallet as early as January, when your employer starts to withhold more taxes from your paycheck.

The Tax Policy Center estimates that a married couple with two kids under 13 and a household income of roughly $75,000 could end up paying about $2,600 more in federal income taxes next year than they would if the tax cuts were extended.

But the likelihood of all the tax cuts expiring isn’t high, since both Democrats and Republicans agree on one thing: They want to extend the tax cuts at least for folks making less than $200,000 ($250,000 for joint filers).

What’s the economic argument for extending the tax cuts?

Here’s the main concern of many economists and lawmakers: If Americans’ tax bills go up next year, they will have less money to spend and invest in the economy, and that could erase whatever economic ground has been recovered since the housing crisis sent the country into a tailspin.

“The biggest argument for extending the tax cuts right now is our economy is very weak, and raising taxes during a recession, or the recent weak recovery from the recession, could reverse our economic growth,” Roberton Williams, a senior fellow at the Tax Policy Center, noted in one of the group’s videos.

If the tax cuts are extended, however, taxpayers won’t really notice any change in their bottom line. So it’s unlikely to create any new stimulus for the economy.

That’s in part why some deficit hawks, like Diane Rogers of the Concord Coalition, say the Bush tax cuts should be compared in their effectiveness to other types of tax cuts to make sure the money is well spent.

Overall, extending the tax cuts may prove to be a mixed bag for the economy if they are extended permanently, according to a recent analysis by the Congressional Budget Office. In the short-run, making them permanent might help preserve the recovery, but may actually dampen economic growth in the long run because extending the cuts would add significantly to U.S. debt.

That’s why many who don’t want to let the tax cuts expire right away are only pushing for a one- to two-year extension.

What’s the beef about extending them for the $250,000-and-up crowd?

President Obama and many Democrats have said they want the Bush tax cuts to expire for couples with incomes over $250,000 ($200,000 for individuals).

Their argument: wealthy taxpayers don’t need the extra money, and if they get it they will probably save it and not spend it. That won’t do much to help the economy. By contrast, they say, lower- and middle-income families are more strapped and would be more likely to spend any extra money from a tax cut.

If Obama gets his way, high-income households would see the top two income tax rates increase to 36% (from 33%) and 39.6% (from 35%). In addition, their investment tax rates would go up to 20% from 15%.

But high-income taxpayers would still benefit from the extension of tax cuts for the middle class. Among other things, that’s because the changes made at the lower tax brackets would be preserved for everyone. Two examples: the creation of the 10% tax bracket and the reduced marriage penalty. The marriage penalty used to result in two-earner couples paying more than they would have as single filers.

And, ironically, if the Bush tax cuts do expire for top earners, some might actually find themselves with a somewhat smaller tax bill next year.

Republicans and a small but growing number of Democrats say the cuts should also be extended for high earners, at least temporarily because the economy is too fragile to raise anyone’s taxes.

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Republicans also contend that small business job growth could be hurt because some business owners file at the top two tax rates and they, while a very small minority, generate a lot of small business income. The tax statistics aren’t very clear, however, on the job creation potential among those who report small business income at the top two income tax rates.

What’s at stake for the deficit?

Treasury estimates the costs of making the tax cuts permanent for everyone is $3.7 trillion over 10 years.

Of that, $3 trillion accounts for the cost of extending them for the vast majority of Americans, as the president has proposed. The remaining $700 billion is the cost of extending them permanently for the high-income earners.

The cost would obviously be less if the cuts were extended for only one or two years. There are no formal estimates for a short-term extension, but based on Treasury Department estimates, the cost is likely to range anywhere from $200 billion to $500 billion, depending on whose cuts are extended and for how long.

Those who support extending the tax cuts note that if the cuts expire and the economy suffers as a result, the deficit will get worse because the government will have to borrow more.

So what’s gonna happen?

Um, who knows?

The lack of consensus on the tax cuts isn’t just between the Democrats and the Republicans. It’s within each party as well. And with a midterm election at stake, there’s no predicting yet what, if anything, will be extended, for how long and for whom.

But since both parties support extending the tax cuts at least for the lower- and middle-income families, chances are high that that will happen.

And given that a small but apparently growing number of Democrats now support extending the tax cuts for upper-income folks as well, there’s some chance that could happen too, at least in part.

But few are expecting lawmakers to sign off on any final piece of legislation before the mid-term elections, although the House or Senate may take a vote on their own tax cut bills before that. 

By Jeanne Sahadi

IRS Posts Revised Form 941 and Instructions for Claiming New Hire Payroll Tax Exemption

MAY 18, 2010

Stuart Rohatiner, CPA, JD

On May 18, the IRS posted a new version of Form 941, Employer’s QUARTERLY Federal Tax Return, and its instructions for claiming the special payroll tax exemption that applies to new workers hired in 2010.

The Hiring Incentives to Restore Employment Act (HIRE Act) created a payroll tax exemption for employers who hire workers who have been unemployed for at least 60 days and who are not replacement hires. For qualifying new employees hired after Feb. 3, 2010, and before Jan. 1, 2011, an employer can claim an exemption equal to the employer’s share of Social Security taxes on wages paid in 2010 after March 19.

On the newly revised Form 941, employers will claim the exemption related to wages paid after March 31 on lines 6a through 6e (or on lines 12c through 12e for the exemption related to wages paid between March 19 and March 31). These lines ask for the number of qualified employees who were first paid exempt wages or tips in the quarter, the number of qualified employees who were paid exempt wages or tips in the quarter, and the amount of the wages and tips paid to qualified employees, which are multiplied by 0.062 (the amount of the employer’s share of Social Security tax). This amount is subtracted from the total Social Security and Medicare tax reported on line 5d.

The exemption for the employer’s share of Social Security taxes on wages paid to eligible employees between March 19 and March 31 is treated on the second quarter Form 941 as an April 1 tax deposit and does not adjust the amount of tax liability reported on lines 10 and 17.

The instructions say that an employer cannot claim the Social Security tax exemption and the work opportunity credit for the same employee. If an employer does not wish to claim the Social Security tax exemption for an eligible employee, the employer omits that employee and his or her wages from lines 6a through 6d (and lines 12c through 12e, if applicable).

To be a qualified employee for purposes of the payroll tax exemption, the employee must have signed Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, (or a similar statement) under penalties of perjury. The employee must not be a replacement hire, unless the worker being replaced separated from service voluntarily or for cause, and the employee cannot be related to the employer or to a 50% owner.

‘Bush-ama’ tax cuts: The $2.2 trillion decision

May 4, 2010: 12:10

NEW YORK (CNNMoney.com) — They’re often called the “Bush” tax cuts. But at this point they might as well be called the Bush-ama tax cuts.

That’s because President Obama has embraced the tax relief measures introduced in 2001 and 2003, proposing they be extended indefinitely for most Americans. If lawmakers do nothing, the measures expire Dec. 31.

The tax cuts lowered income and investment tax rates, boosted the child credit, reduced the estate tax, and narrowed inequalities affecting married taxpayers.

Another reason for the new Bush-ama moniker: Like President Bush, President Obama has not called on Congress to pay for the cost of the tax cuts. In fact, the extension of the cuts is exempt from the new “pay-go” rules that Obama signed into law recently.

Extending the tax cuts for most Americans will increase the federal deficit by an estimated $2.2 trillion over 10 years.

Deficit hawks are uber-frustrated.

“Why do you spend over $2 trillion in your budget — the most you spend on any single policy item — on your predecessor’s tax policy, which you repeatedly explain is to blame for the deterioration and unsustainability of our nation’s fiscal outlook?” Diane Rogers, chief economist for the Concord Coalition, wrote in her blog Economistmom.com.

In a nod to deficit reduction, Obama did propose that lawmakers let the tax cuts expire for high-income households, couples making more than $250,000. Doing so would reduce the deficit by $678 billion from where it would be if the cuts were extended for everyone.

But recently, while he didn’t say so explicitly, Obama seemed open to rethinking his campaign promise not to raise taxes on the middle-class. In an interview last month, he said he would weigh recommendations from the bipartisan fiscal commission he created to suggest ways to put the U.S. fiscal house in order.

“We should be able to solve this problem without putting a burden on middle class families,” he told CNBC. “Having said that, I’m also going to wait for the fiscal commission to provide me [with] their best recommendations. … At a certain point, what we’ve got to do is match up money going out and money coming in.”

The next 7 months

The commission won’t report its recommendations until Dec. 1. In the meantime, it’s not clear when Congress will take up the issue of the 2001/2003 tax cuts. One theory is that they’ll vote to extend them before their August recess to score political points before the midterm elections in November.

“It would look ugly to go home and campaign for five weeks without having done something for the middle class,” said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.

On the other hand, the legislative agenda is already fairly packed.

Anne Mathias, director of research at Concept Capital’s Washington Research Group, is in the camp that believes Congress may not address the issue until December.

It’s also not clear yet how long lawmakers might opt to extend the tax cuts. There had been a push by both parties to make them permanent. But some believe extending them for a year or two may be the smartest move given current political and economic constraints.

IOUSA Solutions’: Deficit explosion

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, proposes that lawmakers extend the tax cuts to the end of 2012, and then use the prospect of making them permanent as a “sweetener” to draw votes for a serious deficit-reduction deal. No deal, no tax cuts.

“This would turn the expiration of the tax cuts at the end of 2012 into a realistic action-forcing hammer … . Otherwise, the task of stabilizing the debt goes from really hard to nearly impossible,” MacGuineas wrote in a blog post.

No matter how long the tax cuts are extended, no one should bank on low rates forever, Stretch cautioned. The country’s long-term fiscal condition is too precarious for that.

“No matter what happens, Americans’ taxes are going up one way or another. The middle class is going to have to be called on to help reduce the deficit. There’s not enough fiscal capacity if we just tax the top 3%,” Stretch said.

New Guidance Targets Loan Modifications

May 2, 2010
Journal of Accountancy

Responding to the recent rise in loan modifications, FASB on Thursday updated standards related to troubled-debt restructuring.

Amendments in the update are aimed at increasing comparability regarding modifications of loans accounted for within pools under ASC Subtopic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality.

FASB said differences in practice had developed over whether a loan that is part of a pool of loans accounted for as a single asset should be removed from that pool after a modification that would constitute a troubled-debt restructuring. The objective of the amendments is to address the diversity in practice regarding such transactions.

“In the view of certain entities, accounting for troubled debt restructuring does not apply to individual loans within a pool, and modified loans should remain within the pool,” according to the update. “In the view of other entities, each modified loan should be evaluated against the troubled debt restructuring criteria, and if the loan modification is a troubled debt restructuring, the modified loan should be removed from the pool and accounted for as a separate asset.”

The amendments also clarify guidance about maintaining the integrity of a pool as the unit of accounting for acquired loans with credit deterioration.

Accounting Standards Update No. 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset (a consensus of the FASB Emerging Issues Task Force), is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early application is permitted.

“Upon initial adoption of the guidance … an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30,” according to the update. “This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.”

Health Care Reform Reshapes Tax Code

By ALISTAIR M. NEVIUS, J.D.

April 1, 2010

In March, Congress passed two pieces of legislation designed to reform the U.S. health care system. The Patient Protection and Affordable Care Act (PL 111-148) was enacted on March 23, and was quickly followed by the Health Care and Education Reconciliation Act of 2010 (PL 111-152), which amended several portions of the first act, as well as adding new provisions of its own. While the legislation generally deals with the health care system, it contains many revisions to the Internal Revenue Code. Individuals and businesses are affected and are likely to look to their accountants and financial advisers for guidance and compliance help.

Among other things, the legislation provides a credit to help individuals afford insurance; it also imposes a penalty on individuals who do not obtain health insurance. Small businesses that provide health coverage for their employees are also eligible for a credit; large businesses that provide inadequate health coverage are subject to an excise tax. The medical deduction threshold is increased to 10% of adjusted gross income. And, in a provision not related to health care, Forms 1099 will now be required for payments of $600 or more to corporations (see sidebar, “Provisions Unrelated to Health Care,” at bottom of page).

This article describes many of the tax items in the two acts applicable to individuals and businesses. Note that most of these items do not take effect until future years.

PROVISIONS FOR INDIVIDUALS

Premium assistance credit. The Patient Protection Act provides for a refundable tax credit that eligible taxpayers can use to help cover the cost of premiums for health insurance purchased through a state health benefit exchange (which each state is required to establish under the act). Under new IRC § 36B, an eligible individual will enroll in a plan offered through an exchange and report his or her income to the exchange. Based on the information provided to the exchange and his or her income, the individual will receive a premium assistance credit. The Treasury Department will pay the premium assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual will then pay to the plan in which he or she is enrolled the dollar difference between the premium tax credit amount and the total premium charged for the plan. Alternatively, eligible individuals can pay for the insurance out of pocket and then claim the credit on their tax returns.

Eligibility for the premium assistance credit is based on the individual’s income for the tax year ending two years prior to the enrollment period. The premium assistance credit is available for individuals (single or joint filers) with household incomes between 100% and 400% of the federal poverty level (for the family size involved) who do not received health insurance through an employer or a spouse’s employer. The credit amount is determined by the secretary of Health and Human Services, based on the amount by which premiums exceed a threshold amount. The threshold rises from 2% of income for those at 100% of the federal poverty level for the family size involved to 9.5% of income for those at 400% of the federal poverty level for the family size involved.

The Reconciliation Act provides for an inflation adjustment in the starting and ending percentages for years after 2014. The adjustment will be based on the rate of premium growth for the preceding calendar year over that year’s rate of income growth.

After 2018, the inflation adjustment will be based on the rate of premium growth for the preceding calendar year over that year’s consumer price index growth, but only if the aggregate amount of premium assistance tax credits and cost-sharing reductions (under section 1402 of the Patient Protection Act) for the preceding calendar year exceeds an amount equal to 0.504% of the gross domestic product for the preceding calendar year.

The premium assistance credit will be available for years ending after Dec. 31, 2013.

Excise tax on uninsured individuals. The Patient Protection Act creates new IRC § 5000A, which requires U.S. citizens and legal residents to maintain minimum amounts of health insurance coverage. Minimum essential coverage includes various government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans, and other coverage as recognized by the secretary of Health and Human Services in coordination with the Treasury secretary. The coverage requirement would not apply to individuals who are incarcerated, are not legally present in the United States, or qualify for a religious exemption.

Individuals who fail to maintain minimum essential coverage will be subject to a penalty equal to the greater of (1) 2.5% of the amount by which the taxpayer’s household income for the tax year exceeds the threshold amount of income required for income tax return filing under section 6012(a)(1); or (2) $695 per uninsured adult in the household. The penalty will be phased in from 2014–2016. For 2014, the penalty will be the greater of 1% of household income over the filing threshold or $95; for 2015, it will be the greater of 2% of household income over the filing threshold or $325; and for 2016 it will be the full 2.5% or $695.

The act specifies that liens and seizures are not authorized to enforce this penalty, and noncompliance will not be subject to criminal penalties. The excise tax on uninsured individuals has been criticized as unconstitutional, and it has been challenged in a lawsuit brought by several state attorneys general (Florida v. Dept. of Health and Human Services, docket no. 3:10-cv-00091-RV-EMT (N.D. Fla., filed 3/23/10)).

This provision is effective for tax years beginning after Dec. 31, 2013.

Adult dependent. The Reconciliation Act raises the age up to which parents can carry their children on their health insurance policy. It does this by changing the definition of “dependent” for purposes of IRC § 105(b) (excluding from income amounts received under a health insurance plan) to include amounts expended for the medical care of any child of the taxpayer who has not yet reached age 27. The same change is made in section 162(l)(1) for purposes of the self-employed health insurance deduction, section 501(c)(9) for purposes of benefits provided to members of a VEBA, and in section 401(h) for benefits for retirees. These changes were effective upon enactment.

Medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses is increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for tax years beginning after Dec. 31, 2012, except that in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.

Additional hospital insurance tax on high-income taxpayers. Under the Patient Protection Act, the employee portion of the hospital insurance tax part of FICA, currently 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.

The provision applies to remuneration received and tax years beginning after Dec. 31, 2012.

Medicare tax on investment income. The Reconciliation Act added a new IRC § 1411 that imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or adjusted gross income over the dollar amount at which the highest trust and estate tax bracket begins.

For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000.

Net investment income means investment income reduced by deductions properly allocable to that income. Investment income is defined as income from interest, dividends, annuities, royalties and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business (however, income from passive activities and from a trade or business of trading in financial instruments or commodities is included in the definition of net investment income).

This provision applies to tax years beginning after Dec. 31, 2012.

Return information disclosure. The Patient Protection Act allows the IRS, upon written request of the secretary of Health and Human Services, to disclose certain taxpayer return information if the taxpayer’s income is relevant in determining the amount of the tax credit or cost-sharing reduction or eligibility for participation in the specified state health subsidy programs.

Upon written request from the commissioner of Social Security, the IRS may disclose certain limited return information of a taxpayer whose Medicare Part D premium subsidy, according to the records of the Treasury secretary, may be subject to adjustment.

Flexible spending arrangement. The Patient Protection Act mandates that the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee’s dependents, and any other eligible beneficiaries with respect to the employee, under a health flexible spending arrangement for a plan year (or other 12-month coverage period) must not exceed $2,500. The provision is effective for tax years beginning after Dec. 31, 2012.

Restrictions on use of HSA and FSA funds. Under the Patient Protection Act, amounts paid for over-the-counter medications will no longer be reimbursable from health savings accounts (HSAs), Archer medical savings accounts (MSAs), health FSAs, or health reimbursement arrangements. Amounts paid for a drug will only meet the definition of “qualified medical expenses” in sections 106, 220 and 223 if the drug is a prescribed drug (or is insulin). This provision is effective for amounts paid or expenses incurred after Dec. 31, 2010.

Tax on HSA distributions. The additional tax on distributions from an HSA or an Archer MSA that are not used for qualified medical expenses is increased to 20% of the disbursed amount, effective for disbursements made during tax years starting after Dec. 31, 2010. (Under prior law, the tax was 10% of the disbursed amount for HSAs and 15% for Archer MSAs.)

Cafeteria plans. The Patient Protection Act makes premiums for coverage under a qualified health plan offered through an exchange a qualified benefit under a cafeteria plan. This provision applies only to cafeteria plans established by a small employer that elects to make all its full-time employees eligible for one or more qualified plans offered in the small group market through an exchange.

This provision is effective for tax years beginning after Dec. 31, 2013.

PROVISIONS FOR BUSINESSES

Small business tax credit. The Patient Protection Act provides tax credits for small businesses and individuals designed to increase levels of health insurance coverage, as part of the IRC § 38 general business credit. Small businesses—defined as businesses with 25 or fewer employees and average annual wages of less than $50,000—are eligible for a credit of up to 50% of nonelective contributions the business makes on behalf of its employees for insurance premiums (new IRC § 45R). Tax-exempt organizations would get a 35% credit against payroll taxes.

Employers with 10 or fewer employees and average wages of less than $25,000 will get 100% of the credit; for other eligible employers, the credit will be reduced based on the number of employees over 10 and the excess of the employees’ average wages over $25,000. The $25,000 average annual wages figure will be indexed for inflation after 2013. 

This credit is available for tax years beginning after Dec. 31, 2009, and is phased in from 2010 through 2013. During the phase-in years, the maximum credit is 35% of the employer’s eligible premium expense (25% for tax-exempt employers).

Employer responsibility. Under new IRC § 4980H, an “applicable large employer” that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60%, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee.

An employer is an applicable large employer with respect to any calendar year if it employed an average of at least 50 full-time employees during the preceding calendar year.

The penalty for any month is an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) multiplied by $166.67 (one-twelfth of $2,000).

This provision is effective for months beginning after Dec. 31, 2013.

Prescription drug coverage deduction. The Patient Protection Act eliminates the IRC § 139A deduction for employers who subsidize prescription drug coverage for their employees who are eligible for Medicare Part D. This provision is effective for tax years beginning after Dec. 31, 2010.

Reporting requirements. The Patient Protection Act requires insurers (including employers who self-insure) that provide minimum essential coverage to any individual during a calendar year to report certain health insurance coverage information to both the covered individual and to the IRS (new IRC § 6055).
The information required to be reported includes: (1) the name, address and taxpayer identification number of the primary insured, and the name and taxpayer identification number of each other individual obtaining coverage under the policy; (2) the dates during which the individual was covered under the policy during the calendar year; (3) whether the coverage is a qualified health plan offered through an exchange; (4) the amount of any premium tax credit or cost-sharing reduction received by the individual with respect to such coverage; and (5) such other information as the Treasury secretary may require.

This requirement is effective for calendar years beginning after 2013.

Information reporting. The Patient Protection Act requires employers to disclose on each employee’s annual Form W-2 the value of the employee’s health insurance coverage sponsored by the employer, effective for tax years beginning after Dec. 31, 2010.

Tax-exempt health insurers. The Patient Protection Act provides for a program administered by the Department of Health and Human Services to encourage the creation of qualified nonprofit health insurance issuers to offer health insurance. Insurers receiving federal grants or loans under the program would be exempt from federal tax (under IRC § 501(a)) for periods when the insurer complies with the terms of the program.

Fees on health plans. Under new IRC § 4375, a fee is imposed on each specified health insurance policy. The fee is equal to $2 ($1 in policy years ending during fiscal year 2013) multiplied by the average number of lives covered under the policy. The issuer of the policy is liable for payment of the fee.

New IRC § 4376 imposes a similar fee on self-insured health plans, equal to $2 ($1 in policy years ending during fiscal year 2013) multiplied by the average number of lives covered under the plan.

For any policy year beginning after Sept. 30, 2014, under both IRC §§ 4375 and 4376, the dollar amount is equal to the sum of the dollar amount for policy years ending in the preceding fiscal year plus an amount equal to the product of (1) the dollar amount for policy years ending in the preceding fiscal year, multiplied by (2) the percentage increase in the most recent projected per capita amount of national health expenditures.

The fee is effective with respect to policies and plans for portions of policy or plan years beginning on or after Oct. 1, 2012.

Charitable hospitals. The Patient Protection Act establishes new requirements applicable to section 501(c)(3) hospitals, regarding conducting a community health needs assessment, adopting a written financial assistance policy, limitations on charges, and collection activities.

Excise tax on high-cost employer plans. New IRC § 4980I imposes an excise tax on insurers if the aggregate value of employer-sponsored health insurance coverage for an employee (including, for purposes of the provision, any former employee, surviving spouse and any other primary insured individual) exceeds a threshold amount. The tax is equal to 40% of the aggregate value that exceeds the threshold amount. For 2018, the threshold amount is $10,200 for individual coverage and $27,500 for family coverage, multiplied by the health cost adjustment percentage (as defined in the act) and increased by the age and gender adjusted excess premium amount (as defined in the act).

Retirees and employees in certain high-risk professions or who repair or install electrical or telecommunications lines have a higher limit. After 2018, the annual limitation is adjusted for inflation.

The provision is effective for tax years beginning after Dec. 31, 2017.

Medical device excise tax. The Reconciliation Act added new IRC § 4191, which imposes a 2.3% excise tax on sales of certain medical devices. The tax applies to sales of any medical device intended for humans (as defined in section 201(h) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. § 321(h))), except eyeglasses, contact lenses, hearing aids, and medical devices generally sold at retail to the public for individual use. This provision is effective for sales after Dec. 31, 2012.

SIMPLE cafeteria plans for small businesses. The Patient Protection Act establishes a SIMPLE cafeteria plan for small businesses. Under the provision, an eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self-insured medical expense reimbursement plan, and benefits under a dependent care assistance program. Under the safe harbor, a cafeteria plan and the specified qualified benefits are treated as meeting the specified nondiscrimination rules if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements.

The provision is effective for tax years beginning after Dec. 31, 2010.

The health care legislation contains several tax provisions unrelated to health care. These include:

Information reporting. The Patient Protection Act requires businesses to file an information return (for example, a Form 1099) for all payments aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation). The provision is effective for payments made after Dec. 31, 2011.

Expansion of adoption credit, adoption-assistance programs. For 2010, the maximum adoption credit is increased to $13,170 per eligible child (a $1,000 increase). This increase applies to both non-special-needs adoptions and special-needs adoptions. Also, the adoption credit is made refundable. The new dollar limit and phase out of the adoption credit are adjusted for inflation in tax years beginning after Dec. 31, 2010. The scheduled sunset of Economic Growth and Tax Relief Reconciliation Act (EGTRRA) provisions relating to the adoption credit is delayed for one year (that is, the sunset becomes effective for tax years beginning after Dec. 31, 2011).

For adoption-assistance programs, the maximum exclusion is increased to $13,170 per eligible child (a $1,000 increase). The new dollar limit and income limitations of the employer-provided adoption-assistance exclusion are adjusted for inflation in tax years beginning after Dec. 31, 2010. The EGTRRA sunset of provisions relating to adoption-assistance programs is also delayed for one year (that is, the sunset becomes effective for tax years beginning after Dec. 31, 2011). Under the sunset, after 2011, the adoption credit will revert to its pre-EGTRRA provisions (that is, a $6,000 credit for special-needs children only), and the income exclusion will disappear.

Economic substance doctrine. The Reconciliation Act codifies the economic substance doctrine in new IRC § 7701(o). The provision says that a transaction will be treated as having economic substance only if the transaction changes the taxpayer’s position in a meaningful way (apart from the tax benefits) and the taxpayer has a substantial purpose (apart from the tax benefits) for entering into the transaction.

The economic substance doctrine was created by the courts, and while they agree about the general definition and purpose, they have applied various tests in determining whether a transaction has economic substance. The act codifies a two-part test and requires transactions to meet both prongs of the test.

The Reconciliation Act puts failure to meet the economic substance test within the list of transactions that are subject to penalty under IRC § 6662 and imposes an increased penalty amount for nondisclosed transactions that lack economic substance. The act also removes transactions that lack economic substance from the reasonable cause exception in IRC § 6664.

Tax on indoor tanning services. The Patient Protection Act imposes a 10% tax on amounts paid for indoor tanning services (new IRC § 5000B). Like a sales tax, the tax will be collected from the person tanning when payment for the tanning services is made. The provision applies to services performed on or after July 1, 2010.

Current US Deficit is $1.4 Trillion. How Big is a Trillion? Let’s See ….

Goldman exec in alleged fraud to testify on Hill

Because You Need To Know What is Happening in the Latest Goldman Sachs Scandal

By DANIEL WAGNER (AP)

WASHINGTON — The Goldman Sachs trader at the center of fraud charges filed by the Securities and Exchange Commission will testify before a Senate subcommittee next week, the panel announced Thursday.

Fabrice Tourre, who was named along with Goldman & Co. in the charges filed last week, will testify Tuesday before the Permanent Subcommittee on Investigations, the panel said.

The hearing is the fourth in a series examining the causes of the financial crisis. It also will include testimony from Goldman CEO Lloyd Blankfein, chief financial officer David Viniar and four other current and former Goldman executives.

The SEC charged that Tourre marketed an investment that officials say was designed to lose value. He failed to tell investors that the mortgage securities in the deal were selected by a hedge fund that was betting they would fail, the agency alleges.

The SEC complaint quotes from an e-mail Tourre sent in January 2007 in which he bragged about being the “only potential survivor” of a forthcoming financial meltdown.

After the system toppled, he wrote in the e-mail, he would be “standing in the middle of all of these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

Tourre’s lawyer declined Thursday to comment on the matter.

Goldman has called the charges unfounded and says it plans to fight them.

The SEC is conducting a broad probe of the way banks profited from questionable activity ahead of the financial crisis. They are investigating other Wall Street banks besides Goldman.

The case against Goldman has brought attention to high-risk dealings on Wall Street. In particular, it’s shed light on complex products called synthetic collateralized debt obligations that amount to side bets on an investment’s performance. Synthetic CDOs are linked to the values of other investments — in the Goldman case, pools of mortgage securities — but don’t actually contain those investments.

Investment bankers have said there were numerous other cases in which hedge funds designed deals they expected would lose value. The SEC wants to know if banks other than Goldman marketed these deals without telling investors they were designed by people who would profit if investors lost money.

The Senate subcommittee is using Goldman Sachs as a case study to examine the role of investment banks in the financial bubble that led to a worldwide credit freeze in the fall of 2008.

It already has held hearings on the role of subprime lenders and federal bank regulators. On Friday, it will examine how credit rating agencies helped banks sell risky investments by labeling them as safe.

AP Business Writer Stevenson Jacobs in New York contributed to this report.

Copyright © 2010 The Associated Press. All rights reserved

IRS Announces Release of Draft Schedule to Report Uncertain Tax Positions

APRIL 19, 2010

Stuart Rohatiner, CPA, JD

The IRS on Monday announced that it was releasing draft Schedule UTP and draft instructions as part of its initiative to require certain business taxpayers to report uncertain tax positions on their returns (Announcement 2010-30). (See previous JofA coverage of this proposal. The AICPA Tax Division has prepared a briefing on the IRS proposal; click here to read more.)

According to the announcement, taxpayers with uncertain tax positions and assets of $10 million or more will be required to file Schedule UTP beginning with the 2010 tax year if they, or a related entity, filed audited financial statements. Affected taxpayers include corporations required to file Form 1120, U.S. Corporation Income Tax Return, insurance companies required to file Form 1120L, U.S. Life Insurance Company Income Tax Return, or 1120PC, U.S. Property and Casualty Insurance Company Income Tax Return, and foreign corporations required to file Form 1120F, U.S. Income Tax Return of a Foreign Corporation.

For 2010 tax years, the IRS will not require Schedule UTP from taxpayers who file other forms in the 1120 series, or from pass-through entities or tax-exempt organizations.

Under the draft instructions, a taxpayer who properly files Schedule UTP will be treated as having filed Form 8275, Disclosure Statement, or 8275-R, Regulation Disclosure Statement, and the IRS says it is considering other circumstances in which a tax position reported on Schedule UTP need not be reported elsewhere on the return or another disclosure statement.

The IRS has requested comments on the draft schedule and instruction, as well as on its proposal to require reporting of uncertain tax positions on the tax return, by June 1. Comments can be submitted via e-mail to announcement.comments@irscounsel.treas.gov, with “Announcement 2010-9” in the subject line.