On November 6, 2009, Congress passed legislation allowing taxpayers to elect a greater carry back period for net operating losses (“NOLs”) generated in tax years 2008 or 2009. The original carry back period of two years was extended to allow taxpayers to recover taxes paid three, four or five years prior to the year of loss.
As many states are grappling with the recession and a gloomy economic outlook, state legislatures are attempting to find inventive ways to stimulate the local economy. This newsletter describes significant tax legislation passed, pending, proposed, or failed during the 2010 legislative sessions in the various states in the Southeast. The failed legislation is important due to the economic position of many states. Although certain legislation may have failed initially, it is a signal of the types of legislation that may pass in a special session or in subsequent years. The following legislative synopsis contains either direct or indirect excerpts from legislative committees or specific bill language. In addition, this newsletter is current as of the date prepared as stated above and is not intended to be a comprehensive analysis of the respective legislative sessions.
Since the Quality Stores decision, the IRS has been quick to deny protective refund claims filed outside of the 6th Circuit for FICA taxes dealing with severance related supplemental unemployment compensation benefits paid in the 2006 tax year. These protective refund claims were filed in response to a Michigan District Court holding that certain involuntary severance payments were not subject to FICA taxes, United States v. Quality Stores, Inc., 2010 U.S. Dist. LEXIS 15825 W.D. Mich. Feb. 23, 2010.
In addition to denying Quality Stores claims filed by employers outside the Sixth Circuit, the IRS is also examining claims filed in the Sixth Circuit more closely.
OVERVIEW
As part of the American Recovery & Reinvestment Act, states are implementing their
own subsidized employment opportunities. Each state has slightly different
requirements and benefits, but all of the programs are aimed at increasing the
number of jobs available to Americans.
Overview
Poison pills, also commonly referred to as Shareholder Rights plans, were first
introduced in the early 1980s, in an environment of hostile takeovers. As a
defense against hostile bidders and leveraged buyouts, target companies would
implement poison pill plans to deter acquisitions by competitors and corporate
raiders. Rights plans achieved this by distributing rights to purchase additional
shares to the non‐offensive shareholders at a discount, effectively diluting the
hostile investor’s ownership percentage. These purchase rights would be
distributed once a triggering event had occurred, typically when an unwanted
investor had acquired a 15% to 20% ownership stake.
2009 will likely go down as one of the worst financial slumps in history. The economic
downturn has resulted in companies realizing losses at every level of their supply chains.
This in turn has far‐reaching implications on the transfer pricing methods applied by many
taxpayers. At the same time, tax authorities, facing increased pressure to collect additional
tax revenues, will look to impose transfer pricing adjustments.
Most taxpayers have adopted a profit‐based approach in setting their “arm’s‐length”
transfer pricing policies. During normal economic times, such an approach allows taxpayers
with mature businesses to earn acceptable profits in the tax jurisdictions in which they
operate. During an economic downturn, however, a multinational enterprise (“MNE”) may
incur significant losses and the same transfer pricing policies may cause distortions in the
operating results of individual entities. Such distortions include “limited risk” distributors
with significant losses, or contract manufacturers not able to cover fixed costs.
The changing composition of state and local tax warrants more attention. As the
economy constricted in 2009, state and local tax receipts declined from 9.25% of
Gross Domestic Product in 2008 to 8.8% in 2009. According to the U.S. Government
Accountability Offices (GAO) report to Congress on State and Local Governments’
Fiscal Outlook (GAO-10-358, FY 2009), while most sources of state and local tax
receipts decreased, property tax receipts increased. In 2009, corporate state income
tax accounted for approximately 10% of all state and local tax receipts while property
tax accounted for more than a third of all state and local receipts totaling
approximately 34%.
Is Your Tax Team Tactical or Strategic?
Do You Proactively Promote Legislative Change?
The tax world of today is more complex than the tax world of yesterday, or is it?
Aided by technology and prompted by tough economic times, governments have
become more aggressive in audit and collection activities.1 Regardless of
economic conditions, tax matters present complex challenges which require a
careful analysis of laws, regulations, judicial decisions, administrative decisions,
customs, and practice. In addition to complex legal analysis, tax issues require a
firm understanding of the facts. Closer scrutiny and heightened regulation of
accounting for income taxes have increased the job requirement complexity for
tax professionals. Ironically, companies have recently reduced resources
allocated to the tax function as part of an overall business contraction.2 By
necessity, corporate tax teams generally adopt a tactical approach, largely
ignoring the strategic potential of proactively promoting legislative change.
Highlights
Under the Worker, Homeownership, and Business Assistance Act of 2009 signed into law by President Obama on November 6, 2009, taxpayers may elect to carry back net operating losses arising in a 2008 or 2009 tax year for up to 5 years. A similar election was created for certain small business taxpayers as part of the Emergency Economic Stabilization Act of 2008 but was only available to a limited number of taxpayers.
Now, any business (with limited exceptions) regardless of its size qualifies for an extended carryback period of 5 years. The new legislation applies to net operating losses of a taxpayer for any taxable year ending after December 31, 2007, and beginning before January 1, 2010. The carryback election, however, may be made only with respect to one taxable year within such period.
On February 23, 2010, the U.S. District Court for the Western District of Michigan held in the Quality Stores case that the taxpayer was entitled to a $1 million refund in overpaid FICA taxes on severance payments. This decision should cause employers to reconsider whether protective FICA refund claims related to severance payments should be filed. The deadline to file FICA refund claims for 2006 severance payments is April 15, 2010.
The Energy Tax Incentives Act of 2005 added Section 179D to the Internal RevenueCode, which allows a deduction for “energy‐efficient commercial building property” is placed in service. If you own, lease, design, or build energy efficient commercial buildings, you may be entitled to a federal income tax deduction for the cost of energy‐efficient property.
Section 179D caps this deduction at $1.80 per square foot. For example, a 250,000 square foot building may result in a potential deduction of $450,000 for qualifying energy‐efficient property. To qualify for the deduction, several criteria must be satisfied, including an energy savings threshold requirement. Partial deductions are available for buildings not meeting the overall energy savings building requirement.
There is a timely opportunity for companies to deduct previously capitalized repair and maintenance costs for a reduction of a taxpayer’s current tax liability or increase their net operating loss (NOL) to be carried back five years for federal income tax purposes. Due to an upcoming change in the regulations, companies may be significantly limited in the ability to deduct previously capitalized repair costs.
Many companies follow the book method of accounting for repairs and maintenance expenses and often times overcapitalize certain types of repair costs. Such costs maybe currently deductible for federal income tax purposes in the year in which they were incurred. Companies may be eligible to file an automatic accounting method change for the 2009 tax year and currently deduct the remaining basis of such improperly capitalized repair costs thereby resulting in accelerating cash flow. Many industries are impacted including retail, real estate, manufacturing, services, and energy. Typical capitalized repair costs include roofs, HVAC, parking, painting, and renovations.
Companies should consider filing the automatic accounting method change prior to the finalization of the Treasury Regulations for tangible property. True Partners Consulting can assist estimating the potential amount of overcapitalized repair costs for tax purposes.
OVERVIEW
True Partners’ Cap 2 Xpense team analyzes your company’s 2009 capital expenditures budget in order to maximize expiring taxincentives that the legislature has currently set to sunset by December 31, 2009.
THINGS YOU SHOULD KNOW
By carefully planning your remaining 2009 capital expenditure budget, you can recoup significant costs and maximize expiring tax benefits, including:
• Increased IRC §179 expense deduction (up to $250K)
• 50% bonus depreciation
• Accelerated placed-in service
• Refundable tax credits
It was the best of times, it was the worst of times,” so starts Dickens’ timeless masterpiece, A Tale of Two Cities. For many C-Class executives, the current recession has certainly been the worst of times, at least in their business careers. However, as companies take a hard look at their current operating structures, both legally and functionally, it is the best of times to achieve not only operational efficiencies but also tax efficiencies. This article discusses and illustrates, through a case study, some of the tax benefits that can be achieved through restructurings for a corporation conducting business in more than one tax jurisdiction.
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As the calendar year of corporate America enters into the fourth quarter with more financial uncertainty on the horizon, there is one thing which is known for sure: The financial world in which we all live and hopefully prosper provides a much more transparent view into the financial health of a company’s operations. To many of you this evolution may have seemed to take an eternity; the long hours, increased professional fees, and scrutiny over every minute detail associated with your corporate governance, internal controls, and financial reporting have been flowcharted, documented, and memorialized in volumes of text. To others this may be just the beginning, and you may soon feel much like Alice as she embarks on her incredible journey on the other side of the looking glass. No matter which side of the mirror you are on, transparency will certainly be the overriding theme.
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Employers who provide cell phones or other similar telecommunications equipment to employees must comply with IRS record-keeping requirements or risk losing their Tax deduction. The IRS requires taxpayers to support its tax deduction relating to employer-provided cell phones with written records inteming the amount of the use and expense, each time and place of such usage, and the business purpose of each expense or use.
On October 13, 2009, the Wall Street Journal published an article concerning President Obamaí’s international tax reform proposals. The article, Obama Administration Shelves Plan to Change How U.S. Treats Overseas Profits, stated that President Obamaí’s international reform proposals have been postponed for 2009. However, many tax practitioners believe that the Obama administration will reconsider some form of these proposals in 2010.
Recently, the landlord of a multi tenant office building in Chicagoí’s Loop reduced its taxes by over $500,000 after successfully demonstrating the building suffered from economic obsolescence given recent vacancies and the buildingí’s subsequent underutilization. Similarly, a real estate developer constructed an office building in Los Angeles and secured a property tax reduction of $300,000+ based on rent loss calculations. Also, an Indiana assessor reduced the tax liability of a large manufacturing company by $1,600,000 by accepting obsolescence calculations from the taxpayer for their tangible personal property. Companies with significant real or personal property tax liabilities may reduce their tax bill by identifying, quantifying, and demonstrating the obsolescence of their equipment and facilities.
Business combinations and transactions present companies with unique opportunities for growth and diversification. In recent years, transactions have become larger and more complex requiring the assistance of legal counsel, financial advisors, and accounting professionals to successfully execute mergers and other transactions. These endeavors often produce great results, but come with the burden of high fees, integration obstacles, and increased reporting requirements. To address the increasingly complex and variable reporting environment, the Financial Accounting Standards Board delivered guidance on business combinations in 2001 with Financial Accounting Statement No. 141 (“FAS 141”).
Canned software is a commodity that virtually all businesses use. As its purchase usually entails a significant investment for a business, its taxability status should be considered. Certain software purchases may be exempt from sales tax depending on where, when, and how the purchases were made. If the software purchase is found to be nontaxable, it is the economic equivalent of a 6 to 10% discount on the transaction. Even if the software purchase were found to be tax exempt after the purchase had been made, the business may still obtain, with sufficient documentation, a tax refund from the software vendor or the state or local taxing jurisdiction—generally, whichever jurisdiction had initially collected the tax on the purchase. Thus, on purchases of $1 million of software, savings or refunds of as much as $100,000 can be obtained.
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