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Buy-Sell Tax Savings for Corporations and LLCs in Manhattan

admin — Mon, 30 Aug 2010 12:00:21 +0000

This article is a response from questions our Manhattan small business tax CPAs have received from clients concerning an update to their NYC small business’s buy-sell agreement. With many financial options available these days, revisiting the buy-sell agreement makes sense. In anticipation of further investigation of the opportunities, here are some considerations that need to be made in making any revision plans for your New York C corporation, S corporation or LLC.

Cross purchase vs entity buy-sell. The choice of using a cross purchase or an entity buy-sell arrangement depends on the circumstances of each business. Essentially, a buy-sell agreement gives either the surviving shareholders (cross purchase) or their corporation (entity buy-sell) the right to acquire the deceased shareholder’s shares at a pre-agreed price and payment terms.

Under a cross purchase agreement the surviving shareholders receive an increased cost tax basis in their ownership interest in the corporation. Their tax basis is increased by the amount each surviving shareholder paid for the deceased shareholder’s shares. An entity buy-out arrangement usually has an administrative advantage when there are four or more shareholders. The corporation will own only one policy on each shareholder. In the cross purchase, each shareholder would own one life insurance policy on each other shareholder. If, for example, there are six shareholders, 30 policies would be required (six shareholders owning five policies each). This very well may bea wise approach for your New York S corporpration, C corporation, or Manhattan LLC.

Changing existing arrangements. A change from a corporation entity buy-sell to a shareholder-cross purchase may be suggested because of a change in circumstance.
Example. A professional corporation initially has eight shareholders and an insured entity buy-sell arrangement to avoid the administrative burden of maintaining 56 life insurance policies (eight shareholders owning seven policies each). Now only three shareholders remain. To obtain the advantages of a step up in basis on the death of a shareholder, they plan to change to a cross purchase arrangement. Only six policies would be required (three shareholders owning two policies each).
Example. A professional corporation initially has two shareholders and set up an insured cross purchase arrangement. Due to growth, there are now seven shareholders. For full funding, 42 life insurance policies would be required. In addition, the advantage of a step up in basis is now diluted. Under the entity buy-sell, only seven policies would be required (one for each shareholder).
The “transfer-for-value” trap. Changes to existing buy-sell arrangements among shareholders or between shareholders and their corporation can lead to a catastrophic income tax bill when the life insurance is paid. Transferring life insurance between or among shareholders and/or their corporation can fall into a little known tax trap: the “transfer for value rule”. When a life insurance policy is transferred for valuable consideration, the proceeds are not excluded from gross income, except to the extent of any consideration and premiums paid by the transferee. The proceeds in excess of the consideration and premiums are taxed as ordinary income on Manhattan small business and C corporation income taxes.
The creation of an enforceable contract right to receive all or part of the life insurance proceeds may well create a transfer for value:

Example. An S or C corporation’s officer-stockholder enters into a cross purchase agreement with employees. Both the officer-stockholder and the corporation transfer existing life insurance policies to a trustee to fund part of the employees’ purchase. No consideration is paid for the transfer to the trustee. The employees pay the premiums on the policies. This is a transfer for value. The employees’ consideration was their agreement to buy the deceased officer-stockholder’s stock and to pay the premiums. (If the employee purchased new life insurance policies, however, no transfer would occur.)

Example. Two shareholders each owned life insurance on themselves. They signed a cross-purchase agreement and then transferred their policies. Even if the policies have no cash value, a transfer-for-value has occurred. Each shareholder received the other shareholder’s insurance policy in exchange for their own insurance policy.
Take advantage of exceptions. Life insurance proceeds will be tax free, even if the transfer is for value, where the insurance is transferred to:
•   the insured,
•   a partner of the insured,
•   a partnership in which the insured is a partner, and
•   a corporation in which the insured is a shareholder or officer.
Example. Shareholders plan to change an entity buy-sell to a cross purchase. If the corporation transfers the policies it owns to the stockholders, the transfer-for-value rule will apply. If the same individuals are partners in a partnership business instead of having a stockholder-corporation relationship, the policies can be transferred to the partnership (or the partners) without incurring the transfer-for-value risk.

If you have any further questions about how these lucrative yet complicated rules relate to your New York S corporation, LLC, C corporation, or other small business income taxes in NYC, please do not hesitate to call our team of Manhattan small business CPAs.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

New York C-corporation Taxes and Capital Loss

admin — Sun, 29 Aug 2010 12:00:37 +0000

Our Manhattan CPAs know that many of our clients who file C-corporation taxes experience a significant amount of capital losses. We believe that long-range tax planning can make it possible for you to use these losses more effectively to reduce your overall NYC C-corporation tax liability.

Although capital losses can only be deducted against capital gains and cannot be deducted against ordinary income, they can be carried back for three tax years, and if not fully absorbed, carried forward for up to five years. If not fully used after five years, however, capital losses expire. Planning strategies can be implemented to reduce the possibility of the losses expiring unused and thus negatively affecting your C-corporation taxes in New York City. One example of such a strategy is to structure a sale-and-leaseback of property to generate capital gain that can be offset by the loss.

Please contact our Manhattan C-corporation CPAs to determine if this, or another strategy, is a feasible and appropriate method of ensuring that you achieve the greatest NYC C-corporation tax benefit from the capital losses that you have incurred.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

Small Business and Personal Travel Income Tax in New York

admin — Sat, 28 Aug 2010 12:00:20 +0000

Dear Client:
The following is something to consider if you own a LLC, S-corp, or other form of small business or freelancer in New York: Business trips, conventions, and continuing education seminars are frequently planned to incorporate exotic locations and leisure time. With proper planning, these trips can yield great personal pleasure while at the same time generate legitimate deductions on your income taxes in Manhattan. Although the basic rules are relatively simple, there are a number of factors in this area that you might be interested in knowing.
Business Travel – The Rules. NYC freelancers, LLCs and S-corps who travel away from their tax home on business are permitted to deduct travel expenses, including fares, meals, lodging, and incidental expenses on their small business income taxes in New York City, if they are not otherwise lavish or extravagant. A business trip is “away from home” if it takes enough time that the NYC LLC owner may be reasonably expected to need sleep or rest. A taxpayer’s tax home is his regular or principal place of business, or his regular abode if he has no regular or principal place of business. Naturally, you are not prohibited from enjoying nonbusiness or personal activities while on a business trip, but the primary reason for the trip must be related to your trade or business if you wish to deduct it on your Manhattan income taxes.
Foreign Travel. Foreign travel expenses are subject to some limitations that are not applicable if the business trip is within the United States. Some of an individual’s foreign travel expenses may not be deductible on their New York LLC income taxes if he or she takes part in substantial nonbusiness activity during the trip. NYC s-corp owners who travel outside the U.S. for longer than one week or spend less than 75 percent of their time on business are subject to allocation rules, which operate to partially disallow their expenses, unless they had no control over the trip arrangements or the vacation portion was not a major consideration of making the trip. The general rule is to allocate expenses, including meals and lodging, between business and nonbusiness on a day-to-day basis. Each day is either entirely for business, or it is considered to be a nonbusiness day. A day counts as entirely for business if the taxpayer’s principal activity on such day was the pursuit of a trade or business. In addition, a day is counted as a business day if any of the following factors are present:
•   The individual was traveling to or from an overseas destination in pursuit of a trade or business.
•   The individual’s presence outside the U.S. on that day was required at a particular place for a specific and bona fide business purpose.
•   The individual was prevented on that day from engaging in the conduct of his or her principal business activity due to circumstances beyond his control.
•   The day was a Saturday, Sunday, legal holiday or other reasonably necessary stand-by day, which intervened during the course of the taxpayer’s trade or business.

Educational Travel. The tax law expressly prohibits deducting expenses for travel as a form of education. Nevertheless, a Tax Court case allowed a school teacher to deduct her travel and tuition costs related to two university courses overseas. There, the court found that the educational activities engaged in by the taxpayer went beyond mere travel and helped her maintain and improve skills necessary to her employment. The courses were well organized and conducted with regular lectures, extensive assignments, and left her with little free time for personal pleasure. The taxpayer was able to show that the knowledge she gained helped her to develop curriculum materials for the courses she taught. Whether this “business need” may be extended to other professions or businesses remains to be seen as this case law develops.
Conventions and Seminars. Expenses for both NYC freelancer and self-employed persons and employees to attend a convention in the U.S. may be deductible on New York S-corp income taxes if there is a sufficient relationship to the taxpayer’s trade or business. However, a special rule prohibits the deduction of any costs of attending conventions or seminars for investment purposes.
Cruise ships. A limited deduction is permitted for conventions on cruise ships if the ship is of U.S. registry, all ports of call are in the U.S. or its possessions, and the meeting is directly related to the taxpayer’s trade or business. Rigorous reporting requirements must be satisfied, including written statements by both the attendee and an officer of the sponsoring organization.
Foreign conventions. Foreign conventions. A foreign convention under the tax law is considered one held outside the U.S., its possessions and territories, Canada, or Mexico. The deductibility of expenses for foreign conventions is subject to a higher standard than for conventions held in the U.S. The taxpayer must establish that the meeting is directly related to the active conduct of his trade or business and that it is as reasonable to be held outside the North American area as within it.
For a stateside convention, the taxpayer merely has to show that his business duties and responsibilities are related to the agenda of the meeting even though it may not deal with the specific duties of the taxpayer’s work.
Staying Over. Due to airline pricing policies, it is sometimes economical for a business traveler to stay over Saturday night although business was concluded on Friday. The additional lodging expense is frequently more than offset by the lower airfare as a result of the Friday and/or Saturday night stayover. In such situations, the additional meals and lodging expenses for the Friday/Saturday mini-vacation may be written off entirely as part of the deductible as ordinary and necessary expenses of the trip.
If, on a business trip during the week, a certain day is devoted primarily for pleasure, that day’s expenses are not deductible on your NYC small business income taxes . Although this may be a nondeductible expense that the business traveler is willing to pay, you should be careful not to devote over half of the time you spend away from home on pleasure. In such a case, none of the transportation expenses getting to and from the location are deductible. On the other hand, if more than half of the trip is devoted to business, all of the transportation expenses may be written off as a New York small business expense.
If you have any questions about how the travel rules would apply to any business trip that you anticipate taking soon for your NYC s-corp, LLC, or other small business, please do not hesitate to call one of our Manhattan small business CPAs.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

COBRA Subsidy Appeals of Denials for NYC Income Tax Credit Assistance

admin — Fri, 27 Aug 2010 12:00:37 +0000

Our Team of New York income tax CPAs want you to know that individuals who are involuntarily terminated from employment on or after September 1, 2008 and on or before May 31, 2010 can elect to pay 35 percent of their NYC COBRA continuation coverage and be treated as paying the full amount. The former employer pays the remaining 65 percent and then seeks reimbursement from the IRS, through a New York City payroll income tax credit. The COBRA subsidy has been credited with helping millions of individuals maintain their health insurance coverage during the economic slowdown.

The COBRA premium subsidy was first introduced in the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) and extended in subsequent legislation. The latest extension was in the Continuing Extension Act of 2010. The Continuing Extension Act extended eligibility for COBRA premium assistance through May 31, 2010. Congress is expected to approve legislation extending the subsidy through December 31, 2010. If passed, this would greatly help people who have been wit by the economy with their Manhattan income taxes.

In New York, COBRA premium assistance is excluded from gross income. However, the subsidy phases out for higher income individuals. Individuals with modified adjusted gross income (AGI) between $125,000 and $145,000 ($250,000 and $290,000 married couples filing jointly) must repay a portion of the subsidy on their income taxes in Manhattan. If a taxpayer’s modified AGI exceeds $145,000 ($290,000 for married couples filing jointly) the full amount of the subsidy will be repaid as an additional tax. A higher income individual can elect to waive COBRA premium assistance.

If you believe you are eligible for COBRA premium assistance but your former employer or plan denied the subsidy, you may apply to the U.S. Department of Labor (DOL) to review the denial. DOL has posted, online, its process for individuals to appeal denials of COBRA premium assistance under the 2009 Recovery Act. The DOL has promised to expedite review of denials for the temporary subsidy for COBRA continuation coverage.

Individuals who believe they are eligible for COBRA premium assistance, but have been denied the subsidy, can appeal to the DOL. Individuals can file their appeals electronically at its web site ( www.dol.gov/cobra ) or, alternatively, can print the online appeals form and send it to the DOL by mail or fax.
Individuals filing an appeal should have:
•   COBRA election notice;
•   A “Request for Treatment as an Assistance Eligible Individual” or other form used to request the premium reduction;
•   Insurance information card;
•   Payroll stubs showing deductions for health benefits;
•   Any documents detailing the date and circumstances of the termination; and
•   Any documentation the individual received regarding the denial of the premium reduction.

The DOL processes appeals from individuals who were employed in the private sector. If the individual was employed by the federal government or a state or local government, the U.S. Department of Health and Human Services (HHS) processes the appeal. HHS has also posted information about appeals on its web site ( www.cms.hhs.gov ).

If you have questions about COBRA premium assistance in New York, or the COBRA denial and appeals process, please do not hesitate to call our team of Manhattan income tax CPAs. We can answer your New York income tax questions and provide you with more specific information that you may need.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

Just A Reminder: C-corporation Estimated Tax Payments

admin — Thu, 26 Aug 2010 12:44:02 +0000

Dear Client:
This article is a reminder about your quarterly estimated NYC C-corporation tax for 2010. Estimated tax is payable in four installments. The payment amounts may be based on the current year’s tax, on the previous year’s tax, or on annualized or seasonal income. Manhattan C-Corporations that fail to pay sufficient estimated tax are subject to a penalty equal to the interest on the underpayment for the period of the underpayment. If your are a C corporation, it i important that you understand the C-corporation tax requirements in New York City. Our Manhattan income tax CPAs can help.

You are required to make electronic deposits of all depository taxes for 2010 (such as employment tax, excise tax, and corporate income tax) using the Electronic Federal Tax Payment System (EFTPS) if:
1. The total deposits of such taxes in 2008 were more than $200,000, or
2. You were required to use EFTPS in 2009.

If you are required to use EFTPS and fail to do so, you may be subject to a 10% penalty. If you are not required to use EFTPS, you may participate voluntarily.
If you are not registered to file using EFTPS, you must deposit your estimated tax payment using a Form 8109, Federal Tax Deposit Coupon. The completed Form 8109 should be mailed or delivered to an authorized depository by [DUEDATE]. Your check should be made payable to the depository institution.

If you have any questions about the amount of your payment or the means of payment or any other questions that relate to C-corporation taxes in New York, please call our office. One of our Manhattan C-corporation income tax CPAs will be happy to assist you.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

New York Income Tax Business and Nonbusiness Bad Debts

admin — Wed, 25 Aug 2010 12:00:17 +0000

It is virtually inevitable that all of us will at one time or another incur financial losses in our small business and personal lives. One frequently occurring type of loss that affects many Manhattan LLCs, S-corps, freelancers and small businesses in NYC is a bad debt. Whether made in the course of business, or to a friend or relative, sometimes a loan simply cannot be repaid despite the best intentions of the debtor, and if there is little or no prospect that repayment can be made in the future you may have a bad debt. From a tax standpoint, the question is how to handle bad debts, and what steps to take to at least derive the maximum tax benefits available from them. Although this subject is fraught with complexities, our New York small business CPAs will outline the basic principles here to give you an idea as to whether the bad debt rules may apply to you.

The first step is ascertaining that a real debt exists. There must be a valid and legally enforceable obligation to pay you a fixed or “determinable” sum of money. Loans between family members, or other related parties such as New York City s-corporations and their shareholders, are particularly scrutinized to make sure that they are really debts rather than disguised gifts, dividends, or contributions to the corporation’s capital. Therefore, if you are contemplating a loan to a related party, you must ensure that you treat the transaction as a true loan by taking the steps that an arm’s-length lender would take, such as putting it in writing and charging a reasonable rate of interest.

It then must be determined if, and when, the debt has become totally or partially worthless, that is, a bad debt. The problem here is that the IRS often requires taxpayers to play a guessing game. If a taxpayer claims a bad debt loss when nonpayment is only probable, rather than a virtual certainty, the IRS may disallow the loss as premature because there is some possibility of repayment in a later year. On the other hand, if the taxpayer waits until repayment is clearly hopeless, the IRS may maintain that the debt was really worthless in an earlier year and the loss should have been taken then. Because of potential statute of limitations problems, we generally recommend that the loss be claimed in the earliest possible year that it can reasonably be argued to be worthless. There are a number of facts which might indicate worthlessness, including the debtor’s bankruptcy, but no one of them is decisive; it is the totality of circumstances that is determinative.

Once it is established that a bad debt exists in your NYC small business, LLC or s-corp, the business or nonbusiness nature of the debt decides the outcome. As you might expect, a business bad debt must be created or acquired, or become worthless, in the course of your trade or business. If you conduct a business in the form of a s-corporation in New York, generally any debt held by the corporation is a business debt. Any debt not falling into the business category is a nonbusiness debt. A nonbusiness debt must be completely worthless before a loss can be taken, whereas a loss on a business bad debt can be taken when partial worthlessness can be established. Furthermore, nonbusiness bad debts are subject to the limitations on capital losses. Business bad debts, on the other hand, are deductible as ordinary losses in full against your other income.

As we said above, this is a complex topic and the preceding discussion can give only a rudimentary overview of all of the tax rules involved. If you are, or may be in a situation where these rules could affect your LLC, S-corp or Freelancer income taxes in New York, please do not hesitate to contact our Manhattan small business CPAs.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

Understanding the Child Tax Credit and Income Taxes in NYC

admin — Tue, 24 Aug 2010 12:00:08 +0000

To claim a child tax credit on your income taxes in Manhattan, your qualifying child must have been under the age of 17 at the close of the tax year. For example, for the 2010 tax year, your child must be under the age of 17 as of December 31, 2010 in order to claim them on your New York income tax return.

You are generally entitled to a $1,000 credit for each child under the age of 17 whom you claim as a dependent on your income taxes in New York City. This $1,000 per child amount is effective every year through 2010. After 2010, unless Congress extends it, the credit is scheduled to fall to $500. The American Recovery and Reinvestment Act of 2009 (ARRA) enhanced the child tax credit for 2009 and 2010 for lower and moderate income taxpayers. If the total amount of a taxpayer’s allowable child tax credit exceeds the taxpayer’s total tax liability (regular and alternative minimum), the taxpayer is eligible for a refundable child credit equal to 15 percent of the taxpayer’s earned income in excess of $3,000, up to the per child credit amount.

The Emergency Economic Stabilization Act of 2008 tied the child tax to the child’s dependency exemption. A qualifying child for purposes of the child tax credit must also be the taxpayer’s dependent. This restored the pre-2005 rule, under which the child credit was explicitly tied to the child’s dependency exemption.
To recap, generally, a qualifying child for the credit is someone who meets the following criteria:
•   Under age 17 at the end of 2009
•   Is your son, daughter, adopted child, stepchild or eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals
•   Is a U.S. citizen, U.S. national or resident of the U.S.
•   Did not provide over half of his or her own support
•   Must have lived with you for more than half of 2009 (there are some exceptions to this criteria)

The child tax credit reduces the tax on income dollar-for-dollar and, therefore, is considerably more valuable than a tax deduction on your Manhattan income tax return. For those lower income taxpayers without enough tax liability to cover the $1,000 per child credit, a portion of the credit is refundable. Higher income taxpayers, however, may find themselves excluded from the benefit of the credit because of an adjusted gross income (AGI) cap placed on taxpayers eligible for the credit.

Married taxpayers who file their NYC income taxes jointly and who have an annual modified adjusted gross income of more than $110,000 lose $50 of the credit for every $1,000 above $110,000. Likewise, single taxpayers with an annual modified adjusted gross income of more than $75,000 lose $50 of the credit for every $1,000 above $75,000. Nevertheless, if you are eligible for the child tax credit, you may take it against either the regular tax or any alternative minimum tax that you may owe.

Please contact our team of Manhattan income tax CPAs if you have any additional questions or comments about how the rules may apply specifically to your situation.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

Deducting the Cost of Computer Software for a small business in New York

admin — Mon, 23 Aug 2010 12:00:12 +0000

Dear Client:
Computer systems are virtually indispensable in a wide variety of small businesses, and an increasingly expensive component of these systems is the software. Therefore, here’s a quick review of how you may be able to write off the software expenses you incur in your Manhattan small business or LLC on your New York corporation taxes.

If the software is included in the purchase price of the computer itself, it generally does not have to be broken out separately on your New York City small business, LLC or corporation income taxes. The entire cost of the machine and the software it comes with may be depreciated over five years, or expensed in full in one year, subject to the annual limit, generally $250,000 for 2010 (and scheduled to drop to $25,000 after 2010). The $250,000 amount is the same as it was in 2009, extended by Congress in the Hiring Incentives to Restore Employment (HIRE) Act of 2010. These annual expensing caps, however, apply to the total of all expensed property you begin to use in your business for any designated year, just not computers or software. What’s more, if a business purchases more than $800,000 of qualifying property in 2010 (also the same as in 2009), the total dollar amount that may be expensed starts to be “phased out.”

Another tax tip: While a computer and software package must be depreciated over five years, the software component can usually come within rules that allow a faster three-year write off on your corporation taxes in NYC, if the price is stated separately.

If you have bought additional software, it is fully deductible in the year of purchase if it has a useful life of one year or less. This may apply, for example, to software that is upgraded annually or for which a new edition must be issued each year for the user to stay current.

Bonus depreciation was not extended into 2010. Thus, if your business does not qualify for full first-year Code Sec. 179 expensing because it exceeds the $800,000 qualifying limit for 2010, there is no depreciation deduction to turn to this year write-off those hefty expenses upfront.

Even if the software isn’t “off-the-shelf” because it has been designed or specifically modified for you, or you have an exclusive license to use it, it can be written off over three years on your small business, LLC or corporation taxes in New York if it was bought for use in your regular business, and was not obtained as part of acquiring another business. However, if the software is customized and was received in a business acquisition, the cost of the software must be amortized over 15 years. Note that the type of “software” that must be amortized over 15 years generally does not include databases, unless the database is in the public domain and is incidental to the operation of deductible computer software.

Please contact one of our Manhattan small business CPAS to determine whether you are eligible for the depreciation bonus with respect to a software purchase on your corporate income taxes in NYC .

If instead of buying “off-the-shelf” or customized software, a business writes or develops its own software internally, the research and development costs can be written off currently, or can be written off over five years or any shorter useful life that can be clearly established. This is true whether or not the software is patented or copyrighted, and whether or not you also sell it to others. But if you choose to fully deduct these costs, generally you must do so consistently each year.

Please do not hesitate to contact our team of small business CPAs in New York to see how best to handle your past as well as present software purchases on your NYC corporation income tax return.

Jonathan Medows, CPA

MEDOWS CPA, PLLC

A Unique, Boutique New York CPA Firm Serving the Needs of Individuals & Small Businesses

2010 Second Quarter Federal and New York Income Tax Developments

admin — Sun, 22 Aug 2010 12:00:36 +0000

Dear Client:
During the second quarter of 2010, there were many important federal and New York income tax changes. This letter highlights some of the more important federal tax developments for you. As always, please give our team of Manhattan income tax CPAs a call or send us an email if you have any questions about these income tax changes.

Tax legislation. Congress recessed for its Independence Day holiday without passing a tax extenders bill and a small business tax relief bill. The House approved versions of both bills earlier in 2010 but the bills stalled in the Senate over their price tags. The American Jobs and Closing Tax Loopholes Act (H.R. 4213) would extend over 40 temporary individual, business, charitable, energy, and infrastructure tax incentives that mostly expired at the end of 2009. The Small Business Jobs Tax Relief Act of 2010 (H.R. 5486) would, among other things, provide Code Sec. 6707A penalty relief to small businesses and increase the Code Sec. 195 deduction for qualified start-up expenses. Congress did, however, pass two smaller bills that will change your NYC income taxes: the Homebuyer Assistance Improvement Act of 2010 (H.R. 5623) and the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (H.R. 3962). The homebuyer act extends the closing date deadline from June 30, 2010 to September 30, 2010 for homebuyers who signed sales contracts prior to May 1, 2010. The pension relief act includes a package of defined benefit pension funding relief measures. The homeowner act is offset, by among other things, by extension of the Code Sec. 6657 bad check penalty to electronic payments.

Health care reform. The IRS issued significant guidance on various provisions of the new health care reform package (the Patient Protection and Affordable Care Act (PPACA) and the Health Care and Education Reconciliation Act of 2010) enacted earlier this year, both of which may affect your Manhattan income taxes. The IRS issued taxpayer-friendly guidance on the new extended exclusion from income for employer-provided health insurance for any employee’s child who has not attained age 27 as of the end of the tax year. For most individuals, this is the calendar year. The IRS also issued temporary and proposed regulations implementing the new requirement that health insurance plans that provide coverage for children continue to make such coverage available until the child turns 26 years of age. The IRS also issued temporary and proposed regulations under which health insurance plans will be treated as grandfathered plans under the PPACA. Additionally, the IRS described notice requirements that grandfathered plans must give to participants and beneficiaries.

Small employer health insurance tax credit. Another New York City income tax change: the IRS and the Department of Health and Human Services (HHS) issued a key component of the new Code Sec. 45R small employer health insurance tax credit. The agencies released the average premium for the small group market in each of the 50 states for the 2010 tax year. The IRS also issued guidance clarifying eligibility for the Code Sec. 45R credit, premiums, coverage, state tax credits, and more.

Form 990 filing deadline. An exempt organization required to file and failing to file for three consecutive years automatically loses its federal tax-exemption status. Form 990 is due on the 15th day of the fifth month after an organization’s fiscal year ends. For calendar-year organizations, the date was Monday, May 17, 2010, since May 15th fell on a Saturday this year. Exempt organizations could request an extension to file Form 990 by filing Form 8868, Application for Extension of Time To File An Exempt Organization Return, by the original due date. The IRS cautioned that many small tax-exempt organizations failed to file the required information return in time. Very small tax-exempt organizations must file Form 990-N (also known as the “e-Postcard”). The IRS indicated that it will provide additional guidance on how these small tax-exempt organizations can maintain their tax-exempt status even if they missed the May 17, 2010 deadline.
Basis overstatement. The Tax Court, in a court-reviewed decision, invalidated the IRS’s temporary and proposed regulations extending the limitations period for partnership assessments based on omissions of income. The court found the regulations contrary to the Supreme Court’s decision in Colony, Inc., 58-2 ustc P. 9593 .

Wrongful death payments. The IRS determined that a survivor could exclude from income a payment received for the wrongful death of another, including claims for emotional distress. The payment was intended to provide compensation for wrongful death and personal injury including the resulting claim for emotional distress.

Tax accrual workpapers. In a controversial move, the U.S. Supreme Court declined to review the decision of the Court of Appeals for the First Circuit allowing the IRS access to a corporation’s tax accrual workpapers. The First Circuit in Textron Inc. v. U.S., 2009-2 ustc P. 50,574 found that the work product privilege did not protect tax accrual workpapers.

HIRE Act payroll tax forgiveness. The IRS unveiled a revised Form 941, Employer’s Quarterly Federal Tax Return, and its instructions to reflect payroll tax forgiveness under the Hiring Incentives to Restore Employment (HIRE) Act.

Tax Court e-filing. Beginning with petitions filed on or after July 1, 2010, taxpayers represented by counsel must file all documents with the U.S. Tax Court using the court’s electronic filing (e-filing) system. The requirement brings the Tax Court into conformity with e-filing policies applicable to other federal courts.

401(k) compliance project. The IRS’s Employee Plans Compliance Unit (EPCU) launched a compliance check on 401(k) plans by sending a comprehensive questionnaire to a random sample of 1,200 plans. The IRS intends to use the information from the compliance checks to obtain a comprehensive view of 401(k) plans, which the agency can then use to focus its 401(k) education, outreach, guidance and enforcement efforts. As information is obtained, the IRS will focus on compliance problems. The project is designed to determine potential compliance issues, gain a better understanding of the reasons for noncompliance, and determine any potential plan operational issues. The survey includes more than 60 basic questions.

SSN and back-up withholding. Due to a change in practice by the Social Security Administration (SSA), the IRS amended the method required for recipients of interest, dividends, and other reportable amounts to validate their Social Security Number (SSN) with the payor of those amounts. As a result of the new procedure, recipients of a second “B notice” from a payor indicating that their SSN is incorrect must obtain a Social Security Number Printout from their local SSA office. Payee recipients of second B notices can no longer request the SSA to send Form SSA-7028 to the payor to validate the payee’s SSN. Instead, the payee must obtain a Social Security Number Printout and send a copy to the payor.

Registered domestic partnerships. In a series of memoranda, IRS Chief Counsel concluded that registered domestic partners in California must each report one-half of the community property income on their separate federal income tax returns. The determination applies for tax years beginning after December 31, 2006, and applies to compensation as well as income from property, such as investment income from community assets.

FICA student exception. The U.S. Supreme Court decided to take up the long-standing dispute between medical schools and the IRS over the treatment of medical residents for FICA tax purposes. The Supreme Court has agreed to hear an appeal from a 2009 case, Mayo Foundation for Medical Education and Research, CA-8, 2009-1 ustc P. 50,432 . In that case, the Court of Appeals for the Eighth Circuit upheld the IRS’s final regs in T.D. 9167, which generally provide that full-time employees are not students for purposes of the FICA student exception.
Indoor tanning tax. The IRS issued temporary and proposed regulations to implement the new 10 percent Code Sec. 5000B indoor tanning excise tax. The tax applies to amounts paid after June 30, 2010 for qualified indoor tanning services.
Whistleblower cases. The IRS posted guidelines on its web site about the investigation and processing of whistleblower claims. The guidelines reflect changes made to the whistleblower rules by the Tax Relief and Health Care Act of 2006.
Therapeutic discovery project credits. The IRS began accepting applications on newly-issued Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program, from companies seeking investment tax credits or tax-free grants for therapeutic discovery projects.

These are just some of the many New York income tax changes during the second quarter of 2010. Please contact our Manhattan income tax CPAs if you have any questions about these or any income tax changes in New York.
Sincerely yours,

Jonathan Medows, CPA

MEDOWS CPA, PLLC