Quarles & Brady Tax Newsletter
December Edition 12/07/11 Thomas J. Phillips
This edition contains the following articles:
From the Editor
Three Percent Withholding Repealed
Income Tax Provisions Expiring at the End of This Year
Fixed Bonus Pool Deductible Even Though Accrual Basis Taxpayer Does Not Know Which Employee Will Receive Any Bonus or How Much
New Settlement Program for Misclassified Workers
Standard Mileage Rates
Personal Use of Employer Provided Cell Phones Not Taxable
FROM THE EDITOR
Welcome to the December 2011 edition of the Quarles & Brady LLP Taxation Group's newsletter dedicated to keeping you apprised of newsworthy tax developments.
For tax year 2009, more than three million partnerships filed federal tax returns reporting $18.8 trillion in total assets and almost $410 billion in total net income. For tax year 2009, taxpayers filed 140.5 million individual income tax returns, which was a 1.4 percent decrease from the 142.5 million returns filed for tax year 2008. The adjusted gross income less deficit reported on these returns totaled $7.6 trillion, a 7.7 percent decrease from the previous year.
(Source: Internal Revenue Service, Statistics of Income Bulletin, Fall 2011, Washington, D.C.)
In 2005, the Tax Increase Prevention and Reconciliation Act imposed a 3 percent government withholding obligation on certain payments effective for payments after December 31, 2010. Subsequent legislation and IRS regulations delayed the effective date to payments made after December 31, 2012. The 3% Withholding Repeal and Job Creation Act, which was signed by President Obama on November 21, 2011, repealed the 3 percent government withholding obligation.
INCOME TAX PROVISIONS EXPIRING AT THE END OF THIS YEAR
The Joint Committee on Taxation listed 59 provisions of the Code, which expire at the end of this year. Among these expiring provisions are the following:
- New markets tax credit (IRC § 45D(f)(1)).
- Increased AMT exemption amount (IRC § 55(d)(1)).
- Deduction for state and local general sales tax (IRC § 164(b)(5)).
- Additional first year depreciation for 100 percent of basis of qualified property except for certain longer lived and transportation property (IRC § 168(k)(5)).
- Increase in expensing to $500,000/$2,000,000 and expansion of definition of IRC § 179 property (IRC §§ 179(b)(1), (2) and 179(f).
- Above the line deduction for qualified tuition and related expenses (IRC § 222(e)).
- Reduction in S corporation recognition period for built in gains tax (IRC § 1374(d)(7)).
- Temporary payroll tax cut (§601 of P.L. 111-312).
- The 100 percent exclusion of gain on qualified small business stock and non-applicability of the 7 percent tax preference on such gain (IRC § 1202 (a)(4)).
(Source: Joint Committee on Taxation, List of Expiring Federal Tax Provisions 2010 - 2020. January 21, 2011, JCX-2-11 and Sherlock, Congressional Research Service Report, Tax Provisions Expiring on 2011 and Tax Extenders, November 30, 2011)
There is uncertainty whether Congress will do anything to reinstate these provisions if they expire.
The Internal Revenue Service ("IRS") allows an accrual basis taxpayer to deduct a fixed amount of bonuses payable to a group of employees even though taxpayer does not know which employees will receive a bonus or the amount of any bonus to an employee until after the end of the taxable year (Rev. Rul. 2011-29, IRB 2011-49 (December 5, 2011).
Under Regulations Section 1.461-1(a)(2)(i), an accrual basis taxpayer generally may take a deduction in the taxable year a liability is incurred when (1) all events have occurred that establish the fact of liability; (2) the amount of the liability can be determined with reasonable accuracy; and (3) economic performance has occurred for the liability. The ruling only addressed whether the first requirement of this test was met.
The IRS announced a new Voluntary Classification Settlement Program ("VCSP") (Announcement 2011-64, September 21, 2011), which is similar to the current Classification Settlement Program ("CSP") (Internal Revenue Manual 4.23.6 (October 30, 2009)), for taxpayers under IRS examination. Both the VCSP and CSP permit the prospective reclassification of workers from independent contractors or other nonemployee status to employees with reduced federal employment tax liability for past nonemployee treatment.
To be eligible for the VCSP, a taxpayer (i) must have consistently treated workers as nonemployees; (ii) must have filed all required Forms 1099 for the workers for the previous three years; (iii) cannot be under examination by the IRS; and (iv) cannot currently be under examination concerning worker classification by the U.S. Department of Labor or by a state government agency.
To participate in the VCSP, a taxpayer must file a Form 8952 (Application for Voluntary Classification Settlement Program) and enter into a closing agreement with the IRS under which the taxpayer (i) agrees to treat the workers as employees for future tax periods; (ii) pays 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year as computed on the Form; (iii) agrees to extend the statement of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the closing agreement to begin treating the workers as employees; (iv) will not be liable for any interest and penalties on the liability; and (v) will not be subject to an employment tax examination for worker classification for prior years.
In general, under the CSP subject to the requirements a taxpayer would agree to properly reclassify its workers prospectively and either pay a full employment tax assessment for one taxable year under examination or 25 percent of the employment tax liability for such year.
The taxpayer may choose to continue treating its workers as independent contractors and not use the VCSP or CSP when the taxpayer meets the requirements of Section 530 of the Revenue Act of 1978 (generally reporting and substantive consistency requirements and a reasonable basis test).
Because of increases in the price of fuel, the IRS has revised the standard mileage rates effective for expenses on or after July 1, 2011. This is a reminder that the revised standard mileage rates are 55.5 cents per mile for business miles and 23.5 cents per mile for medical and moving expenses. This represents an increase of 4.5 cents over the rates in effect for the first six months of 2011. The standard mileage rate for charitable service miles is fixed at 14 cents per mile under Section 170(i) of the Internal Revenue Code (Announcement 2011-40, June 23, 2011).
PERSONAL USE OF EMPLOYER PROVIDED CELL PHONES NOT TAXABLE
For taxable years beginning after December 31, 2009, when an employer provides an employee with a cell phone primarily for non-compensatory business reasons, the IRS will treat the employee's use of the cell phone for reasons related to the employer's trade or business (such as the employer's need to contact the employee at all times for work-related emergencies; the employer's requirement that the employee be available to speak with clients when the employee is away from the office; or the employee's need to speak with clients located in other time zones outside of the employee's normal workday) as a working condition fringe benefit, the value of which is excludable from the employee's income. In addition, the IRS will treat the value of any personal use of a cell phone provided by the employer primarily for non-compensatory business purposes as excludable from the employee's income as a de minimis fringe benefit. (IRS Notice 2011-72, September 14, 2011)
Questions about the subject matter of this communication should be addressed to Thomas J. Phillips at (414) 277-5831 / [email protected] or your Quarles & Brady attorney.