Legislation to Accelerate the Income Tax Benefits for Charitable Cash Contributions for the Relief of Victims of the Earthquake in Hait (P.L. 111-126)
Chapter 10: Nonbusiness Expenses
¶1070A. Reporting, Recordkeeping and Substantiation.
Haiti Earthquake Relief. Charitable deductions may be taken on 2009 income tax returns for cash contributions made after January 11, 2010, and before March 1, 2010, to qualified charities that provide relief to victims in areas affected by the earthquake in Haiti on January 12, 2010. Taxpayers can deduct these contributions on either their 2009 or 2010 returns, but not both. Contributions may be made by cash, check, money order, credit card, charge card, debit card, or via text message. For donations by text message, the recordkeeping requirements can be met by a telephone bill showing the name of the donee organization, the date of the contribution and the contribution amount (Act Sec. 1 of P.L. 111-126; IRS News Release IR-2010-12; IRS Pub. 526).
The Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)
Tax Rates - Features
Other Taxes
¶49. Social Security Taxes.
Unemployment Compensation. The temporary 0.2 percent FUTA surtax has been extended. The gross FUTA tax rate of 6.2 percent will apply through June 30, 2011, and will decrease to 6.0 percent for the remainder of calendar year 2011 and thereafter. (Code Sec. 3301, as amended by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)).
Chapter 2: Corporations
¶227. Time and Amount of Installment Payments.
Corporations with $1 Billion in Assets. Corporations with more than $1 billion in assets are required to make larger (or smaller) estimated tax payments in certain months in 2014. Specifically, such corporations must make payments that are 133.25 percent of the amount otherwise due in July, August, or September of 2014. These payments are balanced out, in that the payments due in October, November, or December of 2014 are 66.75 percent of the amount otherwise due (Act Sec. 401 of the Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222), as amended by Sec. 202 of the Corporate Estimated Shift Act of 2009 (P.L. 111-42) and Sec. 18 of the Worker, Home Ownership, and Business Assistance Act of 2009 (P.L. 111-92)).
Chapter 3: S Corporations
¶353. Return Requirements.
An S corporation is required to file Form 1120-S for each of the corporation's taxable years, regardless of whether the corporation has taxable income for that year (Reg. §1.6012-2(h)). An S corporation's return is due on or before the 15th day of the third month following the close of the tax year (Reg. §1.6037-1(b)). Form 7004 should be used to apply for an automatic six-month filing extension. (Reg. §1.6081-3(a)).
For returns due after December 20, 2007, but on or before December 31, 2008, an S corporation that fails to timely file Form 1120-S (or files an incomplete return) is liable for a penalty of $85 per shareholder, per month for a maximum of twelve months, unless reasonable cause is shown. For returns required to be filed after December 31, 2008, for tax years that begin before on or before December 31, 2009, the amount of the penalty per shareholder, per month, increases to $89. For returns required to be filed for tax years that begin after December 31, 2009, the amount is $195 ( Code Sec. 6699(b), as amended by the Worker, Retiree, and Employer Recovery Act of 2008 (P.L. 110-458) and the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)).
An S corporation may not contest the penalty assessment in the Tax Court, but must pay the entire penalty and then sue for a refund (Code Sec. 6699(d)).
Chapter 4: Partnerships
¶406. Return Used by Partnership.
Annual information reporting on Form 1065 is required regardless of whether the partnership has taxable income for the tax year. Although Code Sec. 6063 states that the return may be signed by any one of the partners, the instructions to Form 1065 indicate that the form must be signed by one of the partnership's general partners or, in the case of a limited liability company, by one of the member managers. A U.S. partnership's return on Form 1065 is due on or before the 15th day of the fourth month following the close of the tax year. A foreign partnership that does not have U.S.-source income is not required to file a partnership return if the partnership has no effectively connected income and no U.S. partners at any time during the partnership's tax year (Reg. §1.6031(a)-1(b)(3)(ii)). Form 7004 should be used to apply for an automatic six-month filing extension. (Temporary Reg. §1.6081-2T).
For returns due after December 20, 2007, but on or before December 31, 2008, a partnership that fails to timely file Form 1065 or files an incomplete return is liable for a penalty of $85 ($86 for returns for tax years that begin in 2008) per partner per month for a maximum of twelve months unless reasonable cause is shown. For returns required to be filed after December 31, 2008, for tax years that begin before on or before December 31, 2009, the amount is $89 ($90 for returns for tax years that begin in 2008). For returns required to be filed for tax years that begin after December 31, 2009, the amount is $195 (Code Sec. 6699(b), as amended by the Worker, Retiree, and Employer Recovery Act of 2008 (P.L. 110-458) and the Worker, Home Ownership, and Business Assistance Act of 2009 (P.L. 111-92)).
A partnership may not contest the penalty assessment in the Tax Court but must pay the entire penalty and then sue for a refund (Code Sec. 6698). Certain domestic partnerships with 10 or fewer partners do not have to pay the penalty if all partners have fully reported their distributive shares on timely filed income tax returns (Rev. Proc. 84-35).
Chapter 8: Exclusions From Income
¶863. Fringe Benefits.
The American Recovery and Reinvestment Act of 2009 (P.L.111-5 ) expanded the HAP, effective February 17, 2009, to allow assistance with respect to wounded members of the Armed Forces, wounded civilian Department of Defense and Coast Guard employees, surviving spouses of certain service members and civilian employees killed in the line of duty, and members of the Armed Forces permanently reassigned from an area at or near a military installation to a permanent duty station more than 50 miles away (where the other HAP requirements are also met). Payments made under the expanded HAP are eligible for exclusion. (Code Sec. 132(n) , as amended by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L.111-92 )).
Chapter 11: Losses
¶1173. Application of Net Business Loss.
In light of the special extended carryback period allowed for 2008 and 2009 NOLs (see ¶1179), an application for a tentative carryback adjustment regarding an NOL for a tax year ending before November 6, 2009, is timely if filed before the return due date (including extensions) for the taxpayer's last tax year beginning in 2009 (Act Sec. 13(e)(4) of the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)).
¶1179. Carryover and Carryback.
Generally, net operating losses can be carried back to the two years preceding the loss year and then forward to the 20 years following the loss year. Further, for net operating losses that arose in tax years beginning before August 6, 1997, taxpayers could have carried back an NOL to the three years preceding the loss year and then forward to 15 years following the loss year. No deduction is allowed in the year the loss is incurred (Code Sec. 172(b); Reg. §1.172-4). A three-year carryback period is retained for an “eligible loss,” which is the portion of an NOL that: (1) relates to casualty and theft losses of individual taxpayers; or (2) is attributable to federally declared disasters (see ¶1137) in the case of a small business or a farming business. An “eligible loss” for this purpose does not include a farming loss or a qualified disaster loss (see “Farming Loss” and “Federally Declared Disasters” below) (Code Sec. 172(b)(1)(F)). If a taxpayer has elected to use the special extended carryback period allowed for 2008 and 2009 NOLs, the three-year carryback provision for “eligible losses” will not apply. See “Extended Carryback for 2008 and 2009 NOLs,” below.
Election to Forgo Carryback. A taxpayer may elect to waive the entire carryback period (Code Sec. 172(b)(3)). If this election is made, the loss may be carried forward only. The election must be made by the return due date (including extensions) for the tax year of the NOL. The election may also be made on an amended return filed within six months of the due date of an original timely return (excluding extensions). Refer to the instructions for Form 1139, Corporation Application for Tentative Refund, or Form 1045, Application for Tentative Refund, for specific statement requirements. Once made, the election is irrevocable; however, in light of the special extended carryback period allowed for certain 2008 and 2009 NOLs, the election to forgo carryback of an NOL for a tax year ending before November 6, 2009, can be revoked before the return due date (including extensions) for the taxpayer's last tax year beginning in 2009 (Act Sec. 13(e)(4) of the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)); see “Extended Carryback for 2008 and 2009 NOLs,” below).
Extended Carryback for 2008 and 2009 NOLs. A taxpayer can elect a three-, four- or five-year carryback period (instead of the normal two years) for its NOL for any tax year that ends after December 31, 2007, and begins before January 1, 2010 (Code Sec. 172(b)(1)(H), as amended by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)). Most taxpayers can make the election for only one tax year (2008 or 2009); eligible small businesses (defined below) may be able to elect an extended carryback period for 2008 and 2009 NOLs. If a taxpayer has elected to use the extended carryback period for 2008 or 2009 NOLs, then the three-year carryback period for “eligible losses” (i.e., casualty or theft losses of individuals, NOLs of farmers or small businesses from federally declared disasters) will not apply.
The election must be made by the return due date (including extensions) for the taxpayer's last tax year beginning in 2009. Once an election is made, it cannot be revoked. The IRS will set forth the procedure for making a valid election. (Detailed procedures exist for the election for 2008 NOLs of eligible small businesses under the prior extended carryback provision (Rev. Proc. 2009-26).)
If the taxpayer elects to use a five-year carryback period, the NOL amount that can be carried back to the fifth tax year cannot exceed 50 percent of the taxpayer's taxable income for such preceding tax year (computed without regard to the NOL for the loss year or any tax year thereafter). In determining the amount of carrybacks and carryovers to other tax years, adjustments must be made to account for the 50-percent limitation. The 50-percent limitation does not apply if an eligible small business made a five-year carryback election under the prior carryback provision for an NOL for a tax year beginning or ending in 2008 (Code Sec. 172(b)(1)(H)(iv), as amended by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)).
Eligible small businesses that made or make the election to carry back a 2008 NOL for three, four or five years under the prior carryback provision can also make an election for a 2009 NOL; thus, eligible small businesses can make the election for two tax years (2008 and 2009) (Code Sec. 172(b)(1)(H)(v), as amended by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)). An “eligible small business” is a one that meets a $15 million (or less) gross receipts test for the tax year in which the loss arose; the test is based on the gross receipts test in Code Sec. 448(c). If an eligible small business did not make a timely election for a 2008 NOL under the prior carryback provision, then it can only make an election under the amended carryback provision for a 2008 or a 2009 NOL. In such case, the 50-percent of taxable income limitation (described above) will apply to the NOL carried back to the fifth tax year preceding the loss year (Joint Committee on Taxation, Technical Explanation of Certain Revenue Provisions of the Worker, Homeownership, and Business Assistance Act of 2009 (JCX-44-09), November 3, 2009).
Certain taxpayers participating in the Troubled Asset Relief Program (TARP) cannot elect the extended carryback period for applicable 2008 or 2009 NOLs (Act Sec. 13(f) of the 2009 Worker Act).
Corporate Equity Reduction Transactions (CERTs) . A C corporation may not carry back a portion of its NOL if $1 million or more of interest expense is incurred in a “major stock acquisition” of another corporation or in an “excess distribution” by the corporation (Code Sec. 172(b)(1)(E) and (h)). The amount subject to the limitation is the lesser of: (1) the corporation's deductible interest expense allocable to the CERT or (2) the amount by which the corporation's interest expense for the current tax year exceeds the average interest expense for the three tax years preceding the tax year in which the CERT occurs. The portion of the NOL that cannot be carried back may be carried forward. If an eligible corporation has elected to use the three-, four- or five-year carryback period for its applicable 2008 or 2009 NOL (see “Extended Carryback for 2008 and 2009 NOLs,” above), special rules apply (Code Sec. 172(b)(1)(H)(i)(II), as amended by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)).
Chapter 13: Tax Credits
¶1324. First-Time Homebuyer Credit.
A refundable first-time homebuyer credit is available to qualified individuals that purchase a home to be used as their principal residence (Code Sec. 36, as amended by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)).5 The credit may be claimed by first-time homebuyers and also by existing homeowners who meet certain conditions. The credit and any recapture of the credit are reported on Form 5405, First-Time Homebuyer Credit. The amounts, rules, restrictions, and eligibility applicable to the credit have changed several times since the initial enactment. The credit is currently set to expire at the end of April 2010.
First-time homebuyers. The first-time homebuyer credit is available to individuals who have had no ownership interest in a principal residence during the three-year period ending on the date of the purchase of a home to be used as a principal residence. In the case of joint filers, neither spouse can have such an ownership interest during that period. For residences purchased on or after January 1, 2009, and before May 1, 2010, the maximum amount of credit that may be claimed is equal to the lesser of:
- 10 percent of the purchase price, or
- $8,000 ($4,000, if married, filing separate).
The maximum credit amount is available for purchases which are under a written binding contract before May 1, 2010 and the purchase completed before July 1, 2010. The credit may be allocated in any reasonable manner among unrelated purchasers provide that no credit amount is allocated to unqualified individual (Notice 2009-12).
Generally, no recapture of the credit will be required unless the taxpayer disposes of the home within 36 months of the date of purchase (see Recapture, following).
For residences purchased after April 8, 2008, and before January 1, 2009, the amount of the credit that may be claimed is equal to the lesser of:
- 10 percent of the purchase price, or
- $7,500 ($3,750, if married, filing separate).
The $7,500 credit amount must be recaptured over a 15-year period. The recapture amount is treated as an addition to tax for each year of the recapture period and is equal to 6.67 percent of the credit amount claimed (or 1/15 of the credit amount). The recapture period begins with the second tax year following the tax year in which the credit was claimed. If the taxpayer disposes of or ceases to use the home as a principal residence within the 15-year recapture period, any remaining amount of the credit must be recaptured in the year of disposition.
Long-term residents. For individuals that are long-term residents of a principal residence and purchase a new principal residence after November 6, 2009, and before May 1, 2010, a reduced version of the first-time homebuyer credit is allowed. The amount of the credit is equal to:
- 10 percent of the purchase price, or
- $6,500 ($3,250, if married, filing separate).
The credit is available to purchasers who enter into a written binding contract prior to May 1, 2010 and complete the purchase before July 1, 2010. A long-term resident is an individual who has owned and used the same home as a principal residence in any five consecutive years during the last eight years ending on the date of purchase (Code Sec. 36(c)(6), as added by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)). Generally, no recapture of the credit will be required unless the taxpayer disposes of the home within 36 months of the date of purchase (see Recapture, following).
Principal residence. The term “principal residence” for purposes of the first-time homebuyer’s credit has the same definition as in Code Sec. 121 (the principal residence gain exclusion provision) (¶ 1705).
Self-constructed new homes. Taxpayer-constructed residences are treated as purchased on the date the home is first occupied.
Election to treat purchase as occurring in the previous year. Taxpayers are allowed to elect to claim the first-time homebuyer credit for either in the year of purchase or in the year previous to the year of purchase. If the election is made, the home purchase is treated as having occurred on December 31 of the previous year. The rules pertaining to eligibility and amount of the credit will generally apply as of the date of the purchase, not as of the December 31 election date.
Extension for certain governmental and military personnel. Certain government officials and Armed Forces personnel serving on qualified official extended duty for at least 90 days during the period beginning after December 31, 2009, but before May 1, 2010, may claim the first-time homebuyer credit on any purchase made before May 1, 2011. The same one-year time extension also applies to purchases that were under written binding contract before May 1, 2011, and the purchase is completed before July 1, 2011.
Recapture of the credit amount is waived in the case of disposition or cessation of the use of the home as a principal residence in the event the individual (if married, their spouse) receives orders for qualified official extended duty service. Qualified official extended duty service is defined as service on qualified official extended duty as a member of the Armed Forces, the Foreign Service, or an employee of the intelligence community (Code Sec. 36(f) and (h), as amended by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)).
Phaseout. For residences purchased after November 6, 2009, the phaseout of the first-time homebuyer credit begins when a taxpayer’s modified adjusted gross income (MAGI) exceeds $150,000 ($225,000 for joint filers). MAGI is defined as adjusted gross income increased by the exclusions for foreign earned income, U.S. possession earned income and foreign housing costs (Code Secs. 911, 931, and 933). The phaseout range is $20,000, and no credit is available to taxpayers with a MAGI of $170,000 or more ($245,000 for joint filers). For purchases before November 7, 2009, the MAGI phaseout threshold begins at $75,000 ($150,000 for joint filers), and the credit completely phases out at $95,000 ($175,000 for joint filers).
Restrictions. The first-time homebuyer credit is subject to different sets of restrictions based on date the home is purchased. The following restrictions apply from the initial date of enactment of the credit (April 8, 2008) through April 30, 2010:
- Nonresident aliens cannot claim the first-time homebuyer credit.
- No credit is available to taxpayers that dispose of, or cease to use, the home as a principal residence before the close of the tax year.
- No credit is allowed if the basis of the home for the purchaser is determined in any way by reference to the basis in the seller or if the property is acquired from a decedent.
The Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)) placed new restrictions on claiming the first-time homebuyer credit. Specifically, for houses purchased after November 6, 2009:
- The credit is not allowed if the purchase price of the residence exceeds $800,000.
- The credit is not allowed if the taxpayer can be claimed by another taxpayer as a dependent.
- The credit is not allowed unless either the taxpayer or the taxpayer’s spouse is eighteen years old or older on the date the residence is purchased.
- The credit is not allowed if the taxpayer acquires property from a person related to the taxpayer (or the taxpayer’s spouse).
The first-time homebuyer credit could not be claimed for purchases prior to January 1, 2009, if tax-exempt mortgage revenue bond proceeds were used to finance the purchase. However, this prohibition has been repealed for purchases after December 31, 2008.
Interaction with the D.C. Homebuyer Credit. For homes purchased in 2008, the first-time homebuyer credit allowed under Code Sec. 36 cannot be claimed if the taxpayer (or the taxpayer’s spouse) was eligible for the District of Columbia first-time homebuyer credit (¶1308). For houses purchased after 2008, if the taxpayer is eligible for the Code Sec. 36 first-time homebuyer credit, the D.C. first-time homebuyer credit cannot be claimed.
Recapture. The amount of the first-time homebuyer credit claimed must be recaptured if the home, purchased after December31, 2008, ceases to be the principal residence of the taxpayer at any time within the 36-month period from the date of purchase. The recapture amount is claimed as an addition to tax in the year the property is disposed of or ceases to be the taxpayer’s principal residence. The recapture amount cannot exceed the amount of gain from the sale of the home to an unrelated third party. The exceptions to the required recapture are:
- Death of the taxpayers.
- Involuntary conversion if the taxpayer acquires a new principal residence within two years. However, the accelerated recapture rule will apply to the new principal residence during the remainder of the recapture period.
- Transfer between spouses or incident to a divorce. However, the transferee steps into the shoes of the transferor in respect to the recapture and accelerated recapture rules.
Reporting. Substantiation requirements must be satisfied to claim the credit. Specifically, when claiming the credit in tax years ending after November 6, 2009, a copy of the signed settlement statement (HUD-1) for the purchase must be attached to the return. Any errors in claiming the credit will be treated as mathematical errors allowing the IRS to issue a summary assessment for any additional tax without going through the deficiency procedures.
Chapter 23: Special Corporate Status
¶2377. Operation Loss Deduction.
A life insurance company may claim an operations loss deduction, which is the excess of its life insurance deductions over its life insurance gross income (subject to limitations). An operational loss may be carried back three years (but see below) and carried forward 15 years. The company, however, may elect to forgo the entire carryback period for an operational loss for any tax year. In addition, if the company qualifies as a new life insurance company, the operational loss for any tax year may be carried forward 18 years (Code Sec. 810).
Life insurance companies can elect to carry back operations from operations losses incurred in a tax year ending after December 31, 2007, and beginning before January 1, 2010. This election can only be made for one tax year and is irrevocable (Code Sec. 810(b)(4), as added by the Worker, Home Ownership, and Business Assistance Act of 2009 (P.L. 111-92)).
Chapter 25: Returns: Payments of Tax
¶2503. Electronic Filing.
For income tax returns of individuals, estates, or trusts (i.e., individual income tax returns) filed after December 31, 2010, the IRS must require filing on magnetic media if the return is prepared and filed by a specified tax return preparer for the calendar year during which the return is filed. With respect to any calendar year, a “specified tax return preparer” means any tax return preparer (see ¶2517), unless the preparer reasonably expects to file 10 or fewer individual income tax returns during the calendar year (Code Sec. 6011(e)(3), as added by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92)).
Chapter 26: Withholding: Estimated Tax
¶2661. FUTA Tax Rate.
The Federal Unemployment Tax Act imposes a tax on employers who employed one or more persons in covered employment on at least one day in each of 20 weeks during the current or preceding calendar year or who paid wages (in covered employment) of at least $1,500 ($20,000 for agricultural labor or $1,000 for household employees) in a calendar quarter in the current or preceding calendar year. The tax is based on the first $7,000 of certain wages paid during the calendar year to each employee. The full rate of tax is 6.2 percent (a six-percent rate plus a temporary surtax rate of 0.2 percent) through June 30, 2011, but the employer is allowed a partial credit against this tax based on its state unemployment insurance tax liability (Code Secs. 3301 and 3302) (see IRS Pub. 15). The temporary surtax rate of 0.2 percent was originally set to expire after December 31, 2009, but was extended through June 30, 2011 (Code Sec. 3301, as amended by the Worker, Homeownership, and Business Assistance Act of 2009 (P.L.111-92)). Therefore, for July 1, 2011, and thereafter, the full FUTA tax rate is 6 percent.
