2012 MIDDLE CLASS TAX RELIEF AND JOB CREATION ACT

Congress has extended the employee-side payroll tax cut through the end of 2012.   After weeks of uncertainty over whether an agreement could be reached, the House passed the Middle Class Tax Relief and Job Creation Act of 2012 on February 17, 2012. Senate approval quickly followed, also on February 17.   A potential impasse over revenue increases was avoided entirely when both parties agreed to offset costs of the full-year, two percentage point payroll tax cut through transfers from the general fund of the Treasury to the OASDI trust fund. In a revenue neutral provision, however, the new law eliminates a timing-shift in the estimated tax payments that had been required of certain large corporations under previous laws. Non-tax provisions within the new law extend unemployment benefits and implement a "doc fix" for Medicare. President Obama is expected to sign the bill as soon as it reaches the White House.

The Temporary Payroll Tax Cut Continuation Act of 2011 (2011 Payroll Continuation Act) had extended the employee-side payroll tax rate reduction of two percentage points through the end of February 2012. The new law extends the employee-side payroll tax holiday through the end of 2012.

Under the new law, individuals who receive wages and salaries will pay Old-Age, Survivors, and Disability Insurance (OASDI) taxes at a rate of 4.2 percent for calendar year 2012. The OASDI tax rate for self employed individuals for 2012 similarly has been extended at a reduced 10.4 percent level through the end of 2012.

A Capitalizable Christmas Present

Just before the New Year, the IRS released much-anticipated temporary and proposed regs on the capitalization of tangible property (so-called "repair regs"). The regs, the IRS explained, are intended to clarify and expand existing standards for capitalization of specific expenses associated with tangible property and provide some bright-line tests for applying the standards.  Many taxpayers will not consider the new definitions of a unit of property to be much of a Christmas present.  Much analysis of these regs will be needed are they are implemented in 2012.

 Background

Under Code Sec. 263(a), amounts paid to acquire, produce, or improve tangible property generally must be capitalized. The IRS issued proposed regs in 2006 that attempted to carve out certain repairs and maintenance exceptions. Those proposed regs were further refined in 2008. Now, the IRS has issued new regs, not only making further changes but also making the regs "temporary regs," binding on both taxpayers and the government. The temporary regs are generally effective for expenditures made in tax years beginning on or after January 1, 2012.

Materials and supplies

The temporary regs generally track the definition of materials and supplies in the 2008 regs and provide an alternative optional method of accounting for rotable and temporary spare parts, along with an election to treat certain materials and supplies under the de minimis rule of Reg §1.263(a)-2T.

Repairs

The temporary regs also generally track the treatment of repairs under the 2008 regs. A taxpayer is permitted to deduct amounts paid to repair and maintain tangible property provided such amounts are not required to be capitalized under Code Sec. 263(a) or any other provision of the Tax Code or regs.

To determine whether payments are repairs or capital expenditures, taxpayers must first look at the unit of property. The regs add clarity regarding a unit of property.

Rentals/leased property

The temporary regs reflect the existing rule in Reg. §1.162-11(a) that provides a taxpayer may amortize the cost of acquiring a leasehold over the term of the lease. The temporary regs also revise the rule in Reg. §1.162-11(b) that provides that the cost of erecting a building or making a permanent improvement to property leased by the taxpayer is a capital expenditure and is not deductible as a business expense.

Acquire/produce tangible property

The temporary regs generally track the 2008 regs in the treatment of amounts paid to acquire or produce units of tangible property. Generally, acquisition and production costs must be capitalized. The temporary regs also address moving and reinstallation costs; work performed prior to placing property into service; and transaction costs. Additionally, the temporary regs modify the de minimis rule in the 2008 regs.

Amounts to improve property

The temporary regs retain the approach in the 2008 regs for determining the unit of property and for determining whether there is an improvement to the unit of property. The temporary regs also retain some of the simplifying conventions in the 2008 regs.

Accounting method

The IRS reported it anticipates issuing additional guidance to advise taxpayers regarding how to obtain automatic consent to change to a method of accounting provided in the temporary regs for tax years beginning on or after January 1, 2012. These automatic consent requests may be filed beginning with taxpayers’ 2012 returns. Taxpayers may not request a change to a method described in the temporary regs on their 2011 returns, the IRS advised.

Temporary Payroll Tax Cut Continuation Act of 2011

What did our disfunctional Congress do before leaving town for Christmas?

At the eleventh hour, Congress approved a two-month extension of the employee-side payroll tax cut in the Temporary Payroll Tax Cut Continuation Act of 2011. The two-month extension, for January and February 2012, is intended to give lawmakers additional time to negotiate a full-year extension of the payroll tax cut through the end of 2012.

OASDI tax rate. Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program and Medicare's Hospital Insurance (HI) program are financed primarily by employment taxes. Prior to 2011, the OASDI tax rate was 6.2 percent for employees and employers, each; and the OASDI tax rate for self-employment income was 12.4 percent.

OASDI limits the amount of earnings subject to taxation for a given year. This limit changes each year with changes in the national average wage index. For 2011, the OASDI wage base was $106,800. The OASDI wage base is $110,100 for 2012. There is no limitation on HI-taxable earnings.

2011 temporary reduction. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced, for wages and salaries paid in 2011 and self-employment income in 2011, the OASDI tax by two percentage points, applied to the portion of the tax paid by the employee and the self-employed individual (4.2 percent and 10.4 percent, respectively). The employee-side payroll tax cut under the 2010 Tax Relief Act was scheduled to expire after December 31, 2011.

Two-month extension. On December 23, 2011, Congress approved and President Obama signed a two-month extension of the employee-side payroll tax cut. The Temporary Payroll Tax Cut Continuation Act of 2011 extends the two percentage point employee-side payroll tax cut through the end of February 2012.

Recapture. Shortly after President Obama signed the Temporary Payroll Tax Cut Continuation Act, the IRS explained that the new law includes a recapture provision, which applies to individuals who receive more than $18,350 during the two-month extension period. The OASDI wage base for 2012 is $110,100, and $18,350 represents two-months of the full-year amount. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. The House Ways and Means Committee reported that the recapture provision will only apply if the payroll tax reduction is not extended for the remainder of 2012.

Implementation. The IRS instructed employers to implement the reduced payroll tax rate as soon as possible in 2012 but no later than January 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in employees’ pay as soon as possible but no later than March 31, 2012, the IRS advised.

NYS Tax Law Changes for 2012

Condensed summary of NYS law changes as provided by our friends at CCH.

New York Gov. Andrew M. Cuomo has signed legislation containing new credit provisions and modifications to the corporate franchise and personal income tax rates, including a restructuring of the individual income tax brackets. The legislation also contains property tax provisions, which are reported separately.

Individual Income Tax Changes

Under the legislation, for joint filers in taxable years beginning after 2011 and before 2015, taxpayers with New York taxable income of $40,000 to $150,000 will be taxed at 6.45% (previously, 6.85%); taxpayers with New York taxable income of $150,000 to $300,000 will be taxed at 6.65% (previously, 6.85%); taxpayers with New York taxable income of $300,000 to $2 million will be taxed at 6.85% (previously, 7.85% to 8.97%); and taxpayers with New York taxable income over $2 million will be taxed at 8.82% (previously, 8.97%).

For taxpayers with other filing statuses, the top 8.82% rate will apply to head of household filers with New York taxable income over $1.5 million and to single filers with New York taxable income over $1 million. The legislation also provides for a cost of living adjustment to the brackets and the standard deduction.

The Department of Taxation and Finance has announced that it is developing new withholding tables that will be effective on January 1, 2012.

Metropolitan Commuter Transportation Mobility Tax

Metropolitan commuter transportation mobility tax (MCTMT) provisions are amended to exclude certain small businesses from the tax. Specifically, the legislation modifies the definition of "employer" to provide that payroll expense must exceed $312,500 (previously, $2,500) in any calendar quarter. The definition is also amended to exclude eligible educational institutions.

In addition, the MCTMT, previously imposed on employers at the rate of 0.34%, is imposed at the following rates: 0.11% for employers with payroll expense no greater than $375,000 in any calendar quarter; 0.23% for employers with payroll expense no greater than $437,500 in any calendar quarter; and 0.34% for employers with payroll expense exceeding $437,500 in any calendar quarter. For self-employed individuals, tax at the rate of 0.34% applies if earnings attributable to the Metropolitan Commuter Transportation District exceed $50,000 (previously, $10,000) for the tax year.

The MCTMT amendments applicable to employers take effect for the quarter beginning on April 1, 2012.

Corporate Franchise Tax on Manufacturers

The legislation provides a 50% rate reduction under the corporate franchise tax for eligible qualified New York manufacturers, for taxable years beginning after 2011 and before 2015.

The Commissioner of Taxation and Finance is required to establish guidelines and criteria specifying the requirements for a manufacturer to be classified as an eligible qualified New York manufacturer. The criteria may include factors such as regional unemployment, the economic impact that manufacturing has on the surrounding community, population decline within the region, and median income within the region.

Credits

The legislation creates the Youth Works Tax Credit Program, under which credits are available for employing at-risk youths in part-time and full-time positions. Qualified employers are entitled to a credit of $500 (full-time) or $250 (part-time) per month for up to six months for each qualified employee. Employers are also entitled to $1,000 (full-time) or $500 (part-time) for each qualified employee who is retained for an additional six months. Qualified employees must start their employment on or after January 1, 2012, and no later than July 1, 2012. Up to $25 million in tax credits may be allocated under this program.

The legislation also creates the Empire State Jobs Retention Program, which provides credits to targeted businesses harmed by a natural disaster. Participants in the program must (1) be located in a county in which an emergency has been declared by the governor on or after January 1, 2011, (2) demonstrate substantial physical damage and economic harm resulting from the event leading to the emergency declaration, and (3) retain at least 100 full-time equivalent jobs in the county. The credit equals 6.85% of the wages of retained jobs.

3% Federal Withholding Relief?http://www.cchgroup.com/wordpress/index.php/tax-headlines/federal-tax-headlines/ways-and-means-approves-3-percent-withholding-tax-repeal/

Special IRS Audits Target Wealthy Elite - Forbes

A great article about new examination practices by the IRS to audit "wealthy" taxpayers. The strategy behind this program is to examine the totality of the taxpayer's reported income and expense items on their tax returns. Further, the objective is to examine the taxpayer's "financial life" and determine if items are being properly reported on tax returns. This is in contrast to past practices where the IRS may have only reviewed selected issues on a taxpayers return. The IRS perceives that there has been abuse by this group of taxpayers with respect to offshore and unreported income. There also has been a number of publicized tax shelter cases where the IRS has previaled in its challenges of these shelters.

Are you ready for an examination like this?

Special IRS Audits Target Wealthy Elite - Forbes

IRS Reminders on Charitable Giving

Healthy list of reminders from the IRS about claiming tax deductions related to charitable giving.  Remember it is not always as easy as just writing the check to the charity.

IRS Summertime tax tips

President Obama's Jobs Bill

It's worth a post on our blog to provide a link to what is included in the President's Jobs Bill.  It is hard to invest much time on analysis expecting that so much will change if it becomes law...ever.

Good old bonus depreciation could be back for another year.  Punishment is handed out to corporate jet owners and owners of carried interests.

Much more to come on this subject.

CCH tax briefing

2011 Year End Tax Planning Opportunities - Capital Equipment

I know.  Summer just finished with the passing of Labor Day.  It's too early to think about year end tax planning.  Not so much...

Some business sectors of the economy are becoming stronger.  Encouraged businesses may be making decisions to buy additional capital equipment.  Planning opportunities remain related to bonus depreciation and Section 179 expenses deductions for 2011.

To encourage economic stimulus and job creation, Congress has enacted the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act of 2010). The Tax Relief Act of 2010 provides significantly increased incentives for business investment in capital and equipment, including a temporary extension of bonus depreciation, a bonus depreciation allowance of 100 percent of the cost of qualified property placed in service after September 8, 2010 and before January 1, 2012, and temporary increases in the deductible amount and investment limitation under Code Sec. 179 for tax years beginning in 2012.

The Tax Relief Act of 2010 extends the 50-percent first-year bonus depreciation allowance for two years to apply to qualifying property in service in the tax year through 2012 (through 2013 for certain longer-lived and transportation property). In addition, the provision expands the first-year bonus depreciation deduction to 100 percent of the cost of qualified property placed in service after September 8, 2010 and before January 1, 2012 (before January 1, 2013 for certain longer-lived and transportation property).

Under the extension provisions, a corporation also is permitted to increase the minimum tax credit limitation by the bonus depreciation amount with respect to certain property placed in service after December 31, 2010 and before January 1, 2013 (January 1, 2014 in the case of longer-lived and transportation property).

In addition to the bonus depreciation changes, the Tax Relief Act of 2010 increases the deduction and investment limits under Code Sec. 179. Generally, Code Sec. 179 permits a business that satisfies limitations on annual investment to elect to deduct (or “expense”) the cost of qualifying property rather than depreciate the cost over time. For tax years beginning in 2010 and 2011, taxpayers are permitted to expense up to $500,000 of the cost of qualifying property under Code Sec. 179, reduced by the amount by which the qualified investment exceeds $2,000,000. Qualifying property includes depreciable tangible personal property purchased for use in the active conduct of a trade or business. However, after 2011, the expense deduction limit of $500,000 was set to drop to $25,000. Similarly, the phase-out amount was scheduled to be reduced to $200,000.

To address this concern, the Tax Relief Act of 2010 increased the maximum amount a taxpayer may expense under Code Sec. 179 for tax years beginning in 2012 to $125,000 of the cost of qualifying property placed in service in the tax year, reduced, but not below zero, by the amount by which the cost of qualifying property placed in service in the tax year exceeds $500,000. These amounts are to be indexed for inflation. However, for tax years beginning in 2013 and thereafter, the maximum expense deduction permitted drops to $25,000 of the cost of qualifying property placed in service for the taxable year, with a maximum phase-out limit of $200,000, not indexed for inflation.

Tax planning action may be needed now to purchase and place qualifying equipment in service before the end of 2011.

More Off Shore Tax News

Just when you thought your Swiss bank account was a secret.  Apparently Switzerland is considering the disclosure of bank account information to the IRS.

Swiss to deliver some bank account data

The IRS has placed increasing emphasis on off shore and international tax compliance as part of its efforts to reduce the tax gap.