The Tax Adviser

The targeted jobs tax credit has been reinstated through passage of the Small Business Job Protection Act of 1996 as the work opportunity tax credit, but the credit is only being made available from Sept 1996 to Oct 1997. Employers that employ certain workers from disadvantaged situations will be eligible for a 35% tax credit on wages for first-year wages up to $6,000. The employer must have the worker certified as qualifying before employment begins, and it is uncertain whether employers wil...

Investment strategies unique to assets held in charitable remainder trusts.

Brief Article

Planning around the 'success' tax.

Distributions to individuals with substantial assets in 401(k) plans, defined benefit and contribution plans, individual retirement accounts, profit-sharing plans and other retirement plans may be subject to a 15% excise tax on excess retirement accumulations. The excise tax applies to distributions in excess of $155,000 per year or $775,000 for lump-sum distributions, indexed for inflation. When paired with estate and income taxes, total tax rates on these funds may exceed 70%. Suspension of...

GST tax exemption - late allocation issues.

Generation-skipping transfer Taxpayers that anticipate generation-skipping transfer (GST) tax liability have the opportunity to plan when their $1 million GST exemption will be used. Form 709 can be filed during life to allocate a portion of the exemption to particular gifts, or the taxpayer may elect to pay the GST tax currently. Allocation of the exemption on Form 706 at death is also an option. If a life insurance trust is likely to result in a transfer to a skip person, the value of the ...

Law firms overlook deduction for certain client costs.

Brief Article

Long-term care insurance gets health insurance tax treatment.

The Health Insurance Portability and Accountability Act of 1996 has extended the tax treatment of health insurance to long-term care insurance beginning in 1997. The requirements for qualification include guaranteed renewability, consumer protections, limitations on refunds, and lack of cash surrender value. The insurance coverage is limited to qualified long-term care services and is capped at $175 per day. Actual costs in excess of this amount are excludible if reimbursed. Allowable premium...

Sale of S stock generates ordinary income.

Brief Article

Midnight surprise - personal injury alert.

The Small Business Job Protection Act of 1996 includes limitations on the income tax exclusion of personal injury damages, but the legislation fails to resolve uncertainty surrounding the exclusion of some awards. All punitive damages will be includible, except those in wrongful death suits. Compensatory damages are only excludible if they flow from a personal injury or a physical injury. The change in law does not resolve issues raised by awards that combine physical and economic harms. Prop...

Timing of worthless security deductions.

Worthless securities loss deductions must be claimed for the first tax year during which an event occurred that demonstrated worthlessness. The taxpayer has the burden of proving complete worthlessness. Some evidence of worthlessness includes bankruptcy, cancellation of stock, business cessation, or liabilities exceeding fair market value. Reference guides listing worthless securities are available. Returns being amended to claim such capital loss deductions are subject to a seven year statut...

Interest expense allocation related to debt-financed distributions from a passthrough entity.

Tax treatment of interest expense incurred by a passthrough entity will be determined at the owner level or both the entity and owner levels, depending on whether the general allocation method or the optional allocation method is used. Under the general rule, deductibility of interest expense will depend on how the debt proceeds distributed to the particular owner are used. Under the optional rule, a portion of the interest expense can be allocated at the entity level, based on operating cost...

Using stock-based compensation plans.

The most appealing stock option plans for companies to use for deferred compensation are incentive stock options and restricted stock options. Incentive stock option plans provide employees with tax deferral and long-term capital gains treatment upon exercise. Under restricted stock option plans, employees are granted a certain number of shares, and the employer has a limited period when the shares can be rescinded. Restricted stock options can provide the company with deductible losses if sh...

IRA planning opportunities.

Individual retirement account Some 1996 tax law revisions will provide holders of individual retirement accounts (IRAs) with planning opportunities. Suspension of the excess distributions excise tax can provide some IRA holders with the chance to reduce risks of both excess accumulations and excess distributions liabilities. Medical expense exemptions from early distribution penalties have been expanded. Restrictions on spousal IRA contributions have been relaxed to allow for contributions u...

The SIMPLE retirement plan?

Savings incentive match plans for employees - Brief Article

New planning opportunities for distributions from S corporations.

Brief Article

S corporations after the 1996 tax legislation.

Some ownership and holding restrictions placed on S corporations have been relaxed by provisions of the Small Business Job Protection Act of 1996. Electing small business trusts and some tax-exempt entities will become eligible S corporation shareholders, and the maximum number of shareholders allowed will increase from 35 to 75. S corporations can now own 80% or more C corporation subsidiaries and qualified S subsidiaries. The five-year waiting period for reelection of S status for revocatio...

SRLY loss temp. regs. offer significant planning opportunities.

Separate return limitation year The transition provisions offered under the temporary IRS regulations on separate return limitation year (SRLY) losses under IRC section 1502 may provide consolidated groups with planning opportunities. Groups that have purchased subsidiaries with SRLY losses since Jan. 28, 1991, can amend returns for years that are open as of Jan. 1, 1997. Although the regulations require consistent treatment, consolidated groups can assess whether current regulations or the ...

Current developments in employee benefits.

Part 2 Tax legislation enacted and case law decided in 1995-1996 had a significant effect on executive compensation and welfare benefits. Courts resolved the tax treatment of on-site meals offered to employees for free, the obligation to pass on health insurance volume discounts to employees and deduction of contributions to voluntary employees' beneficiary associations. Other issues addressed included the timing of COBRA post-employment health benefits, the taxability of frequent flier mile...

Significant recent developments in estate planning.

Estate planning professionals should be aware of numerous changes to the laws governing estates, trusts and gifts that have resulted from legislation and cases decided April 1995 through August 1996. The use of grantor retained trusts was limited, drafting requirements were added for qualified personal residence trusts and Crummey powers were attacked. Related party loans and transfers to trusts were found to be gifts. Other decisions and regulations also addressed special valuation, generati...

Practitioners beware - use of Form 1045 or 1139 may create unexpected liability.

Applying for a tentative refund for carryback losses by using IRS Form 1045 or Form 1139 may accelerate the refund process, but taxpayers using tentatives may be exposing themselves to tax liabilities that are otherwise barred by the statute of limitations. The IRS can offset carryback refunds with assessments from the closed tax year at issue. Interest can be added in that exceeds the refund, creating a net tax liability. Making post-audit claims for refund on Forms 1040X and 1120X will prot...

Update on FTA EDI Audit and Legal Issues Task Force.

Federal of Tax Administrators, electronic data interchange The Federation of Tax Administrators Task Force on Electronic Data Interchange (EDI) Audit and Legal Issues for Tax Administration is working on a report designed to address audit issues raised by the increased use of EDI. Electronic communications and industrial diversification have made business communications and record-keeping more complex, taxing the ability of EDI to provide standards for such communications. The work groups de...

Determining whether boot received in an acquisitive reorganization has dividend effect.

Boot received in a Type A acquisitive reorganization will be treated as a dividend distribution if it is not considered a substantially disproportionate redemption of stock under IRC section 302(b)(2). If the cash payment is considered a distribution, it will reduce the gain recognized and will reduce basis in the stock of the acquiring company that accompanied the boot. If the boot is considered a substantially disproportionate redemption, it will have to be recognized.