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Many tax changes for preparers, businesses and investors go into effect in 2011
April 25th, 2011
Many important tax changes go into effect this year. Most are the result of new rules in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of2010 (2010 Tax Relief Act) as well as in six other tax laws enacted in 2008-2010, while others are triggered by regs. This Practice Alert reviews recent non-extender,non-indexing changes for return preparers, businesses, and investors and notesrecent Federal Taxes Weekly Alert articles where more detail can be found. [Note:The online version of this article on today's Newsstand provides live links to thereferenced Weekly Alert articles.] A separate upcoming Practice Alert will review non-extender,non-indexing changes for individuals and retirement plans.
New-for-2011 tax return preparer requirements.New regs require tax returnpreparers to obtain a preparer tax identification number (PTIN) for tax returns orrefund claims filed after Dec. 31, 2010. In some cases, return preparers may obtaina provisional PTIN. See Federal Taxes Weekly Alert 1/06/2010 for details on thelatest guidance on the new-for-2011 tax return preparer rules.
EFT rules now in place.Beginning Jan. 1, 2011, employers must use electronicfunds transfer (EFT) to make all federal tax deposits such as deposits of employmenttax, excise tax, and corporate income tax (see Federal Taxes Weekly Alert12/09/2010). Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be usedafter Dec. 31, 2010.
E-filing by return preparers.Under the Worker, Homeownership, and BusinessAssistance Act of 2009 (WHBAA, P.L. 111-92), for returns filed after 2010, specified tax return preparers who expect to file more than 10 individual returns must filethem electronically. For this purpose, an individual income tax return also includesincome tax returns for estates and trusts. (Code Sec. 6011 (e) (3)) In December of2010, IRS announced that it was phasing in the new e-filing requirement over 2years (see Federal Taxes Weekly Alert 12/09/2010). Accordingly, for calendar year2011, a tax return preparer must file electronically if he expects to file-or if he is amember of a firm that reasonably expects in the aggregate to file-l00 or moreindividual income tax returns during the year. A hardship waiver is available (Form8944, Preparer e-file Hardship Waiver Request, see Federal Taxes Weekly Alert 12/23/2010).
Up-to-$1,000 credit for “retained workers” in 2011.For any tax year endingafter Mar. 18, 2010, Sec. 102 of the Hiring Incentives to Restore Employment Act(HIRE Act, P.L. 111-147) provides an up-to-$1,000 increase (retention credit) to thegeneral business credit for “retained workers.” A retained worker is any qualifiedindividual (as defined for purposes of the employer payroll tax holiday that was ineffect for hiring unemployed workers). See Federal Tax Weekly Alert 03/25/2010 forwho makes a proper certification on Form W-11 and:
(1) Who was employed by the taxpayer on any date during the tax year?
(2) Who was employed by the taxpayer for a period of not less than 52 consecutiveweeks, and
(3) Whose wages (as defined for income tax withholding in Code Sec. 3401(a)) for thatemployment during the last 26 weeks of the period (described in item (2) above) equaled atleast 80% of the wages for the first 26 weeks of that period. (HIRE Act §102(b))The retained worker must have begun employment with a qualified employer after Feb. 3,2010, and before Jan. 1, 2011.
Shorter S corp. built-in gain period.For tax years beginning after Dec. 31, 2010, the”Small Business Jobs Act of 2010,” the tax title of H.R. 5297, the Small Business LendingFunding Act (P.L. 111-240) provided that for S corporation tax years beginning in 2011, notax isimposed on the net unrecognized built-in gain of an S corporation if the fifth year inthe recognition period preceded the 2011 tax year. (Code Sec. 1374 (d) (7) (B) (ii))
New basis and character reporting rules.Under the Emergency Economic StabilizationAct of 2008 (EESA, P.L. 110-343), generally effective on Jan. 1, 2011, every brokerrequired to file an information return reporting the gross proceeds of a “covered security”must include in the return the customer’s adjusted basis in the security and whether anygain or loss with respect to the security is short term or long term under Code Sec. 1222. (Code Sec. 6045 (g)) A covered security is any specified security acquired on or after theapplicable date if the security: (0 was acquired through a transaction in the account inwhich the security is held, or (ii) was transferred to the account from an account In whichthe security was a covered security, but only if the broker received a statement under CodeSec. 6045A regarding the transfer. (Code Sec. 6045 (g) (3) (A)) Jan. 1, 2011, is theapplicable date for stock in a corporation (other than stock in a regulated investmentcompany or stock acquired in connection with a dividend reinvestment plan).
A specified security is: (a) any share of stock in a corporation (including regulatedinvestment company (RIC), or RIC shares), (b) any note, bond, debenture, or otherevidence of indebtedness, (c) any commodity, or contract or derivative with respect to thecommodity, if IRS determines that adjusted basis reporting is appropriate, and (d) anyother financial instrument with respect to which IRS determines that adjusted basisreporting is appropriate. For details, see articles in Federal Taxes Weekly Alert 10/21/2010.
Corporate actions that affect stock basis must be reported.Effective Jan. 1, 2011,under Code Sec. 6045B, as added by EESA, issuers of specified securities must file a returnaccording to IRS forms or regs describing any organizational action (e.g., stock split,merger, or acquisition) that affects the basis of the specified security, the quantitative effecton the basis of that specified security, and any other information required by IRS. Theissuer’s return (and information to nominees or certificate holders) must be filed within 45days after the date of the organizational action or, if earlier, by Jan. 15 of the year followingthe calendar year during which the action occurred. Nominees or certificate holders must(unless IRS waives this requirement) be given a written statement showing (1) the name,address, and telephone number of the information contact of the person required to file thereturn, (2) the information required to be included on the return with respect to thesecurity, and (3) any other information required by IRS. For details, see articles in FederalTaxes Weekly Alert 10/21/2010.
Reporting requirement for payment card and third-party payment transactions.The Housing Assistance Tax Act of 2008, Div. C. of P.L. 110-289, added Code Sec. 6050W.After 2010, it generally requires banks to file an information return with IRS reporting thegross amount of credit and debit card payments a merchant receives during the year, alongwith the merchant’s name, address, and TIN. Similar reporting is also required for thirdparty network transactions (e.g., those facilitating online sales). For final regs on thesubject, see Federal Taxes Weekly Alert 08/19/2010.
Information reporting for real estate.Under the Small Business Jobs Act of 2010, forpayments made after Dec. 31, 2010, except as provided below, solely for purposes of CodeSec. 6041(a) information reporting, a person receiving rental income from real estate willbe considered to be engaged in a trade or business of renting property. (Code Sec. 6041 (h)(1)) Thus, recipients of rental income from real estate generally are subject to the sameinformation reporting requirements as taxpayers engaged in a trade or business. Inparticular, rental income recipients making payments of $600 or more during the tax yearto a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) toIRS and to the service provider.)
The rental property expense payment reporting doesn’t apply to:
• Any individual who receives rental income of not more than a minimal amount, asdetermined under IRS regs;
• Any individual (including one who is an active member of the uniformed services oran employee of the intelligence community) if substantially all rental income is derived fromrenting the individual’s principal residence (as defined for purpose of the home saleexclusion in Code Sec. 121(d) (9) (C) (iv)) on a temporary basis;
• Any other individual for whom the Code Sec. 6041 requirements would causehardship, as determined under IRS regs. (Code Sec. 6041 (h) (2))
Increased information return penalty and failure to furnish payee statementpenalty.For information returns required to be filed after Dec. 31, 2010, the SmallBusiness Jobs Act of 2010 increases the penalty for failure to file under Code Sec. 6721 andthe penalty for failure to furnish payee statements under Code Sec. 6722. See FederalTaxes Weekly Alert 09/30/2010 for details.
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