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The explosion of the Deepwater Horizon oil rig and subsequent oil spill into the Gulf of Mexico has led to substantial damages and has generated many questions about the tax character of the payments made by British Petroleum (BP), and those likely to be made from a newly established claims fund. A new Congressional Research Service (CRS) study surveys the tax character of payments under current law, as well as the tax relief that may be available through Presidential or Congressional action.
BP has already begun to make interim payments to compensate for lost income resulting from the oil spill, particularly in the form of lost wages and income. And some $20 billion will be paid out to businesses and individuals through an Independent Claims Facility. Earlier this month, IRS issued Q&A interim guidance on the tax treatment of payments from BP. The CRS study takes a broader view. It surveys the tax treatment of oil spill related payments under current law, what the tax treatment might be if the event is designated a Presidential disaster, and some tax relief options that Congress might explore.
Current tax treatment. Payments received for lost business income, lost wages or lost profits are includable in income, but a payment made from BP to an individual to compensate for lost wages will not be wages for purposes of the social security tax and Medicare tax because it is not an actual payment for employment within the meaning of the law. These payments will also generally not be subject to income tax withholding, unless backup withholding applies. However, if a payment is made by an employer to its own employees, or by a third party to employees of another employer in satisfaction of an obligation of that employer to its employees, the payment may be subject to social security tax, Medicare tax, and income tax withholding.
In its Q&As, IRS concluded that self-employed individuals who receive a payment that represents compensation for lost income must include the amount of the payment in net earnings from self-employment for purposes of the self-employment tax.
The CRS study reviews other subjects covered in IRS Q&A guidance relating to the tax treatment of payments received for property damage, physical injuries or sickness, and emotional distress. It also covers issues not mentioned in the Q&As, including the following:
… Taxpayers for whom oil spill payments are taxable might be able to deduct costs (e.g., legal expenses) incurred in obtaining the payment. Business taxpayers may generally deduct these costs as ordinary and necessary business expenses under Code Sec. 162 (although if a payment yields capital gain, then the expense should be capitalized). Individuals who are subject to tax on the payments may be able to deduct the costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income floor.
… The Code requires all persons who, in the course of a trade or business, pay another person amounts totaling $600 or more in a single tax year to file an information return with IRS regarding such payments. The definition of person in this context includes a corporation and includes payments for compensatory damages for which the payer is liable. As a result, BP must file a Form 1099 for each claimant who receives more than $600.
… BP payments won’t be eligible for the Code Sec. 102 gift exclusion since “BP’s intent in making payments is not, on the whole, charitable.”
… The BP payments also won’t be eligible for the “general welfare exclusion.” To qualify for this exclusion, a payment must (1) be made from a governmental fund; (2) be for the general welfare, which essentially means it must be based on individual or family needs; and (3) not represent compensation for services. ( Rev Rul 2003-12, 2003-1 CB 283 ) The CRS study says that it appears the interim payments made by BP would not qualify for the exclusion because they represent replacement income and are not made from a governmental fund or based on need.
Presidential disaster designation. There is no precedent for a man-made disaster to result in a Presidential disaster designation. But if the oil spill were to receive this designation, the CRS report points out that relief would become available under provisions such as Code Sec. 139 , which excludes qualified disaster relief payments from gross income, Code Sec. 198A , which provides for expensing of qualified disaster expenses, and Code Sec. 1033(h) , which deals with certain involuntary conversions.
Legislative relief. The CRS study lists a number of different ways Congress could provide relief for victims of the Gulf oil spill, including these:
The Emergency Economic Stabilization Act of 2008 (EESA; P.L. 110-343 ) temporarily changed some of the rules associated with claiming casualty losses for taxpayers in federally declared disaster areas. For the 2008 and 2009 tax years, (1) all taxpayers, including non-itemizers, could claim a disaster loss deduction; (2) the 10% AGI limitation on disaster losses was suspended; (3) a five-year NOL carryback was available for disaster losses; and (4) the amount by which individual taxpayers were required to reduce their personal casualty losses per event was increased from $100 to $500 for deductions claimed in 2009. As an additional benefit for losses in federally declared disaster areas, taxpayers may elect to take losses in the previous tax year. Congress could enact provisions similar to those provided under EESA, allowing all taxpayers to deduct losses and suspending AGI limits.
Congress has responded to disasters in the past by modifying the NOL carryback rules (e.g., for the Katrina, Wilma, and Rita disaster areas) and could do so again by extending the default two–year NOL carryback to five years for businesses negatively affected by the oil spill.
As jobs losses resulting from the oil spill continue to mount, Congress could consider adopting provisions encouraging the hiring of those unemployed due to the oil spill. For example, as was done following the 9/11 terrorist attacks or Hurricane Katrina, the work opportunity tax credit (WOTC) could be modified to include oil-spill-displaced Gulf employees as a targeted group for hiring.
Following Hurricane Katrina, victims located in the disaster area were allowed enhanced access to retirement funds. Penalties for early withdrawals from individual retirement accounts (IRAs) and 401(k)s were eliminated, and the income tax on these distributions could be spread over three years rather than being due in the first year. Any replacement contributions made in the three years following the distribution could be treated as a rollover. The limits on borrowing from qualified employer plans were also increased. Allowing Gulf Coast oil spill victims greater access to retirement savings could help affected individuals smooth their income and consumption during the crisis.
Mark Fly, CPA
Price CPAs, PLLC
3825 Bedford Avenue, Suite 202
Nashville, TN 37215
Phone: 615.577.9686
Fax: 615.463.0586
Circular 230 Notice
We are required by IRS Circular 230 to inform you that any statements contained herein, or any attachments, are not intended or written to be used, and cannot be used, by you or any other person, for the purpose of avoiding any penalties that may be imposed by federal tax law
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Tags: deepwater horizon, oil spill, payments, Tax, the gulf
Posted in Government, News, Tax | No Comments » |
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Key tax changes affecting business in the recently enacted Hiring Incentives to Restore Employment (HIRE) Act.
Extension of enhanced small business expensing (Section 179). The new law gives a one-year lease on life to enhanced expensing rules, which allow qualifying businesses the option to currently deduct the cost of business machinery and equipment, instead of recovering it via depreciation over a number of years. For tax years beginning in 2010, the maximum amount that a business may expense is $250,000, and the expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets. These dollar limits are the same as those that were in effect for 2008 and 2009.
Payroll tax holiday and up-to-$1,000 credit for employers who hire unemployed workers. To help stimulate the hiring of workers by the private sector, the new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer’s 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to Social Security taxes—by the end of the year. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
Workers hired after the date of introduction of the legislation (Feb. 3, 2010) are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after the date of the new law’s enactment receive the exemption for payroll taxes.
Some additional features of the new hiring incentive:
The tax benefit of the new incentive is immediate. It puts money into a business’ cash flow immediately, since the tax is simply not collected in the first place.
The tax benefit generally applies only to private-sector employment, including nonprofit organizations—public sector jobs are generally not eligible for either benefit. However, employment by a public higher education institution would qualify.
There is no minimum weekly number of hours that the new employee must work for the employer to be eligible, and there is no maximum on the dollar amount of payroll taxes per employer that may be forgiven.
For workers that would otherwise be eligible for the “Work Opportunity Tax Credit,” the employer must select one benefit or the other for 2010—no double dipping.
An employer can’t claim the new tax breaks for hiring family members.
A worker who replaces another employee who performed the same job for the employer is not eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
The incentive is not biased towards either low-wage or high-wage workers. Under the measure, a business saves 6.2% on both a $40,000 worker and a $90,000 worker.
The payroll tax holiday does not apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the fist calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.
The Act creates a similar new set of rules permitting a payroll tax holiday for railroad retirement tax purposes.
The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2% of the wages paid by the taxpayer to the retained worker during the 52-consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker’s wages during the 52-consecutive-week period exceed $16,129.03. However, the credit is not available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers).
Mark Fly, CPA
Price CPAs, PLLC
3825 Bedford Avenue, Suite 202
Nashville, TN 37215
Phone: 615.577.9686
Fax: 615.463.0586
Visit us online: http://www.pricecpas.com
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| Posted in Accounting, News, Tax | 1 Comment » |
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Tennessee Property Taxes
Tennessee does not have a homestead exemption. However, there is a property tax relief program for the elderly, disabled and veterans.
The assessed valuation of a property is based on 25% of its fair market value. Depending on the location of the residence, homeowners will be assessed property taxes from the city only, the city and county, or the city, county, and a special school/fire district rate.
Tennessee Sales Tax
Tennessee’s sales tax rate is one of highest in the nation. The state rate is 7% on tangible property (prescription drugs are exempt) and 6% on food and food ingredients. Counties and cities may add another 1.5% to 2.75% to the total of either rate.
Many Tennessee residents benefited from the federal tax law which allowed an itemized deduction for the higher of the sales tax or state and local income tax paid. It remains uncertain as of this writing whether the sales tax deduction will be extended to years 2010 and beyond.
Tennessee’s Version of the Personal Income Tax
While Tennessee does not have an actual personal income tax, as that term is commonly understood, it does have a tax on income derived as dividends from stock and interest on bonds. The tax applies to persons, partnerships, associations, trusts and corporations in the state. Although the value of the stocks and bonds is not taxed, any income that is derived from those items is subject to tax.
Dividends: The tax is only on income from dividends and not on gains realized by stockholders on the sale or transfer of their stock, including distributions in liquidation. Dividends from mutual funds, including capital gains dividends, are fully taxable, regardless of whether those dividends are taken in the form of cash or additional stock. There is an exception in the law that excludes REIT dividends from taxation.
Interest: Interest received on corporate bonds and non-Tennessee tax-exempt bonds is subject to the Hall Income Tax. Also interest on most loans made by the taxpayer to another party (e.g., a second mortgage taken on the sale of a home) is subject to tax. Interest on bank accounts and similar deposits is not taxable.
Tax Rate and Exemptions: The tax rate is 6%. The exemption is $1,250 for single persons and married couples filing separately and $2,500 for married couples filing jointly.
Tennessee’s Gift Tax
Tennessee imposes a tax on gifts. There are two rate structures depending on the donor’s relationship to the donee.
Class A donee: Husband, wife, son, daughter, lineal ancestor, lineal descendant, brother, sister, stepchild, son-in-law, and daughter-in-law. If a person has no child or grandchild, a niece or nephew of such person is a donee in this class.
Class B donee: Any relative, person, association or corporation not specifically designated in Class A.
Exemptions Per Donee: The exemption for Class A donees is $13,000. The exemption for Class B donees is $3,000.
Tax Rate: The tax rate is graduated from 5.5% to 16%.
Note: Tennessee does not follow the federal lifetime gift tax exemption approach. This is a significant departure from the federal law and makes planning with large gifts a more complicated and expensive proposition.
Tennessee’s Estate Tax
What is referred to as an “estate tax” in Tennessee is the amount equal to the difference between the Tennessee “inheritance tax” and the “state death tax credit” allowed on the federal estate tax return, IRS Form 706. But since the federal “state death tax credit” was repealed for the years 2005 – 2010, there is currently no “estate tax” collected in Tennessee, just a state “inheritance tax”. Tennessee imposes this tax on the net value of a resident decedent’s estate or Tennessee real or personal property owned by a nonresident.
Exemption: The exemption is $1,000,000.
Tax Rate: The tax rate is graduated from 5.5% to 9.5%.
Mark Fly, CPA
Price CPAs, PLLC
3825 Bedford Avenue, Suite 202
Nashville, TN 37215
Phone: 615.577.9686
Fax: 615.463.0586
Disclaimer: This information does not constitute legal, tax or accounting advice, and should not be relied upon for any planning purposes. It is provided solely and exclusively for general, non-specific educational purposes, and to advise the reader of the nature of the subject matter.
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Tags: estate tax, exemptions, income tax, property, Tax, tennessee, tennessee tax
Posted in Accounting, Government, Tax | 2 Comments » |
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 Talking about death can be very difficult. It is hard to face the fact that we will not always be around to take care of our family, but it is something we must plan for. It is hard enough to discuss your final wishes with your spouse, but even harder to discuss them with your child. Everyone should have a will if they own assets. Although they are single and have no children, a will is necessary in order for them to direct who “gets their stuff.” All of those years of gifts from grandparents and your own gifting through the years may have accumulated enough to help with the down payment on a house or even more. While most young adults do not have estates large enough to be taxable for federal or state purposes, their parents may have estates that exceed the exemption amount. Therefore it will be beneficial for a young adult to have a will.
If you do not have a will, the State of Tennessee has a will for you. For a single person, the first relatives listed to receive their assets are their parents. If the parents are already in an estate or inheritance tax situation this could compound their estate planning issues. A simple plan would help in this situation merely stating that they leave their estate to their parents. However, if the parents do not survive the young adult then the estate would be left to their siblings, in trust until they have obtained the age of majority or until they have reached the point of being financially responsible.
If the parents are living at the time of the young adult’s death, they can either accept the assets as directed in the will or they can disclaim the assets within nine months and the assets will pass to the next beneficiaries in the will, the siblings. Once the young adult is married, they can obviously change their will to reflect their wishes to take care of the new person in their life.
There are a lot of things on a young adult’s mind and discussing their demise is not normally one of them. As parents, it is our responsibility to not only teach them moral and financial responsibilities, but also to teach them about the need to plan for every aspect of the circle of life.
There are as many different ways to structure your will as there are individuals. Never try to be your own legal counsel. Contact an experienced attorney to draft your documents and this will give you the peace of mind to know that your wishes will be carried out as you planned.
Eva Pulley - CPA
Price CPAs, PLLC
3825 Bedford Ave. Suite 202
Nashville, TN 37215
615.385.0686
Price CPA’s is a Nashville based CPA firm that provides professional services to you in both your personal and business life. We’ll help you determine the right tools and information necessary to help you succeed.
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Tags: Accounting, death, estate planning, legal, old, will, writing a will, young
Posted in Financial Planning, Miscellaneous | No Comments » |
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Often times we find that performing an audit of a company’s financial statements is not necessary in order to accomplish the objectives of its interested parties. Banks, shareholders and potential investors typically have specific financial condition, operational results requirements, or areas of identified risk for which they want some degree of assurance. Depending upon your company’s situation, there are less costly alternatives to the traditional financial statement audit or review. Some alternatives to be considered:
- Audit, review or compilation of a specified element
- Consulting engagement
- Agreed-Upon Procedures (AUP)
Price CPAs frequently recommends AUP engagements when specified third parties are in need of additional credibility regarding a company’s specific financial or nonfinancial data. From an assurance standpoint, AUP engagements are subject to the attestation standards issued by the AICPA. An AUP engagement is very efficient due to the fact that the only procedures performed are specifically defined by the specified parties and the CPA prior to any work being performed. The CPA’s report findings are specific to the procedures they were engaged to perform. The sufficiency of the AUP procedures is the responsibility of the specified parties, however, if you are unsure of the procedures needed, we will gladly provide suggestions.
Please contact us if your company is being required to provide audited or reviewed financials. It is quite possible that the needs of the users of your financial statements can be met with a less costly alternative. Communication with all interested parties on the front-end would allow us to assist you with establishing the specific level of service that is needed. Furthermore, if an AUP engagement is appropriate, we suggest an initial meeting to clear up any ambiguities and suggest alternatives with more efficient or less costly procedures that could be substituted.
Alan Webb - Certified CPA & CVA.
Price CPAs, PLLC
3825 Bedford Ave. Suite 202
Nashville, TN 37215
615.577.9704
Price CPA’s is a Nashville based CPA firm that provides professional services to you in both your personal and business life. We’ll help you determine the right tools and information necessary to help you succeed.
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Tags: Accounting, advice, Auditing, compilation, consulting engagement, Nashville accounting, review
Posted in Auditing, Financial Planning | 1 Comment » |
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The President recently signed into law the “Hiring Incentives to Restore Employment Act of 2010” (the 2010 HIRE Act), the centerpiece of which is a payroll tax holiday and up-to-$1,000 tax credit for businesses that hire unemployed workers. Here’s an overview of these new hiring incentives.
To help stimulate the hiring of workers by the private sector, the new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer’s 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to Social Security taxes—by the end of the year. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
Workers hired after the date of introduction of the legislation (Feb. 3, 2010) are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after the date of the new law’s enactment receive the exemption for payroll taxes.
Some additional features of the new hiring incentive:
1. The tax benefit of the new incentive is immediate. It puts money into a business’ cash flow immediately, since the tax is simply not collected in the first place.
2. The tax benefit generally applies only to private-sector employment, including nonprofit organizations—public sector jobs are generally not eligible for either benefit. However, employment by a public higher education institution would qualify.
3. There is no minimum weekly number of hours that the new employee must work for the employer to be eligible, and there is no maximum on the dollar amount of payroll taxes per employer that may be forgiven.
4. For workers that would otherwise be eligible for the “Work Opportunity Tax Credit,” the employer must select one benefit or the other for 2010—no double dipping.
5. An employer can’t claim the new tax breaks for hiring family members.
6. A worker who replaces another employee who performed the same job for the employer is not eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
7. For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
8. The incentive is not biased towards either low-wage or high-wage workers. Under the measure, a business saves 6.2% on both a $40,000 worker and a $90,000 worker.
9. The payroll tax holiday does not apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the fist calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.
10. The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2% of the wages paid by the taxpayer to the retained worker during the 52-consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker’s wages during the 52-consecutive-week period exceed $16,129.03. However, the credit is not available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers).
Need more information on this Act? Please contact Mark Fly at Price CPA’s. You may contact him by calling 615-385-0686 or sending him an email: mark (at) pricecpas.com
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Tags: 2010, Act, flood, HIRE Act, Nashville accounting, Price Cpas, unemployed
Posted in Uncategorized | 18 Comments » |
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Due to the recent flooding in Nashville, we have closed the office until all repairs have been made. Our hopes are to be up and running by Friday morning. We’ll keep you updated through our Facebook page and here on the blog. Please keep in touch and don’t hesitate to send us an email for any questions you might have regarding the office closing.
Thanks for your patience.
- Price CPA’s
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Tags: closing, flooding, office
Posted in Uncategorized | No Comments » |
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