Originally published on Passive Activities and Other Oxymorons on May 17th, 2011.
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Boston Tax Alert 2011-15, 2011-16, 2011-17, 2011-18
Since Lu Gauthier of Boston Tax Institute has given me permission to republish his newsletter there have been several released. If he keeps up the pace, this may be a regular Tuesday feature of the blog. I realize that I was a little gushy in my introductory post on BTI. I don't take any of it back. BTI gives a high quality, practice relevant seminar. Registration is easy and the pricing is a tremendous value. In the interest of full disclosure though, I do want to show you what you don't get at a BTI seminar. There is never a steamship round. As a matter of fact, you are totally on your own for lunch and frankly the break snacks are sometimes sub par.
Our thanks to Robert J. McNeill, CPA for identifying a potential IRS processing problem with the section 45R small business health credit in connection with a pass through entity!
I have an issue with the IRS on the pass through of the health care credit from a Schedule K-1. The IRS admits to having a problem matching up and allowing this credit even if the individual taxpayer is not subject to AMT. I have been instructed to send a response back to Holtsville along with the K-1 and the original Form 3800, and IRS will restore the credit in 4-6 weeks. If any of you have had a similar problem with the health insurance credit, we would be interested in hearing about it.
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In Multi-Pak Corporation v. Comm. TCM 2010-139 (06/22/10), the Tax Court disallowed $773,896 out of $2,058,000 of compensation as unreasonable for 2003. Applying the five factor test in the Elliotts case, the Tax Court concluded that a hypothetical investor would not have been satisfied with a negative return on his investment in 2003. The compensation of $2,058,000 had put Multi-Pak into a net operating loss position for 2003. By disallowing $773,896 of the compensation, the hypothetical owner of its stock would receive a 10% pre-tax return on the corporation's net equity as of year end. This case, as well as cases involving unreasonably LOW compensation, will be discussed in detail in our 1/2 day seminar entitled Unreasonable Compensation on 6/8 in Waltham. You might consider attending this seminar before attending our seminar on the NH Compensation Deduction on 6/13 in Andover now that NH is looking at federal law in resolving state compensation cases.
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The New Hampshire Department of Revenue Administration ("DRA") continues to aggressively examine the compensation level of business owners operating in "S" corporations, partnerships and limited liability companies. Beginning with the 2010 calendar year, the New Hampshire Legislature amended the Business Profits Tax statute to adopt the Federal compensation standards under IRC 162, the Treasury regulations and any Court precedent relating to reasonable compensation. Currently, the New Hampshire House of Representatives and Senate have proposed a number of bills that would re-examine the reasonable compensation deduction under the Business Profits Tax as well as the burden of proof on the taxpayer and the DRA. Compensation planning and documentation will be key factors in dealing with DRA audits. Our seminar on New Hampshire Taxation of Businesses & Their Owners (June 6th) will briefly discuss the applicable reasonable compensation standards and our seminar on New Hampshire Compensation Deduction and New Hampshire Combined Reporting (June 13th) will discuss in detail the New Hampshire reasonable compensation deduction requirements including the IRC 162 standards as they apply to reasonable compensation in New Hampshire. We will also review the status of proposed legislation affecting New Hampshire tax statutes.
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PAOO Comment - There is a sentiment out there that New Hampshire is something of a tax haven because wages are exempt and the sales tax environment is favorable. For business entities that are flow through or disregarded for federal purposes New Hampshire is probably the worse place to be at least when it comes to complexity.
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Our thanks to Phil Mann and David Fabian for the following email!
The IRS has issued new detailed guidance on Bonus Depreciation with Revenue Procedure 2011-26. One of the key elements is the new ability to elect a step down from 100% Bonus Depreciation to 50%. Another key element is the clarification of the Qualified Restaurant Property and Qualified Retail Improvement Property definitions and guidelines. These may provide tremendous tax savings opportunities and tax planning elements for you and your clients.
Bonus Depreciation was first enacted effective 9/11/01 at 30%, and has subsequently been at 50%, zero, 50% again, and up to 100%. Bonus Depreciation currently is at 100% for all original use property with a recovery period of 20 years or less placed in service after September 8, 2010. New construction must be placed in service after that date AND have a contract date after September 8, 2010.
for the first time, Rev. Proc. 2011-26 enables a taxpayer to elect a step down from 100% to 50% Bonus Depreciation for specific asset categories.
Qualified Leasehold Improvement property (QLIP) has been eligible for Bonus Depreciation as long as it meets all of the Bonus criteria. However, Qualified Restaurant Property (QRP) and Qualified Retail Improvement Property (QRIP) have been excluded from Bonus consideration.
Rev. Proc. 2011-26 now allows for Bonus Depreciation on QRP and QRIP provided they possess a "dual character" property whereby they also meet the rules of QLIP property.
MS Consultants is uniquely qualified to analyze your property for eligibility of these potential tax savings. We can also further increase your deductions via a Cost Segregation Study. The Study will maximize deductions on current year expenses by utilizing all applicable opportunities.
All of these new rules will be discussed in detail in our seminar entitled Combining Real Estate Cost Segregation Studies with Energy Incentives on June 6 in Waltham. We hope to see you there!
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If you have a CPE requirement to fulfill by June 30 or just want some good tax knowledge, be sure to check out the BTI calendar. I will be publishing future newletters on Tuesdays.
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