Tax Relief Blog

Licensed real estate agent's activities count for PAL qualifying real estate professionals' exception

Agarwal, TC Summary Opinion 2009-29

Mike Habib, EA Tax Relief & Tax Problem Resolution

In a Summary Opinion, the Tax Court has held that a licensed real estate agent's activities counted for purposes of the Code Sec. 469 passive loss exception for qualifying real estate professionals. She didn't have to be licensed as a real estate agent to be treated as engaged in the real estate brokerage trade or business. Because she met the material participation standard for qualifying real estate professionals, the agent and her husband could claim losses they incurred on two rental properties they owned.

Background. Under Code Sec. 469(c)(1), the passive activity loss disallowance rules apply to any trade or business in which the taxpayer does not materially participate. A taxpayer is treated as materially participating in an activity if he meets at least one of the seven tests in Reg. § 1.469-5T. In general, any rental activity is per se a passive activity regardless of the taxpayer's participation in the activity. (Code Sec. 469(c)(2)) However, the Code Sec. 469(c)(2) per se rule for rental activities doesn't apply to a qualifying real estate professional. A taxpayer qualifies as such for a particular tax year if:

(1) more than half of the personal services that he performs during that year are performed in real property trades or businesses in which he materially participates; and

(2) he performs more than 750 hours of services during that tax year in real property trades or businesses in which he materially participates. (Code Sec. 469(c)(7)(B))

Observation: A taxpayer who is a qualifying real estate professional isn't automatically entitled to treat a real estate rental activity as non-passive. He must meet the general material participation standard with respect to that activity in order to use its losses or credits to offset non-passive activity income.

The term "real property trade or business" is defined as "any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business." (Code Sec. 469(c)(7)(C)) In determining whether a taxpayer meets the material participation standard, the participation of his spouse is taken into account. (Code Sec. 469(h)(5))

Facts. During 2001 and 2002, Mr. and Mrs. Agarwal owned two rental properties. Mr. Agarwal worked full-time as an engineer and his wife worked full time as a real estate agent for a brokerage firm under an independent contractor arrangement. For those years, Mrs. Agarwal was licensed as a real estate agent only under state law (), not as a broker. Together the spouses spent approximately 170 hours managing one of their rental properties and approximately 170 hours managing the other rental property. They were the only persons who managed their rental properties. Mrs. Agarwal spent a total of 1,400 and 1,600 hours managing the couple's rental properties and selling real estate in 2001 and 2002, respectively. On their Schedule E for 2001, they claimed a $40,000 loss from their rental properties; for 2002, they claimed a $19,600 loss.

IRS disallowed the losses on the ground that Mrs. Agarwal was a licensed real estate agent, not a licensed real estate broker. It argued that under California law, she couldn't be engaged in a brokerage trade or business, and therefore, was not engaged in a real property trade or business as defined by Code Sec. 469(c)(7). Since her activities didn't count as a real property trade or business, the Agarwals didn't meet the PAL exception for qualifying real estate professionals who meet the material participation standard in Code Sec. 469(c)(7)(B). The Agarwals, on the other hand, maintained that Mrs. Agarwal was in the real property trade or business because as an agent she brought together buyers and sellers.

Real estate agent's activities count for PAL real estate exception. The Tax Court found that Congress is presumed to have defined the term "brokerage" in its common or ordinary meaning, and that for PAL purposes, the "business" of a real estate broker includes, but is not limited to:

(1) selling, exchanging, purchasing, renting, or leasing real property; (2) (2) offering to do the activities in (1), above; (3) negotiating the terms of a real estate contract; (4) listing of real property for sale, lease, or exchange; or (5) procuring prospective sellers, purchasers, lessors, or lessees.

Whether Mrs. Agarwal is characterized as a broker or a salesperson for State purposes was irrelevant for federal income tax purposes, the Tax Court said. Rather, the test is whether she was engaged in "brokerage" within the meaning of Code Sec. 469. Consistent with her real estate salesman's license and pursuant to her contract with the brokerage firm, Mrs. Agarwal was engaged in "brokerage"; i.e., she sold, exchanged, leased, or rented real property and solicited listings. Therefore, she was engaged in a "brokerage" trade or business within the meaning of Code Sec. 469(c)(7).

The Tax Court concluded that because Mrs. Agarwal owned an interest in rental property, performed more than one-half of her personal services in real property trades or businesses in which she materially participated, and performed more than 750 hours of services in real property trades or businesses in which she materially participated, she was a qualifying real estate professional for PAL purposes. Because she materially participated with respect to each rental property owned by the Agarwals, they were entitled to deduct their 2001 and 2002 Schedule E losses.

Get tax relief and resolve your tax problems by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Keywords: real estate agent tax problems, real estate tax relief, realtor passive losses, realtor tax problems, realtor tax relief, real estate passive activity losses, real estate agent tax help

IRS has a check for you

Mike Habib, EA Tax Relief & Tax Problem Resolution

IR-2009-16, March 3, 2009

WASHINGTON -- Unclaimed refunds totaling approximately $1.3 billion are awaiting over a million people who did not file a federal income tax return for 2005, the Internal Revenue Service announced today. However, to collect the money, a return for 2005 must be filed with the IRS no later than Wednesday, April 15, 2009.

Especially in these tough economic times, people should not lose out on money that is rightfully theirs," said IRS Commissioner Doug Shulman. "People should check their records, especially if they had taxes withheld from their paychecks but were not required to file a tax return. They may be leaving money on the table, including valuable tax credits that can mean even more money in their pockets."

The IRS estimates that half of those who could claim refunds for tax year 2005 would receive more than $581. Some individuals may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury. For 2005 returns, the window closes on April 15, 2009. The law requires that the return be properly addressed, postmarked and mailed by that date. There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2005 refund that their checks will be held if they have not filed tax returns for 2006 or 2007. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.

By failing to file a return, individuals stand to lose more than refunds of taxes withheld or paid during 2005. Many low-income workers may not have claimed the Earned Income Tax Credit (EITC). Generally, unmarried individuals qualified for the EITC if in 2005 they earned less than $35,263 and had more than one qualifying child living with them, earned less than $31,030 with one qualifying child, or earned less than $11,750 and had no qualifying child. Limits are slightly higher for married individuals filing jointly.

Current and prior year tax forms and instructions are available on the Forms and Publications web page of IRSFORM (1-800-829-3676). Information about the Earned Income Tax Credit and how to claim it is also available on IRS.gov. Taxpayers who need help also can call the toll-free IRS help line at 1-800-829-1040.

How small businesses can take maximum advantage of the new longer 2008 NOL carryback

Mike Habib, EA Tax Relief & Tax Problem Resolution

The American Recovery and Reinvestment Act of 2009, signed into law on Feb. 17, 2009 ( P.L. 111-5 , the "Recovery Act") allows qualifying small business to choose a three- four- or five-year net operating loss (NOL) carryback period for certain losses instead of the usual two-year period. This article explains the details of this new provision and the planning that should be undertaken to ensure that a qualifying business chooses the carryback period that will yield maximum tax benefits for the business, taking into account the carryback itself and its tax picture for this year and previous years.

Background. A net operating loss (NOL) is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. The loss can be deducted, through an NOL carryback or carryover, in another tax year in which gross income exceeds business deductions.

In general, NOLs may be carried back two years and forward 20 years. The NOL is first carried back to the earliest tax year for which it's allowable as a carryback or a carryover, and is then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward.

Different rules apply for certain types of losses. For example, a three-year carryback is allowed for an eligible loss, including an individual's loss from casualty or theft and a farm or small business loss attributable to federally declared disasters. A five-year carryback is allowed for a farming loss, a qualified disaster loss, and certain amounts related to specified disasters.

New law. For NOLs arising in tax years ending after Dec. 31, 2007, the Recovery Act permits small businesses to elect to increase the NOL carryback period for an applicable 2008 NOL (the "applicable NOL") from 2 years to any whole number of years which is more than 2 and less than 6. (Code Sec. 172(b)(1)(H), as amended by Act Sec. 1211(a))

Observation: In other words, an eligible business may elect a three-, four-, or five-year carryback period for the 2008 NOL, instead of the general two-year carryback period.

A small business for this purpose is a corporation or partnership that meets the gross receipts test of Code Sec. 448(c) (applied by substituting $15 million for $5 million) for the tax year in which the loss arose, or a sole proprietorship that would meet that test if the proprietorship were a corporation. This means any trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts (under Code Sec. 448(c), as modified) for the three-tax-year period (or shorter period of existence) ending with the tax year before the year in which the loss arose are $15 million or less.

Observation: The increased carryback period can generate a refund for a small business because it allows the taxpayer to offset income that has already been taxed. Under pre-Recovery Act law, a taxpayer couldn't use the NOL to offset the taxable income for the fifth, fourth, and third tax years preceding the NOL year, and so couldn't have received a refund of the tax paid on those amounts.

Illustration 1: ABC, Inc., an eligible small business, has an "applicable NOL" for 2008. It had taxable income for 2005 (and paid the applicable federal income tax), but not for 2006 or 2007. ABC elects a 3-year carryback for the NOL, and carries it back to 2005. The NOL wipes outs ABC's 2005 taxable income, entitling it to a refund of the tax it paid on that income. Under pre-Act law, the NOL could have been carried back only 2 years, to 2006 and 2007. Because ABC had no taxable income for either year, the carryback wouldn't have resulted in a refund. ABC would have had to wait until later years when it had taxable income to get any tax benefit from the NOL.

Recommendation: The small business should use the tentative (or "quick") carryback procedures (under which taxpayers can recover a refund attributable to an NOL carryback before IRS processes the return filed for the year the NOL arises to expedite the recovery of the refund. That way, the taxpayer won't have to wait until IRS processes the return for the NOL year to get the refund. Presumably, the taxpayer will have to indicate the increased carryback election on the claim form (Form 1045 for individuals, Form 1139 for corporations).

Observation: The key factor in deciding whether to elect to carry an NOL back three, four, or five tax years should be which election will result in the largest tax savings. Thus, if the NOL is more than or at least equal to the taxpayer's combined income for the third, fourth, and fifth years before the year in which it arose, then the loss should be carried back to the fifth year so that it can be used in all three years (see Illustration (2), below). On the other hand, if the NOL is less than the combined income for those three years, the taxpayer should try to carry it back to the year(s) in which his income was taxed at the highest rate so as to get the highest refund (see Illustration (3), below). In some cases, it may be better to not make the election because the largest tax savings will come from carrying the NOL back to the second year before the year in which the NOL arose (see Illustration (4), below).

Illustration 2: Taxpayer, a calendar-year C corporation, has an NOL of $200,000 for its 2008 tax year. It had taxable income of $50,000 in 2003, $50,000 in 2004, and $100,000 in 2005. It had taxable income of $25,000 in both 2006 and 2007. Taxpayer paid federal income taxes of $7,500 on its 2003 income, $7,500 on its 2004 income, $22,250 on its 2005 income, and $3,750 on its income for both 2006 and 2007. If Taxpayer elects to carry its 2008 NOL back five years, the NOL will completely offset its income for 2003, 2004, and 2005 ($50,000 + $50,000 + $100,000 = $200,000), and it will be entitled to a refund of $37,250 (the sum of the taxes it paid for those three years).

If Taxpayer carries the NOL back only four years, it will completely offset its income for 2004, 2005, 2006, and 2007 ($50,000 + $100,000 + $25,000 + $25,000 = $200,000), and will also result in a refund of $37,250 (the sum of the taxes paid for those four years), but it will mean that the income for 2007 will not be available to offset any NOL taxpayer may possibly have in 2009.

If Taxpayer carries the NOL back only three years, it will completely offset its income for 2005, 2006, and 2007 ($100,000 + $25,000 + $25,000 = $150,000), and $50,000 ($200,000 − $150,000) of the loss can be carried forward to 2009. However, it will result in a refund of only $29,750 (the sum of the taxes paid in those three years).

Illustration 3: Assume the same facts as in Illustration (2), except that in 2005, Taxpayer had taxable income of $300,000 on which it paid federal income taxes of $100,250. If Taxpayer elects to carry the NOL of $200,000 back five years, it will completely offset the income of $50,000 for 2003 and 2004, and $100,000 of the income for 2005. Because the income for 2005 above $100,000 is taxed at a rate of 39%, this will result in a refund of $39,000 (39% of $200,000 [$300,000 − $100,000]) for that year and a total refund of $54,000 ($7,500 for 2003, $7,500 for 2004, and $39,000 for 2005).

However, if Taxpayer carries the NOL back only three years to 2005, it will be entitled to a refund of $78,000 (39% of $200,000, the taxable income for 2005 over $100,000).

Observation: Because in Illustration (3), the income for 2003, 2004, and 2005 will not be available to offset any NOL that might arise in 2009, there is no reason to carry the NOL back before 2005 if carrying it back to that year will result in the largest tax refund.

Illustration 4: Assume the same facts as in Illustration (2), except that Taxpayer had taxable income of $300,000 in 2006. Taxpayer will get the largest refund if it does not elect to carry the NOL back beyond two years. By carrying it back to 2006, it will get a refund of $78,000 (39% of the taxable income for 2005 over $100,000). If Taxpayer elected to carry the NOL back five years, it would get a refund of only $37,250 as shown in Illustration (2). If it carries the NOL back four years, it would get a refund of $49,250 ($7,500 for 2004, $22,250 for 2005, and $19,500 [39% of $50,000] for 2006). If it elected to carry the NOL back three years, it would get a refund of $61,250 ($22,250 for 2005 and $39,000 [39% of $100,000] for 2006).

Observation: Because in Illustration (4), the income for 2006 will not be available to offset any NOL that might arise in 2009, there is no reason to carry the NOL back before 2006 if carrying it back to that year will result in the largest tax refund.

What is an "applicable 2008 NOL"? An applicable 2008 NOL is the taxpayer's NOL for:

• any tax year ending in 2008, or,
• at the taxpayer's election, any tax year beginning in 2008. (Code Sec. 172(b)(1)(H)(ii)(II))

An election under Code Sec. 172(b)(1)(H), made in the manner prescribed by IRS, must be made by the due date (including extensions) for filing the taxpayer's return for the tax year of the NOL. (Code Sec. 172(b)(1)(H)(iii)) Any such election is irrevocable. Additionally, any carryback election under Code Sec. 172(b)(1)(H) may be made only with respect to one tax year. (Code Sec. 172(b)(1)(H)(iii))

Excess interest losses. If a corporation has a corporate equity reduction transaction (a CERT, i.e., a major stock acquisition or an excess distribution) and an "excess interest loss" (i.e., interest allocable to the CERT) for a "loss limitation year," the loss is an NOL. It's subject to the regular NOL carryback and carryover rules, except that it can't be carried back to a tax year before the year in which the CERT occurred. The "loss limitation year" is generally the tax year in which the CERT occurred (the "CERT year") and each of the next two tax years.

Under the Recovery Act, if an eligible small business makes a Code Sec. 172(b)(1)(H) election to increase the carryback for an applicable 2008 NOL, then Code Sec. 172(b)(1)(E)(ii) (which defines "loss limitation year") is applied by using the whole number that is one less than the number of years the taxpayer elected as the carryback for the NOL instead of "two." (Code Sec. 172(b)(1)(H)(i)(II))

"Eligible losses." Code Sec. 172(b)(1)(F) prescribes a 3-year NOL carryback for "eligible losses," including an individual's loss from casualty or theft and a farm or small business loss attributable to federally declared disasters. The Recovery Act provides that Code Sec. 172(b)(1)(F) doesn't apply to an applicable 2008 NOL for which a small business taxpayer has made a Code Sec. 172(b)(1)(H) election. (Code Sec. 172(b)(1)(H)(i)())

Alternative tax net operating loss. An alternative tax net operating loss deduction (ATNOLD or ATNOL deduction) is allowed for alternative minimum tax () purposes instead of the regular NOL deduction.

Observation: The regular tax NOL deduction and the ATNOLD are governed by a single carryback period. Thus, the increased carryback elected for the 2008 NOL also applies for the ATNOLD in computing AMTI.

Transition rules. Act Sec. 1211(d)(2) provides that for a NOL from a tax year ending before Feb. 17, 2009:

• any election made under Code Sec. 172(b)(3) to waive the carryback period with respect to such loss may be revoked before Apr. 18, 2009 (the date which is 60 days after the Feb. 17, 2009 enactment date);
• any election to increase the carryback period under Code Sec. 172(b)(1)(H) is treated as timely made if made before Apr. 18, 2009; and
• any application for a tentative carryback adjustment under Code Sec. 6411(a) with respect to such loss is treated as timely filed if filed before Apr. 18, 2009.

Anti-abuse rules. Act Sec. 1211(c) gives IRS authority to issue rules necessary to prevent the abuse of the purposes of Act Sec. 1211, including anti-stuffing rules, anti-churning rules (including rules relating to sale--leasebacks), and rules similar to the rules under Code Sec. 1091 relating to losses from wash sales.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

GAO report says noncompliance with 1099-Misc reporting requirements contributes to the tax gap [GAO-09-238]:

Mike Habib, EA Tax Relief & Tax Problem Resolution

A "significant problem" may exist regarding the extent to which third party payers fail to submit required Form 1099-MISC information returns, the Government Accountability Office (GAO) said in a report released on Feb. 27.

According to GAO, for tax year 2005, 8% of some 50 million businesses with assets under $10 million submitted the form, but IRS cannot say how many of the remaining 92% of businesses were required to report payments and failed to do so. "If even a small share of the businesses that did not submit a 1099-MISC should have, millions of 1099-MISCs could be missing with significant amounts of unpaid taxes by payees." GAO said.

The report noted that various impediments may stand in the way of Form 1099-MISC compliance, "including complex reporting requirements and an inconvenient submission process." IRS compares what payees report on their tax returns with what payers report on Form 1099-MISCs, but the agency does not pursue all mismatches its computers discover, GAO said.

"IRS does not systematically collect information on the causes of mismatches or whether they could be prevented," GAO added.

The report is available at http://www.gao.gov/new.items/d09238.pdf

Get tax relief, IRS Tax Help and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

President's budget proposal includes funds to improve IRS:

Mike Habib, EA Tax Relief & Tax Problem Resolution

President Obama's fiscal year 2010 budget proposal, totaling $3.6 trillion, includes funding "for a robust portfolio of IRS international tax compliance initiatives," according to budget documents released on Feb. 26.

The new administration also wants "to improve the quality of taxpayers' experience when they interact with the IRS." To achieve this, the agency must improve "relationships with critical third-party stakeholders, such as tax preparers, volunteers and practitioners, as well as enhancing electronic filing capabilities."

The administration's "end goal envisions an IRS that correctly answers a taxpayer's questions the first time asked, through the most efficient and taxpayer-friendly means."

The budget outline was sparse in detail but the White House is expected to release the traditional comprehensive budget document by early April.

To access the budget, in total or by sections, go to http://www.whitehouse.gov/omb/budget/

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

How individuals are affected by tax changes in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution

The American Recovery and Reinvestment Act of 2009 (commonly referred to as the Recovery Act), which was signed into law on Feb. 17, 2009, makes a number of beneficial tax changes for individuals. However, most of them are temporary in nature, that is, unless extended by future legislation, they apply for 2009 only or in some cases for 2009 and 2010. Here's a review of the more widely applicable provisions that could have an impact on you and your family.

New Making Work Pay Credit. Individuals who work generally get a credit of up to $400 ($800 for joint filers). The credit is refundable, meaning you get it even if you owe no income tax. This change applies for 2009 and 2010. The credit is the lesser of 6.2% of your earned income or $400 ($800 on a joint return). The credit is phased out for joint filers with modified adjusted gross income between $150,000 and $190,000 and other taxpayers with modified AGI between $75,000 and $95,000.

You won't be getting a separate check from the IRS, as you did with last year's Stimulus payment. Rather, your employer will automatically adjust your withholding so that you will get a little more money in each paycheck. If you have multiple jobs, you may have to adjust your withholding so that too much is not taken out. If you are self-employed, you can effectively receive the credit in advance by reducing your estimated tax payments.

One-time $250 payment or credit for others. The Recovery Act provides a one-time payment of $250 in 2009 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. It also provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. The Making Work Payment credit is reduced by any $250 payment or credit received.

New sales tax deduction for vehicle purchases. For 2009, there is a new deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles after Feb. 16, 2009 and before Jan. 1, 2010. The deduction generally is available regardless of whether you itemize deductions on Schedule A or claim the standard deduction.

The deduction is limited to the tax on up to $49,500 of the purchase price of an eligible motor vehicle. The deduction is phased out for joint filers with modified adjusted gross income between $250,000 and $260,000 and other taxpayers with modified AGI between $125,000 and $135,000.

If you itemize and choose the option to deduct state sales taxes in lieu of state income taxes, you don't get the new deduction. This prevents you from getting a double deduction for the sales taxes on the vehicle but it also involves some tricky planning considerations because different rules apply to the optional deduction and the new deduction. For example, the new deduction but not the optional deduction is allowed against the alternative minimum tax. Additionally, the optional deduction is subject to a limitation that caps the deduction for sales tax on a motor vehicle to the general sales tax rate.

Improved first-time homebuyer credit. Last year's Housing Act included a refundable tax credit for first-time homebuyers equal to the lesser of 10% of the purchase price or $7,500 for qualifying purchases after Apr. 1, 2008 and before July 1, 2009. The credit is essentially an interest-free loan because it has to be paid back to the government over 15 years.

The Recovery Act has improved the credit for 2009 purchases by (1) eliminating the requirement to pay it back (subject to exceptions), (2) increasing the maximum credit to $8,000, and (3) making it available for purchases through November 2009.

You can treat a 2009 purchase as having been made on Dec. 31, 2008 and thus get an immediate refund when you file your 2008 taxes by the Apr. 15, 2009 filing deadline. Even if you have already filed your 2008 taxes, you can file an amended 2008 return to get the credit for a 2009 purchase.

You are considered a first-time homebuyer if you or (or your spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies.

The first time homebuyer credit, whether claimed in 2008 or 2009, phases out for individual taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000-$170,000 for joint filers).

AMT relief. In general terms, to find out if you owe alternative minimum tax (AMT), you start with regular taxable income, modify it with various adjustments and preferences (such as addbacks for property and income tax deductions and dependency exemptions), and then subtract an exemption amount (which phases out at higher levels of income). The result is multiplied by an AMT tax rate of 26% or 28% to arrive at the tentative minimum tax. You pay the AMT only if the tentative minimum tax exceeds your regular tax bill. Although it was originally enacted to make sure that wealthy individuals did not escape paying taxes, the AMT has wound up ensnaring many middle-income taxpayers. Exemption amounts were scheduled to drop and fewer tax credits were to be available to offset AMT for 2009. The Recovery Act provides AMT relief for 2009 by (1) increasing the exemption amounts above last year's levels and (2) allowing nonrefundable credits to offset AMT as well as regular tax.

College tax breaks. The Recovery Act expands tax breaks for individuals seeking a college education. For 2009 and 2010, it gives taxpayers a new "American Opportunity" tax credit of up to $2,500 of the cost of tuition and related expenses paid during the tax year. You receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year. The credit is available for the first four years of post-secondary education in a degree or certificate program. Forty percent of the credit is refundable. The credit is phased out for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers).

Section 529 Education Plans are tax-advantaged savings plans that can be used to pay qualified education expenses, including: tuition, room & board, mandatory fees and books. Under the Recovery Act, for 2009 and 2010, qualified education expenses under these plans include computer technology and equipment, as well as Internet access and related services.

Tax break for the unemployed. Unemployment compensation benefits ordinarily are fully taxable. However, under the Recovery Act, an individual does not have to pay tax on up to $2,400 in unemployment benefits received in 2009.

Limited subsidy for COBRA continuation coverage of unemployed workers. The Recovery Act provides a 65% subsidy for COBRA continuation premiums for up to 9 months for workers who have been involuntarily terminated, and for their families. This subsidy also applies to health care continuation coverage if required by states for small employers. To qualify for premium assistance, a worker must be involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009. Workers who were involuntarily terminated between Sept. 1, 2008 and Feb. 17, 2009, but failed to initially elect COBRA because it was unaffordable, must be given an additional 60 days to elect COBRA and receive the subsidy. The subsidy is not taxable when received, but higher income recipients--those with modified adjusted gross income above $125,000 ($250,000 for joint filers)--will have to pay back part or all of it at tax return time.

Refundable child credit expanded. A taxpayer receives a $1,000 tax credit for each qualifying child under the age of 17. Before the Recovery Act, this credit was refundable only to a limited extent. The Recovery Act makes the child credit refundable to a much greater extent for 2009 and 2010.

Bigger earned income tax credit (EITC). The Recovery Act makes various changes to the earned income tax credit for 2009 and 2010. These changes will result in a bigger EITC for some taxpayers. For example, in 2009, taxpayers with three or more qualifying children may claim a credit of 45% of earnings up to $12,570, resulting in a maximum credit of $5,656.50.

Increased transit and vanpool transportation fringe benefits. For months beginning on or after Mar. 1, 2009 and before Jan. 1, 2011, the Recovery Act increases the monthly exclusion for employer-provided transit and vanpool benefits from $120 to $230. This figure is adjusted for inflation each year and could go up in 2010.

Improved energy tax breaks. The Recovery Act includes a number of provisions that are designed to promote the creation and use of alternative forms of energy including these new or improved energy tax breaks for individuals:

• The Recovery Act extends the tax credit for energy-efficient improvements to existing homes through 2010 and modifies it in various ways so that a larger credit is possible after 2008.
• Under pre-Recovery Act law, individuals could claim a 30% tax credit for qualified solar water heating property (capped at $2,000), qualified small wind energy property (capped at $500 per kilowatt of capacity, up to $4,000), and qualified geothermal heat pumps (capped at $2,000). For tax years beginning after 2008, the Recovery Act removes these individual dollar caps. As a result, each of these types of improvements is eligible for an uncapped 30% credit.
• The Recovery Act modifies and increases the existing new qualified plug-in electric drive vehicle credit.
• For vehicles bought after Feb. 17, 2009 and before Jan. 1, 2012, the Recovery Act creates a new 10% nonrefundable personal credit for electric drive low-speed vehicles, motorcycles, and three-wheeled vehicles.
• For property placed in service after Feb. 17, 2009 and before Jan. 1, 2012, the Recovery Act creates a new 10% credit, up to $4,000, for the cost of converting any motor vehicle into a qualified plug-in electric drive motor vehicle.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Widow entitled to equitable spousal relief for some years

Martinez, TC Memo 2008-165

Mike Habib, EA Tax Relief & Tax Problem Resolution

The Tax Court held that a widow was entitled to equitable spousal relief for two of four tax years even though she had knowledge of her and her husband's tax liabilities, because she took steps to address their tax problems and made significant payments under an installment agreement.

The taxpayer married her husband in 1971 and they remained married until his death on 4/2/01. From 1985, the taxpayer's husband struggled with serious health issues; he stopped working in July 1995. The taxpayer was working as a secretary during this time. The couples' bank account was in her name, but her husband decided which bills to pay and when to pay them. The taxpayer did not review monthly banking statements, did not balance the checkbook, and did not pick up or open the mail. The taxpayer's husband would prepare their tax returns, show her a preliminary draft, and have her sign a blank original that he would complete and mail.

In 1988, the taxpayer and her husband had a balance due for their federal income tax that the IRS collected by levy in 1994. In 1992, they earned equivalent wages and had equivalent withholdings, but began drawing money from the taxpayer's retirement account. By 1995, they were experiencing significant problems as the taxpayer's husband stopped working, and the couple began withdrawing larger amounts of money from their retirement plans. Their tax preparer included the withdrawals in their gross income and reported a 10% additional tax for premature distributions from retirement plans.

In 1996, the taxpayer and her family moved from southern to northern California. Shortly after the move, the taxpayer learned that her husband had not filed their 1992 and 1995 tax returns. The couple hired a regional law firm that specialized in taxes to prepare the delinquent returns. By 1998 or 1999, the couple had no financial resources other than the taxpayer's paycheck, as they had exhausted their retirement accounts and emptied their after-tax investments and savings. The taxpayer's salary was in the low- to mid-thirty thousands.

Shortly before her husband's death, the taxpayer discovered shoe boxes filled with unopened letters from the IRS and the tax returns that she signed but her husband had not mailed. The taxpayer re-engaged the law firm that prepared the prior delinquent returns. The firm determined that the couple had outstanding balances for each year during 1992-2000 except for 1996, where a refund was due. The total amount due was $48,684. The firm prepared an offer-in-compromise of $1,000 to settle the entire debt, which was submitted to the IRS during the summer of 2001. The IRS indicated that it was going to reject the offer, so the taxpayer decided to enter into an installment agreement with the IRS, under which she agreed to pay $775 per month to resolve the entire debt.

The taxpayer began making installment payments in May 2002 and continued until November 2005, when she stopped because the IRS stopped sending her monthly payment coupons. In total, the taxpayer paid approximately $35,650 in installment payments. The IRS applied the couple's 1996 refund to the 1993 underpayment, and applied the installment payments in a "seemingly haphazard manner" that resulted in full payment of the balances owing for 1993, 1994, 1997, and 2000, while leaving balances due on 1992, 1995, 1998, and 1999.

The taxpayer retained a national tax preparation firm to help her prepare her 2004 return. After reviewing her records, the firm suggested that she apply for innocent spouse relief. The taxpayer completed an application, including a Form 12510, Questionnaire for Requesting Spouse, which had a worksheet for monthly income and expenses. The taxpayer reported a monthly net income of $2,636 and expenses of $2,480 (including the $775 monthly installment payment), leaving her a surplus of $156 per month. The IRS denied the taxpayer's request for innocent spouse relief.

The taxpayer timely appealed the denial to the IRS' Office of Appeals, where the Appeals officer determined that the taxpayer was in tax compliance and satisfied the threshold requirements for relief on the portion of the liability attributable to her deceased husband. The Appeals officer rejected the taxpayer's request for relief, because:

(1) The taxpayer had reason to know of the underpayment. (2) In 1999 and 2000 nearly all of the underpayments were attributable to her earnings (the officer did not have the 1998 return for review).

(3) Paying the debt would not cause the taxpayer economic hardship, because she reported a monthly surplus on her worksheet.

(4) The taxpayer's husband did not abuse her. (5) The taxpayer had no health problems.

(1) Marital status. The taxpayer's husband died before she requested relief, so this factor favored relief. (2) Economic hardship. The court said that the Appeals officer properly relied on the taxpayer's Form 12510 in determining that she would not suffer economic hardship if denied relief, because her worksheet showed a monthly surplus after paying basic living expenses and the installment payment and the taxpayer corroborated the determination. The court stated that normally its inquiry would stop there, but because Section 6015(f) required that the court take into account "all facts and circumstances," it considered the taxpayer's new Form 12510, which showed a monthly deficit of $322. The court found that the taxpayer, who already had a modest lifestyle, suffered a diminution in her financial circumstances. Considering the combination of age, education, and work situation, the court found that the taxpayer was in a precarious financial circumstance and said that the economic hardship factor was neutral.

(3) Knowledge or reason to know. The relevant standard applied when a couple accurately reported, but did not pay, balances due is whether the taxpayer requesting relief did not know and had no reason to know that her spouse would not pay the income tax liability. The court found that it was improbable that the taxpayer lacked knowledge. Specifically, sometime after the taxpayer's husband became ill, the taxpayer assumed sufficient responsibility over their delinquent tax filings so as to encourage him to seek help from a law firm. Further, the court noted that the main reason for the balances due for 1992 through 2000 was that the taxpayer had her employer withhold too little tax from her paycheck, adding that only the taxpayer, and not her husband, could have filed the withholding certificate with her employer. Because the court found that the taxpayer knew or had reason to, it found that this factor strongly disfavored relief.

(4) Legal obligation. This factor was inapplicable because the taxpayer and her deceased husband did not divorce. (5) Significant benefit. The court found that during and after her marriage, the taxpayer did not receive jewelry, luxury cars, or designer clothes, nor did she receive or otherwise own a home. Instead, the taxpayer drained her savings and retirement assets trying to support her family and help her dying husband. Thus the court found that this factor significantly favored relief.

(6) Compliance with federal tax laws. Since her husband's death, the taxpayer was in compliance with federal tax laws, making this factor neutral or in favor of relief.

(7) Abuse. Because the court found that the taxpayer was not abused, this factor was neutral. (8) Mental health. The court believed that the taxpayer was under great mental strain dealing with her dying husband while supporting her family solely on her modest wages and found that this factor strongly favored relief.

(9) Other factors. First, with respect to the 1995 tax return, the taxpayer's tax preparer included a 10% additional tax on premature retirement plan distributions, but the court believed that the taxpayer's husband was a good candidate for relief under Section 72(t)(2)(A)(iii), which provides an exception to the additional tax if the distribution was attributable to the employee's being disabled. The court added that if the original 1995 balance was reduced by removing the 10% additional tax attributable to the taxpayer's deceased husband, the IRS's application of the taxpayer's payments would have paid the entire remaining liability. Second, the court noted that the taxpayer paid $35,650 or 73% of the entire liability for 1992 through 2000, including a portion attributable to her deceased husband, which was more than her share of the liabilities for the 1992 and 1995 tax years. Third, the court noted that the 1992 and 1995 liabilities were old, particularly the 1992 liability where, oddly, the IRS applied less of the payments. Finally, the court review of the conference report accompanying the enactment of Section 6015 showed that the conferees intended to expand the circumstances in which innocent spouse relief could be made available. The court therefore concluded that the other factors strongly favored relief.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Newly revised 2008 Form 5405, First-Time Homebuyer Credit, reflects Recovery Act IR 2009-14 Mike Habib, EA Tax Relief & Tax Problem Resolution In a news release issued on Feb. 25, 2009, IRS has announced that it has posted a revised version of the 2008 Form 5405, First-Time Homebuyer Credit, to reflect recent improvements to the credit made the American Recovery and Reinvestment Act of 2009 (Recovery Act, P.L. 111-5). Pre-Recovery Act credit. Under pre-Recovery Act law, for qualifying purchases of principal residences in the U.S. after Apr. 8, 2008 and before July 1, 2009, eligible first-time homebuyers may claim a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). A taxpayer is considered a first-time homebuyer if he (or spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies. Eligible first-time homebuyers who purchase a principal residence after Dec. 31, 2008, and before July 1, 2009, may elect to treat the purchase as made on Dec. 31, 2008. For eligible purchases in 2009, a taxpayer may elect to claim the credit for 2008 or 2009 by attaching Form 5405 to the taxpayer's original or amended 2008 tax return or 2009 tax return. The first-time homebuyer credit phases out for individual taxpayers with modified AGI between $75,000 and $95,000 ($150,000-$170,000 for joint filers) for the year of purchase. The credit for new homebuyers is recaptured ratably over fifteen years, with no interest charge, beginning with the second tax year after the tax year in which the home is purchased. For each tax year of the 15-year recapture period, the credit is recaptured as an additional income tax amount equal to 6⅔% of the amount of the credit. This repayment obligation may be accelerated or forgiven under certain exceptions.

Observation: In other words, the credit for new homebuyers is the equivalent of a long-term interest-free loan from the government.

• increases the maximum homebuyer credit to $8,000. (Code Sec. 36(b))
• extends the credit so that it applies to purchases before Dec. 1, 2009. (Code Sec. 36(h))
• correspondingly, for purposes of the election to treat the purchase of a principal residence as having been made on Dec. 31, 2008, extends the last date of purchase has until Nov. 30, 2009. (Code Sec. 36(g))
• generally waives the recapture of the credit for qualifying home purchases after Dec. 31, 2008. However, if the taxpayer disposes of the home or the home otherwise ceases to be the principal residence of the taxpayer within 36 months from the date of purchase, the pre-Recovery Act rules for recapture of the credit apply. (Code Sec. 36(f)(4)(D))

Observation: Committee reports indicate that this waiver of the recapture applies without regard to whether the taxpayer elects to treat the purchase in 2009 as occurring on Dec. 31, 2008, which is allowed by Code Sec. 36(g).

Observation: Specifically, Part I C calls for the box to be checked "[i]f you are choosing to claim the credit on your 2008 return for a main home bought after December 31, 2008 and December 1, 2009." Thus, Form 5405 reflects the Recovery Act change making this option available for a main home bought Dec. 31, 2008 and before Dec. 1, 2009.

Observation: The election effectively allows eligible first-time homebuyers who make a timely purchase in 2009 to claim the credit on their 2008 returns rather than on their 2009 returns. Thus, in some cases, an individual or couple may be able to get a refund of the credit shortly after the purchase closes and use the refund to pay off a short-term bridge loan that was obtained to help with closing costs.

Observation: A taxpayer whose 2009 qualifying home purchase will be completed after the Apr. 15, 2009 due date for filing the 2008 return should considering getting an automatic six-month filing extension if he would otherwise have to pay tax by the Apr. 15 due date and he is virtually certain to complete the purchase within the extended due date. The credit will be available to offset the tax he otherwise would have had to pay by the regular due date. If the credit won't be sufficient to completely offset the tax, he will have to pay the shortfall with his extension request. This approach should not be undertaken if the home purchase could fall through.

Observation: The parenthetical language containing the $8,000 figure for 2009 purchases on the revised 2008 Form 5405 thus makes it clear that a qualifying 2009 purchaser who elects to claim the credit on his 2008 return is not limited to a maximum credit of $7,500 but rather can take advantage of the increased maximum credit of $8,000.

Observation: Inclusion of the relaxed recapture rules for 2009 purchases on the 2008 Form 5404 thus makes it clear that IRS agrees that a 2009 purchaser who elects to treat the purchase as occurring on Dec. 31, 2008 gets the benefit of the relaxed recapture rules.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

The American Recovery and Reinvestment Act of 2009 (commonly referred to as the Recovery Act), which was signed into law on Feb. 17, 2009, makes a number of beneficial changes for business. Here's a review of the more widely applicable provisions that could have an impact on you and your enterprise.

Mike Habib, EA Tax Relief & Tax Problem Resolution

Liberal expensing limits continued for another year. The Recovery Act gave 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 its cost via depreciation over a number of years. For tax years beginning in 2009, 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. Had the Recovery Act not been passed and signed into law, the dollar limits would have dropped this year to $133,000 and $530,000 respectively.

Bonus first year depreciation extended for another year, too. Bonus depreciation was supposed to go off the books for most assets placed in service after 2008. Fortunately, the Recovery Act extends for another year the ability for businesses to take an extra "bonus" depreciation deduction for the first year new assets are placed in service. The bonus first-year depreciation deduction generally equals 50% of the cost of qualified property (most types of tangible property other than buildings and their structural components, improvements to certain types of leased property, and most software) acquired and placed in service during 2009. Certain types of property with a long life, and certain types of aircraft, may be placed in service before Jan. 1, 2011, and still qualify for the 50% bonus first year depreciation allowance. Also, note that the otherwise allowable first-year depreciation deduction for business autos first placed in service in 2009 is hiked by $8,000 thanks to the Recovery Act.

Extended election to speed up recognition of accumulated AMT and R&D credits instead of claiming bonus depreciation. Many corporations are struggling and can't make good use of the bonus depreciation break. A law enacted last year gave such corporations an alternative tax break. For tax years ending after Mar. 31, 2008, corporations otherwise eligible for bonus depreciation for qualifying assets placed in service in 2008 (or 2009 for certain longer lived assets) could instead elect to accelerate recognition of part of their accumulated pre-2006 research tax credits or certain alternative minimum tax credits. The Recovery Act extends this election so that it is available for property placed in service in 2009 (or 2010 for certain longer lived assets). Please note that this alternative choice is highly specialized and requires a detailed analysis of a corporation's tax situation.

Deferred tax on debt forgiveness income when debt is repurchased. A business generally will wind up with debt discharge income if it repurchases its debt for less than the outstanding amount of the debt. For debt that's repurchased in 2009 or 2010, the Recovery Act permits the tax that's owed on such debt discharge income to be paid over five years, beginning with 2014.

Small businesses may elect longer NOL carryback period. In general, net operating losses (NOLs) may be carried back two years and forward 20 years (different rules apply for certain specialized types of losses). For NOLs arising in a tax year beginning or ending in 2008, the Recovery Act permits small businesses to elect to increase the NOL carryback period from two years to three, four, or five years. A small business for this purpose is a trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts are $15 million or less for the three-tax-year period (or shorter period of existence) ending with the tax year before the year in which the loss arose. The longer NOL carryback period gives small businesses that experienced losses the ability to get refunds of income taxes paid in earlier years. The refunds can be used to fund capital investment or other expenses.

S corporation built-in gain holding period shortened temporarily. An S corporation generally is not subject to tax; instead, it passes through its income or loss items to its shareholders, who pay tax on their pro-rata shares of the S corporation's income. However, if a business that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were "built-in" at the time of the election if the gains are recognized during a special holding period. This holding period is the first ten S corporation years. (Similar rules apply if an S corporation receives property from a C corporation in certain nontaxable transfers.) Thanks to the Recovery Act, for tax years beginning in 2009 and 2010, the special holding period is shortened to seven years.

Bigger exclusion for sale of qualified small business stock. Before the Recovery Act, individuals could exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). To qualify, a QSBS must meet a number of conditions (e.g., its gross assets can't exceed $50 million and it must meet active business requirements). Under the Recovery Act, the percentage exclusion for QSBS sold by an individual increases to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011.

Reduced estimated taxes in 2009 for individuals with small businesses. To the extent that tax isn't collected through withholding, taxpayers generally must make quarterly estimated payments of the "required annual payment." The required annual payment is the lesser of: (1) 90% of the tax shown on the return or (2) 100% of the tax shown on the preceding year's return (110% if adjusted gross income (AGI) for the preceding year exceeded $150,000). The Recovery Act provides that for a tax year beginning in 2009, the required annual payment for individuals with small businesses is the lesser of (1) 90% of the tax shown on the return for the tax year, or (2) 90% of the tax shown for the preceding tax year. An individual qualifies for this relaxed estimated tax payment rule only if: AGI on preceding year's return is less than $500,000 ($250,000 if married filing separately); and at least 50% of the gross income shown on the previous year's return was from a small trade or business (one that employed no more than 500 people, on average, during the calendar year ending in or with the preceding tax year).

More workers eligible for work opportunity tax credit (WOTC). Employers that hire workers from one or more targeted groups (e.g., long term family assistance recipients) can claim a tax credit that varies with the type of person hired. For individuals beginning work for the employer after Dec. 31, 2008, the Recovery Act creates a new targeted group for the WOTC, consisting of unemployed veterans and disconnected youth who begin work for the employer in 2009 or 2010.

Get tax relief, IRS Tax Help and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

President's FY 2010 budget will propose many major tax changes for businesses and individuals

“A New Era of Responsibility: Renewing America's Promise,” the Administration's preview of its FY 2010 budget, is available at http://www.omb.gov

Mike Habib, EA Tax Relief & Tax Problem Resolution

On Feb. 26, 2009, the Obama Administration released a document titled “A New Era of Responsibility: Renewing America's Promise.” It is the Administration's preview of its fiscal policies and planned major budgetary initiatives. In effect, it's an overview of the full FY 2010 budget expected to be released this spring.

The document reveals the major tax initiatives that the Administration will push for. These are a combination of revenue-raising “loophole closers” (most of them aimed at businesses), some favorable tax changes for businesses, higher taxes for “higher income individuals,” and tax cuts for other individuals.

The tax changes the Administration's proposes to push for include the following (in each case, the year in parenthesis indicate when the change is proposed to begin):

Tax Changes For Business

• Make the research tax credit permanent (2010).
• Expand the net operating loss carryback (2011).
• Eliminate capital gains taxation on small business (2014).
• Repeal LIFO (2012).
• Codify the economic substance doctrine (2009).
• Require information reporting for rental payments (2010).
• Tax carried interest as ordinary income (2011).
• Reinstate Superfund Taxes (2011).
• Repeal all of the following oil and gas tax breaks: expensing of intangible drilling costs; deduction for tertiary injectants; passive loss exception for working interests in oil and gas properties; manufacturing deduction for oil and gas companies; and percentage depletion (2011).

Tax Changes for Higher Income Individuals These changes would be proposed to apply to taxpayers earning over $250,000 (married) and $200,000 (single):

• Reinstate the 36% and 39.6% top tax rates (2011).
• Reinstate the personal exemption phaseout and limitation on itemized deductions (2011).
• Impose a 20% tax rate on capital gains and dividends (2010).

The Administration's document separately discusses a proposal to limit the tax rate at which higher-income individuals can take itemized deductions to 28%, with no indication of when this change would take effect. Additionally, the Administration is widely expected to propose keeping the estate tax at some level. Under current law, the estate tax won't apply for 2010, but will be reinstated, at 2001 levels, in 2011.

Other Tax Changes for Individuals

• Make permanent the Recovery Act's refundable $400/$800 “making work pay” tax credit for 2009 and 2010.
• Make permanent the Recovery Act's liberalized child tax credit rules, which under current rules apply for 2009 and 2010 only.
• Make permanent the Recovery Act's “new American opportunity tax credit” for higher education expenses, which under current rules applies for 2009 and 2010 only.
• Eliminate the Advanced Earned Income Tax Credit (2010).
• Expand the saver's credit and automatic enrollment in IRAs and 401(k)s (2011).

The Administration's document also separately discusses a proposal to establish “automatic workplace pensions, on top of and clearly outside Social Security....” Employees would be automatically enrolled in workplace pension plans (unless they opt out). Those employers not offering retirement plans would be required to enroll their employees in a direct-deposit IRA (but employees apparently would be given an opt-out option).

Get tax relief, IRS Tax Help and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Energy tax incentives in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution The recently enacted "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act) includes a package of tax incentives to encourage investments in renewable energy projects or more-efficient technologies. I'm writing to give you an overview of these new provisions. Please call our offices for details of how the new changes may affect you, your investments, or your business.

Long-term extension and modification of renewable energy production tax credit. The new legislation extends the placed-in-service date for wind facilities for three years (through December 31, 2012). It also extends the placed-in-service date through December 31, 2013 for certain other qualifying facilities: closed-loop biomass; open-loop biomass; geothermal; small irrigation; hydropower; landfill gas; waste-to-energy; and marine renewable facilities.

Temporary election to claim the investment tax credit in lieu of the production tax credit. Facilities that produce electricity from solar facilities are eligible to take a 30% investment tax credit in the year the facility is placed in service. Facilities that produce electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities are eligible for a production tax credit, payable over a ten-year period. The Act provides a temporary election to claim the investment tax credit in lieu of the production tax credit.

Business energy credit. The new law enhances the business energy credit by eliminating the cap on small wind property and repealing the basis reduction requirement for subsidized energy financing.

Energy-efficient existing homes. The new law extends the tax credits for improvements to energy-efficient existing homes through 2010. For 2009 and 2010, the amount of the tax credit is increased from 10% to 30% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements during the tax year. The property-by-property dollar caps on the tax credit are also eliminated, and an aggregate $1,500 cap applies to all property qualifying for the credit.

Residential energy property. The new law removes the dollar limitations on certain energy credits, e.g., for qualified small wind energy property ($4,000 cap); for qualified solar water heating property ($2,000 cap); and qualified geothermal heat pumps ($2,000).

Tax credits for alternative fuel pumps. The new law provides an increase for 2009 and 2010 in the 30% alternative refueling property credit for businesses (capped at $30,000) to 50% (capped at $50,000).

Credit for investment in advanced energy facilities. The new law establishes a new manufacturing investment tax credit for investment in advanced energy facilities, such as facilities that manufacture components for the production of renewable energy, advanced battery technology, and other innovative next-generation green technologies.

Vehicles. The new law provides a tax credit for purchases of plug-in electric drive vehicles ranging from $2,500 to $7,500 depending on battery capacity. The new law also restores and updates the electric vehicle credit for plug-in electric vehicles that would not otherwise qualify for the larger plug-in electric drive vehicle credit and provides a tax credit for plug-in electric drive conversion kits.

More funding for bonds. The new law authorizes additional funds for new clean renewable energy bonds and qualified energy conservation bonds.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Business tax changes in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution I'm writing to give you an overview of the key tax changes affecting business in the recently enacted "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act). Please call our offices for details of how the new changes may affect your specific business.

Extension of enhanced small business expensing (Section 179). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write off the cost of these expense in the year of acquisition in lieu of recovering these costs over time through depreciation. Last year, Congress temporarily increased the amount that small businesses could write off for capital expenditures incurred in 2008 to $250,000 and increased the phase-out threshold for 2008 to $800,000. The new law extends these temporary increases for capital expenditures incurred in 2009.

Expanded loss carryback of net operating losses for small businesses. Under pre-Act law, net operating losses (NOLs) may be carried back to the two years before the year that the loss arises and carried forward to each of the succeeding twenty years after the year that the loss arises. For 2008, the new law extends the maximum NOL carryback period from two years to five years for small businesses with gross receipts of $15 million or less.

Incentives to hire unemployed veterans and disconnected youth. Businesses are allowed to claim a work opportunity tax credit equal to 40% of the first $6,000 of wages paid to employees of one of nine targeted groups. The new law expands the work opportunity tax credit to include two new targeted groups: (1) unemployed veterans; and (2) disconnected youth. Individuals qualify as unemployed veterans if they were discharged or released from active duty from the Armed Forces during 2008, 2009 or 2010 and received unemployment compensation for more than four weeks during the year before being hired. Individuals qualify as disconnected youths if they are between the ages of 16 and 25 and have not been regularly employed or attended school in the past 6 months.

Extension of monetization of accumulated AMT and R&D credits in lieu of bonus depreciation. The new law extends the provision contained in the Foreclosure Prevention Act of 2008 and allows AMT and loss taxpayers in 2009 to receive 20% of the value of their old AMT or research and development (R&D) credits to the extent such taxpayers invest in assets that qualify for bonus depreciation.

Delayed recognition of certain cancellation of debt income. To benefit certain businesses that buy their own debt at a discount, the new law lets the businesses recognize cancellation of debt income ("CODI") over 10 years (defer tax on CODI for the first four or five years and recognize this income ratably over the following five tax years) for specified types of business debt repurchased by the business in 2009 or 2010.

Qualified small business stock. The new law increases the exclusion for gain from the sale of certain small business stock held for more than five years from 50% to 75% for stock issued after the enactment date and before 2011.

S corp holding period. The new law temporarily shortens the holding period of assets subject to the built-in gains tax from 10 years to seven years..

Repeal of IRS's built-in loss rules. The new law provides a prospective repeal of Notice 2008-83, the controversial IRS guidance which provided that if a bank recognizes a loss from the disposition of a loan or takes a bad debt deduction under the specific charge-off or reserve methods of accounting after a change in ownership, that loss or deduction will not be treated as a built in loss attributable to the pre-acquisition period.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Expanded college credit in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution The recently enacted "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act) includes a measure aimed at making college more affordable for low and moderate-income students. The new provision temporarily enlarges the Hope tax credit (renamed the American Opportunity tax credit) for students from middle-income families and partially extends this tax credit for the first time to students from lower-income families. Here are the details.

• The new law creates a new American Opportunity tax credit for 2009 and 2010, replacing and expanding the Hope tax credit for those years.
• The maximum amount of the American Opportunity tax credit is $2,500 (up from a maximum credit of $1,800 under the Hope credit). The credit is 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000, so the maximum credit of $2,500 is reached when a student has qualifying expenses of $4,000 or more.
• While the Hope credit was only available for the first two years of undergraduate education, the American Opportunity tax credit is available for up to four years.
• Under the Hope credit, qualifying expenses were narrowly defined to include just tuition and fees required for the student's enrollment. Textbooks were excluded, despite their escalating cost in recent years. The American Opportunity tax credit expands the list of qualifying expenses to include textbooks.
• The Hope credit was nonrefundable, i.e., it could reduce your regular tax bill to zero but could not result in a refund. This meant that if a family didn't owe any taxes it couldn't benefit from the credit, which prompted critics to argue that the credit was thus denied to the very families most in need of help affording college. The American Opportunity tax credit addresses this criticism to a degree by providing that 40% of the credit is refundable. This means that someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government.
• The Hope credit was not available to someone with higher than moderate income. Under the credit's "phaseout" provision, taxpayers with adjusted gross income (AGI) over $50,000 (for 2009) saw their credits reduced, and the credit was completely eliminated for AGIs over $60,000 (twice those amounts for joint filers). Under the American Opportunity tax credit, taxpayers with somewhat higher incomes can qualify, as the phaseout of the credit begins at AGI in excess of $80,000 ($160,000 for joint filers).

Enhanced first-time homebuyer credit in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution In hopes of spurring the housing industry, the recently enacted "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act) includes an enhanced tax credit for first-time homebuyers. Here are the details.

You may remember that last year's Housing Act included a tax credit giving first-time homebuyers up to a $7,500 (actually, 10% of the purchase price or $7,500, whichever is less) credit for buying a home between April 8, 2008, and July 1, 2009, with single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualifying for the full tax credit. However, despite high hopes that the credit would be effective in getting people to buy homes and thereby reduce the excessive inventory on the market, the credit is widely acknowledged to have failed in its objective. The problem, according to realtors and industry officials, was that buyers were turned off by the odd way the credit worked. While the credit functioned initially like other tax credits, reducing a person's tax liability on a dollar-for-dollar basis, it was unusual in that, unlike other federal tax credits (for example, the child credit), the credit for first-time homebuyers had to be paid back to the government ratably over a period of 15 years (or earlier if the house is sold).

So, as a practical matter, the credit was the equivalent of an interest-free loan from the government. It was the payback requirement that many in the industry felt kept potential buyers on the sidelines. Now, Congress has beefed up the credit in renewed optimism of enticing more first-time homebuyers to take the plunge. First and foremost, the new legislation scuttles the repayment requirement for homes purchased on or after January 1, 2009. The new law also extends the credit through the end of November 2009, and bumps up the maximum credit amount from $7,500 to $8,000. However, the new law retains the recapture provisions if the house is sold within three years of purchase.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

"Making Work Pay" tax credit in the American Recovery and Reinvestment Act of 2009

Mike Habib, EA Tax Relief & Tax Problem Resolution

The recently enacted "American Recovery and Reinvestment Act of 2009" (the 2009 economic stimulus act) contains a wide-ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers. The centerpiece of the tax package--and at $115 billion its single largest component--is a "Making Work Pay" tax credit of up to $400 per year for individuals, or $800 per year for couples. Here the details of this new credit:

• Eligible individuals will receive an income tax credit for two years (tax years beginning in 2009 and 2010). The new credit, like other tax credits, will reduce a person's tax liability on a dollar-for-dollar basis. Wage earners who don't earn enough to pay income taxes will be able to claim the difference as a tax refund.
• The new credit is the lesser of (1) 6.2% of an individual's earned income or (2) $400 ($800 in the case of a joint return). In other words, for individuals with earned income above roughly $6,451 ($12,902 for couples), the credit maxes out at $400 ($800 for couples). For the last half of 2009, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. That reduction goes down to about $9 per week next year.
• Nonresident aliens do not qualify for this credit. Neither do estates, trusts, or individuals who can be claimed as a dependent on someone else's return.
• The credit is available in full only if AGI (adjusted gross income, with some modifications for highly specialized income) doesn't exceed $75,000 for an individual ($150,000 if you file a joint return). The credit is phased out at a rate of two percent of the eligible individual's AGI above $75,000 ($150,000 in the case of a joint return). So no credit is allowed for individuals with AGI of $100,000 or more, or for joint filers with AGI of $200,000 or more.
• Unlike the $600 per worker lump-sum rebates issued last year, the credit can be received as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return.
• Since the credit is based on taxable wages and thus unavailable to many retired people and other whose income does not come from wages, the new law includes a one-time payment of $250 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans' Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit. Similarly, a one-time refundable tax credit of $250 is provided in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable making Work Pay credit.