Forms 1120 and 1120S Changes for 2012: Issues for …media.straffordpub.com/products/forms-1120-and-1120s...Forms 1120 andd 1120SS Changes for 2012: Issues for Return Preparers Seminar

Forms 1120 and 1120S Changes for 2012: Issues for Return Preparers Forms 1120 and 1120S Changes for 2012: Issues for Return Preparers Understanding and Implementing New Requirements on 2011 Tax Year Forms and Schedules

TUESDAY, AUGUST 7, 2012, 1:00-2:50 pm Eastern

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F d S Ch f Forms 1120 and 1120S Changes for 2012: Issues for Return Preparers Seminar

Aug. 7, 2012

Christina Manalo, Grant [email protected]

Lauren Jansen, Grant [email protected]

Lewis Taub, McGladrey LLP [email protected]

Today’s Program

Changes To Form 1120 For 2012[Lauren Jansen and Christina Manalo]

Slide 6 – Slide 42

Changes To Form 1120S For 2012[Lewis Taub]

Slide 43 – Slide 72

CHANGES TO FORM 1120 FOR Lauren Jansen and Christina Manalo, Grant Thornton

CHANGES TO FORM 1120 FOR 2012

Agenda For This Section

Merchant card and third party payments Merchant card and third-party payments Credits

• Form 3800• HIRE Act• New Markets• Tax incentives for empowerment zones/Work Opportunityp pp y

Schedule UTP Other form changes Reportable transactions Reportable transactions Extenders §179 and bonus depreciation

© Grant Thornton LLP. All rights reserved. 7

Merchant Card AndThird-Party Payments

There is a new line on Form 1120, line 1a for 2011 for merchant card and third-party payments.

The instructions specifically indicate that for 2011, the amount should be -0-.


Merchant Card And Third-PartyPayments (Cont.)

Since the requirement has been deferred, all gross receipts and sales, including any amounts reported to the corporation on Form 1099-K (Merchant Card and Third-Party Network Payments), should be reported on line 1breported on line 1b.

Going forward, banks, credit card companies and electronic payment ill b i d ll fil iprocessors will be required to annually file aggregate transaction

reports with the IRS listing their total annual payments to individual merchants that receive more than $20,000 and conduct more than 200 transactions each yeartransactions each year.

These companies will also need to supply a copy of the 1099-K to the t


taxpayer.




There can be back-up withholding requirements for the credit card companies or other payors.

Back-up withholding is required if the payee (merchant) does not provide the payor with a correct taxpayer identification number.

Back-up withholding is postponed one additional year, to payments made after Dec. 31, 2012.


Form 3800 (General Business Credit)

In 2011, Form 3800 has been re-designed.

A new part III of the form has been added, to reflect the source of various credits.


Form 3800 (General Business Credit), Cont.

How is an eligible small business credit defined?– An eligible small business is:

• A corporation whose stock is not publicly traded,• A partnership, or • A sole proprietorship.p p p

– The average annual gross receipts of the corporation, partnership or sole proprietorship for the three-tax-year period preceding the tax year of the credit cannot exceed $50 million.y



The classification as a small business credit is important for several reasons.

F dit i d f d f 2010 b th l d AMT t– For credits carried forward from 2010, both regular and AMT tax can be offset.

– 2010 credits can be carried back five years, vs. the general b k i d fcarryback period of one year.



Part III needs to be completed before parts I and II.

P t I i th i f ti f t III Part I summarizes the information from part III.

Part II calculates the allowable credit based on the regular tax and AMT calculation.


HIRE Act Tax Credits

The Hiring Incentives to Restore Employment (HIRE) Act, enacted March 18, 2010, provided two new tax benefits to employers that hired certain previously unemployed workers.

f– Payroll tax exemption: Provided employers with an exemption from their 6.2% share of Social Security tax on wages paid to qualifying employees, for wages paid from March 19, 2010 through Dec. 31, 20102010.

– For each of these qualified employees retained for at least 52 consecutive weeks, businesses are eligible for a general business tax credit referred to as the new hire retention credit A corporationtax credit, referred to as the new hire retention credit. A corporation may be able to claim this credit for qualified employees hired after Feb. 3, 2010 and before Jan. 1, 2011.


HIRE Act Tax Credits (Cont.)

The credit is equal to the lesser of:– 6.2% of wages paid to the employee over the 52 week period, or– $1,000.

The qualified wages for the last 26 weeks must equal at least 80% of q g qwages for the first 26 weeks.

The compensation deduction is not affected by the new hire retentionThe compensation deduction is not affected by the new hire retention credit.



The taxpayer must have a W-11 (Hiring Incentive to Restore Employment Act Employee Affidavit) or similar statement on file to claim the credit.

The affidavit (or other statement) must assert that:– The individual has not been employed for more than 40 hours

during the 60-day period ending on the date employment begins.– The individual is not employed to replace another employee, unless

the other employee is separated from employment voluntarily or for cause.

– The individual is not related.



The credit is claimed on Form 5884-B and then gets reported on Form 3800.


New Markets Tax Credit(Extended Through 2011)

Purpose

• The credit was created to increase investments in low-income communities.

How is the credit calculated?

• The credit is equal to 5% of the investment in a qualified community development entity (CDE) for the first three years and 6% for the next four years. The total credit is limited to 39% of the investment over seven years.

• A qualified CDE is a domestic corporation or partnership that meets the following requirements:


g q

New Markets Tax Credit (Extended Through 2011), Cont.

How is the credit calculated? (Cont.)

• Primary mission is serving, or providing investment capital for, low-income communities or personsp

• These must be certified by the treasury secretary.

• How is the credit claimed?

• Form 8874 – can be claimed by a business or for an individual investmentinvestment

• The amount of the credit reduces the taxpayer’s basis in the investment.


New Markets Tax Credit (ExtendedThrough 2011), Cont.


Tax Incentives For EmpowermentZones (Extended Through 2011)

• Additional tax incentives are available for businesses within empowerment zones.

• Addresses can be checked at: www hud gov/crlocator to see if they• Addresses can be checked at: www.hud.gov/crlocator to see if they qualify.


Tax Incentives For EmpowermentZones (Extended Through 2011), Cont.

• Incentives for empowerment zone activity include:

• Gain rollover

• You can elect to defer the recognition of capital gain realized from the sale or exchange of employment zone assets, if new assets are purchased in the same zone within 60 days of the sale. Deferral is accomplished by reducing the basis of the replacement asset by the amount of the gain.

• Increased exclusion of gains on sale of qualified small business stock related to empowerment zones

• Additional §179 expensing

• Credit for wages paid to employees

• 20% credit against income tax liability (limited to $3,000 per employee)

• Claimed on Form 8844

• Employee needs to both live and work in an empowerment zone.

Fi i f t t b d


• Financing from tax-exempt bonds

• Election to expense environmental clean-up expenditures

Tax Incentives For EmpowermentZones (Extended Through 2011), Cont.


Work Opportunity Credit(Extended Through 2011)

• Extended through 2011 for targeted groups. Examples include:

• Families receiving Temporary Assistance for Needy Families (TANF)

• Qualified food stamp recipients

• Qualified ex-felons

• The work opportunity credit has been enhanced for companies hiringThe work opportunity credit has been enhanced for companies hiring qualified veterans from Nov. 21, 2011 through Dec. 31, 2012.

• Modified to include a credit for hiring unemployed veterans

D bl th dit f hi i lifi d t ith i t d• Double the credit for hiring qualified veterans with service-connected disabilities and who have been unemployed

• Tax-exempt organizations may be eligible for FICA tax credits for hi i lifi d t


hiring a qualified veteran.

Work Opportunity Credit (Extended Through 2011), Cont.

• How is the credit calculated?

• 40% of qualified wages paid to each employee during the first year of employment if the employee performs at least 400 hoursyear of employment, if the employee performs at least 400 hours of service

• 25% for those that worked between 120 and 400 hours, subject to i t f lifi da maximum amount of qualified wages

• State workforce agencies certify whether an individual is a member of the targeted group and therefore eligible for the WOTC.

• The deduction for salaries and wages is reduced by the amount of the credit (results in a new M-1).


( )

Work Opportunity Credit (ExtendedThrough 2011), Cont.


Schedule UTP

• Schedule UTP requires certain corporations to report their U.S. federal income tax positions for the current year on part I, and positions from prior years (including only tax years 2010 and forward) p p y ( g y y )on part II.

• Since last year (2010) did not have a prior tax year starting on or after 2010 part II of Schedule UTP did not apply2010, part II of Schedule UTP did not apply.

• However, for tax year 2011, corporations that must file Schedule UTP will have to complete part II, reporting their 2010 U.S. federal tax positions as defined on Schedule UTPpositions as defined on Schedule UTP.

• If there are no tax positions to report, then no Schedule UTP needs to be filed.


Schedule UTP (Cont.)

• Refresher: Who must file Schedule UTP?

• Corporations that satisfy ALL of the following:

• The corporation files Form 1120, 1120-F, 1120-L or 1120-PC.

• The corporation has assets of $100M or more.

• The corporation (or a related corp ) issued audited financial• The corporation (or a related corp.) issued audited financial statements reporting all or a portion of the corporation’s operations for all or a portion of the corporation's tax year.

Th ti h t iti th t t b• The corporation has one or more tax positions that must be reported on Schedule UTP.

• Note that in 2012, the asset threshold will be reduced to $50


million and it will be reduced further to $10 million for 2014.

Schedule UTP (Cont.)

• If a corporation or related party has recorded a reserve for a tax position for U.S. federal income tax purposes in an audited financial statement, then that position should be reported on Form UTP. , p p

• In addition, if the corporation did not record a reserve for that tax position because the corporation expects to litigate the position, then it should also be disclosedit should also be disclosed.

• A corporation is not required to report a tax position taken in a tax year beginning before Jan. 1, 2010.

• Further, subsequent increases or decreases to reverses with respect to a tax position do not need to be disclosed.


Schedule K, Lines 15a And 15b

Form 1120, Schedule K, Lines 15a and 15b

1099 information returns Affirming the taxpayer filed all required 1099 forms Accuracy and completeness assertion


Form 1125-A: Cost Of Goods Sold

Replaces what was formerly Schedule A – Cost of Goods Sold in prior-year forms.

Exact replica of information on Schedule A from prior years

Purpose is to calculate and deduct cost of goods sold.


Schedule A Is Now Form 1125-A

Before


Schedule A Is Now Form 1125-A (Cont.)

After


Form 1125-E, Formerly Schedule E

Provides detailed reporting of the deduction for compensation of officers

Exact replica of information on Schedule E from prior years

Same rules applypp y

Continue to complete only if total receipts exceed $500,000


Reportable Transactions:Form 8886 Update

The IRS issued final regulations on reportable and listed transaction penalties for a failure to disclose information.

Minimum penalty is $10,000

Maximum penalty is $200,000


Extenders

§179 depreciation

Bonus depreciation

Research and development tax creditp

15-year cost recovery for qualified leasehold improvements


Extenders (Cont.)

Active financing income/look-through treatment

New Markets Tax Credit

Railroad track maintenance credit

Motorsports entertainment complex accelerated recovery

Tax incentives for Empowerment Zones


Work Opportunity for unemployed veterans

§179 And Bonus Depreciation

§179 dollar limitations increased in 2011.

Bonus depreciation – 100% expensing for new assets with a recovery period of less than 20 years


What’s New In 201: IRS2GO

The new phone “app” features

Free iPhone and Android

platforms Tax updates Status Twitter and contact

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Disclaimer

In accordance with applicable professional regulations, please understand that, unless expressly stated otherwise, any written advice contained in, forwarded with, or attached to this document is not intended or written by Grant Thornton LLP to be used, and cannot be used by any person for the purpose of avoiding any penalties that may be imposed underused, by any person for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code.

This presentation addresses certain U.S. federal income tax issues only and does not address state local or other foreign tax issues These authorities are all subject to changeaddress state, local or other foreign tax issues. These authorities are all subject to change, and such change could have retroactive effect. Any such changes could thus have an effect on the validity of our conclusions. Unless specifically requested, we will not update this presentation for subsequent changes or modifications to these authorities. Further, this presentation is based on our interpretation of these authorities; another knowledgeablethis presentation is based on our interpretation of these authorities; another knowledgeable party (such as the IRS or a court hearing the same facts) might reach different conclusions.

The advice expressed in the presentation is not an opinion as to the tax consequences of any transaction


any transaction.

CHANGES IN FORM 1120S FOR Lewis Taub, McGladrey LLP

CHANGES IN FORM 1120S FOR 2012

Shareholder’s Basis In Debt Of An SShareholder’s Basis In Debt Of An S Corporation

© 2012 McGladrey LLP. All Rights Reserved.© 2012 McGladrey LLP. All Rights Reserved.

Shareholder’s Basis In Debt OfAn S Corporationp

Sect. 1366 (d)(1)- Shareholders of an S corporation may deduct their pro-

rata share of losses, to the extent of their basis in debt owed to the shareholder from the corporation.

What works and what does not work?

© 2012 McGladrey LLP. All Rights Reserved.

45

Shareholder’s Basis In Debt OfAn S Corporation (Cont.)p ( )

These don’t work:

Shareholder guarantee of an S corporation loan from a third party p y

“Economic outlay” doctrine is not met:- Circular loans with related parties (Kerzner TC Memo

2009-76)2009 76)- Broz v. Commissioner (137 TC 46 (2011))


46


These do work:

Direct loan to the S corporation from the shareholder Direct loan to the S corporation from the shareholder Importance of good records to reflect proper structure Back-to-back loans with a independent third-party lender

- Miller TC Memo 2006-125- PLR 200619021


47


June 2012: The Treasury Department has issued long-awaited proposed regulations under Sect. 1366.

Under the regulations, a shareholder need not satisfy the g , ycontroversial “economic outlay” doctrine.


48


The key requirement to obtain basis is that there must be a bona fide indebtedness from the S corporation to the shareholder.

The determination of whether indebtedness is bona fide is determined under “general Federal tax principles” and depends upon all of the “facts and circumstances.”

The regulations give several examples of when basis of a shareholder is increased by a debt of the S corporation owed y pto the shareholder. Two of these examples have facts very similar to the Kerzner and Broz cases noted earlier.


49

Is The Basis In Debt At Risk?


Is The Basis At Risk?

Sect. 465: Deductions limited to the amount at-risk.• S corporation shareholder must have both basis in debt and be at

risk with regard to the debt, in order to take S corporation losses against the loans.

• Sect. 465 applies to activities “engaged in by the taxpayer in carrying on a trade or business or for the production of income.” (Sect. 465 (c)(3))


51

Is The Basis At Risk? (Cont.)

Sect. 465(b)(1): Contribution of cash or other property- What if the property is subject to a debt?- The amount at-risk depends upon whether theThe amount at risk depends upon whether the

shareholder is personally liable for the debt.


52


Sect. 465 (b)(2)

Borrowed amounts: For purposes of this subsection, a taxpayer shall be considered at risk with respect to amounts p y pborrowed for use in an activity, to the extent that he:

(A) Is personally liable for the repayments of such amount

Riggs, TC Memo 1992-323


53


Sect. 465 (b)(2), Cont.

Borrowed amounts: For purposes of this subsection, a taxpayer shall be considered at risk with respect to amounts borrowed for use in an activity, to the extent that he:

(B) Has pledged property, other than property used in such activity, as security for such borrowed amount (to the extent of the net fair market value of the taxpayer’s interest in such property).such property).

Shareholder borrows money to invest in an S corporation, and the corporation’s assets are used as collateral for the loan.


54


Exception for qualified non-recourse financing – Sect. 465(b)(6)

Qualified non-recourse financing:Q g- Borrowed with respect to the activity of holding real estate- Borrowed from a “qualified person”

Financing to which no person is personally liable for- Financing to which no person is personally liable for repayment

- Not convertible debt.

A “qualified person” is a person who is actively and regularly engaged in the business of lending money.


55


Sect. 465(b)(3): Loans from interested/ related parties- An S corporation shareholder is not at risk for amounts

borrowed from an person who has an interest in the activity, other than as a creditor or from a person related to a person who has such an interest.

- Regulations provide that a person is considered a person with an interest other than as a creditor, if the person has either a capital interest in the activity or an interest in the net profits of the activity. (Reg. Sect. 1.465-8(b))


56


Sect. 465(b)(3): Loans from interested related parties (Cont.)- Money borrowed by an S corporation shareholder from

another shareholder; borrower is not at risk and even is personally liable for the loan!

- Money borrowed from an individual with “an interest in the net profits”: A loan to an S corporation shareholder will not be at risk with regard to a loan from an employee or independent contractor whose compensation is in part or in full determined by the net profits of the activity.


57


• Sect. 465(b)(3): Loans from interested related parties (Cont.)– Related party provisions: The shareholder is not at risk for

amounts borrowed from persons who are related to those who have “disqualifying interests.”

- A person is considered “related” if:The person is related under either Sect. 267(b) or 707(b)(1), substituting “10 percent” for “50 percent”; or,( )( ), g p p ; ,The related person and the person with the disqualifying interest are engaged in trades or businesses under common control, within the meaning of subsections (a) , g ( )and (b) of Sect. 52.


58

One Business, Many Entities


One Business, Many Entities

Morton v. U.S. 107 AFTR 2d 2011-1963- Court stated that Morton and his controlled S corporations

were one “unified business enterprise.”- Expenses of an asset owned by one entity could be p y y

deducted based on business of other entities. - All entities worked toward a common business purpose.- Distinction made between S and C corporationsDistinction made between S and C corporations


60

Reasonable Compensation In An S easo ab e Co pe sat o SCorporation?


Reasonable Compensation InAn S Corporation?An S Corporation?

Watson, P.C. v. U.S. (107 AFTR 2d 2011-311)- Watson’s (a CPA’s) compensation package:

• Salary $24,000• Distributions $175 000Distributions $175,000

Fact Sheet 2008-25: Warns S corporations not to attempt to avoid paying employment taxes by having officers treatavoid paying employment taxes by having officers treat compensation as cash distributions


62

Reasonable Compensation InAn S Corporation? (Cont.)p ( )

Reasonable compensation is an S corporation issue?? Factors to consider in determining reasonable compensation:

- Training and experience- Duties and responsibilitiesDuties and responsibilities- Time and effort devoted to the business- Dividend history

P t t h h ld l- Payments to non-shareholder employees- Timing and manner of paying bonuses to key people- What comparable businesses pay for similar services


63

Are Warrants A Second Class Of Stock?


Are Warrants A SecondClass Of Stock?

Santa Clara Valley Housing Group, Inc v. U.S. (108AFTR 2d 2011-6361)

It should be noted that the case dealt with a “shelter” transaction.

In general: Instruments obligations or arrangements are notIn general: Instruments, obligations or arrangements are not treated as a second class of stock (Reg. Sect. 1.1361-1(l)(4)(i).


65

Are Warrants A Second ClassOf Stock? (Cont.)( )

Exception to the general rule: An instrument, obligation or arrangement issued by a corporation is treated as a second class of stock if: (1) the instrument constitutes equity or ( ) q yotherwise results in the holder being treated as the owner of stock under general principles of federal tax law, and (2) a “principal purpose” of issuing the instrument is to circumvent the rights to distribution or liquidation proceeds conferred by the outstanding shares of stock (Reg. Sect.1.1361-1(l)(4)(ii)).


66

Are Warrants A Second ClassOf Stock? (Cont.)( )

Exception to the general rule: A call option, warrant or similar instrument is treated as a second class of stock if: (1) “taking into account all the facts and circumstances, the warrant is ,substantially certain to be exercised”; and (2) the warrant has a strike price substantially below the fair market value of the underlying stock on the date that the warrant is issued (Reg. Sect. 1.1361-1(l)(4)(iii)).

.


67

Recent Proposals


Recent Proposals

The small business fast track election- S corporation election would be due on the extended due

date of tax return of first year of S corporation status.- Election would be made on the corporate return.p- Attempt to codify Rev. Proc. 2007-62, allowing for an S

election “no later than six months after the due date of the S corporation return (excluding extensions) … for the first p ( g )taxable year in which the election is intended”


69

Recent Proposals (Cont.)

Attacks on S corporations in the last yearp y

- April 2011: Treasury reveals interest in a plan that would tax S corporations with receipts of more than $50 millioncorporations with receipts of more than $50 million.

- May 2011: Senate Finance Committee Chair Max Baucus (D-Mont ) states “We’re going to have to look at pass throughsMont.) states, We re going to have to look at pass-throughs. They’ve got to be treated as corporations if they earn above a certain income.


70

Recent Proposals (Cont.)

Attacks on S corporations (Cont.)

- September 2011: The “Super Committee” proposes as a revenue raiser:

A crackdown on certain service professionals who avoid Medicare and Social Security taxes by routing their self-employment income through S corporations and paying p y g p p y gthemselves a nominal salary, with remaining earnings paid as dividends

- April 2012: Self-employment provision proposed as a subsidy for student loans.


71

DisclaimerThe information contained herein is general in nature and based on authorities that are subject to change McGladrey LLP guarantees neither the

McGladrey LLP is the U.S. member of the RSM International (“RSMI”) network of independent accounting tax and consulting firms The member

McGladrey LLPauthorities that are subject to change. McGladrey LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. McGladrey LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations.

Circular 230 DisclosureThis analysis is not tax advice and is not intended or written to be used and

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Documents

Forms 1120 and 1120S Changes for 2012: Issues for …media.straffordpub.com/products/forms-1120-and-1120s...Forms 1120 andd 1120SS Changes for 2012: Issues for Return Preparers Seminar