Above-the-Line Deduction for Educator Expenses Reinstated and Extended

Eligible elementary and secondary school teachers may claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom. Under pre-Act law, the educator expense deduction didn't apply for tax years beginning after 2009.

New law. The 2010 Tax Relief Act retroactively extends the educator expense deduction for two years so that it applies to expenses paid in incurred in tax years 2010 and 2011. (Code Sec. 62(a)(2)(D), as amended by Act Sec. 721)

State and Local Sales Tax Deduction Reinstated and Extended

Taxpayers may elect to deduct state and local general sales and use taxes instead of state and local income taxes. Under pre-Act law, this deduction was unavailable for tax years beginning after 2009.

New law. The 2010 Tax Relief Act retroactively extends this provision for two years so that taxpayers can elect to deduct state and local sales and use taxes for tax years beginning before Jan. 1, 2012. (Code Sec. 164(b)(5), as amended by Act Sec. 722)

Liberalized Rules for Qualified Conservation Contributions Reinstated and Extended

A taxpayer's aggregate qualified conservation contributions (i.e., contributions of appreciated real property for conservation purposes) are allowed up to the excess of 50% of the taxpayer's contribution base over the amount of all other allowable charitable contributions (100% for qualified farmers and ranchers), with a 15-year carryover of such contributions in excess of the applicable limitation. Under pre-Act law, these rules didn't apply to any contribution made in a tax year beginning after Dec. 31, 2009, and contributions made thereafter would be subject to the otherwise applicable 30% limit for capital gain property (50% limit for qualified farmers and ranchers).

New law. The 2010 Tax Relief Act retroactively extends for two years the 50% and 100% limitations on qualified conservation contributions of appreciated real property so that they apply to contributions made in tax years beginning before Jan. 1, 2012. (Code Sec. 170(b)(1)(E), as amended by Act Sec. 723)

Above-the-Line Deduction for Higher Education Expenses Reinstated and Extended

A taxpayer may claim an above-the-line deduction for qualified tuition and related expenses for higher education paid by that taxpayer during the tax year, subject to applicable adjusted gross income (AGI) and dollar limits. Under pre-Act law, this deduction wasn't available for tax years beginning after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends the qualified tuition deduction for two years so that it can be claimed for tax years beginning before Jan. 1, 2012. (Code Sec. 222(e), as amended by Act Sec. 724)

RIA observation: For other education-related provisions that were extended by the 2010 Tax Relief Act's sunset relief provisions, see RIA Special Study “2010 Tax Relief Act's Two-Year “Sunset Relief” Protects Key Individual Tax Breaks” in Newsstand e-mail 12/20/2010.

Nontaxable IRA Transfers to Eligible Charities Reinstated and Extended

Taxpayers who are age 70 1/2 or older can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000. These distributions aren't subject to the charitable contribution percentage limits since they are neither included in gross income nor claimed as a deduction on the taxpayer's return. Under pre-Act law, these rules didn't apply to tax years beginning after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends this provision for two years so that it's available for charitable IRA transfers made in tax years beginning before Jan. 1, 2012. (Code Sec. 408(d)(8)(F), as amended by Act Sec. 725) In addition, a taxpayer can elect for such a distribution made in January of 2011 to be treated as if it were made on Dec. 31, 2010. (Act Sec. 725(b)) Thus, a qualified charitable distribution made in Jan. 2011 is allowed to be (1) treated as made in the taxpayer's 2010 tax year and thus so allowed to count against the 2010 $100,000 limitation on the exclusion, and (2) treated as made in the 2010 calendar year and so allowed to be used to satisfy the taxpayer's minimum distribution requirement for 2010. (Committee Report)

Look-through Treatment of Certain RIC Stock in Determining Nonresidents' Gross Estate Reinstated and Extended

A certain proportion of the stock in a regulated investment company (RIC) owned by a nonresident alien decedent isn't treated as U.S. property for purposes of calculating the decedent's estate. Under pre-Act law, this provision didn't apply to decedents dying after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends this provision for two years so that it's available for decedents whose deaths occur in 2010 and 2011. (Code Sec. 2105(d)(3), as amended by Act Sec. 726)

Increase in Excludible Employer-Provided Mass Transit and Parking Benefits Extended

For 2010, an employee may exclude from income up to $230 per month in qualified employer-provided mass transit and vanpool benefits. This exclusion was previously limited to $120 per month, which created a disparity with other qualified transportation fringe benefits (such as parking) that were excludible up to $230; however, for any month beginning on or after Feb. 17, 2009 and before 2011, the monthly exclusion limit for employer-provided mass transit and vanpooling benefits was increased to $230. Under pre-Act law, the disparity was scheduled to return after Dec. 31, 2010, and mass transit and vanpool benefits extended to employees after that date would only be excludable up to $120 per month.

New law. The 2010 Tax Relief Act extends this increase in the monthly exclusion for employer-provided transit and vanpool benefits, equal to that of the exclusion for employer-provided parking benefits, through Dec. 31, 2011. (Code Sec. 132(f)(2), as amended by Act Sec. 727)

RIA observation: Based on Consumer Price Index (CPI) data, RIA has calculated that this exclusion will remain at $230 per month in 2011.

New Provision Retroactively Disregards Refunds in Determining Eligibility for Assistance from Federal and Federally Assisted Programs

New law. The 2010 Tax Relief Act adds Code Sec. 6409, which provides that for purposes of determining a taxpayer's eligibility for benefits or assistance under any federal program or federally-financed state or local program, any refunds made to the taxpayer aren't taken into account as income or resources for a 12-month period after receipt. This new provision is effective for amounts received between Dec. 31, 2009 and Dec. 31, 2012. (Code Sec. 6409, as added by Act Sec. 728)

Treatment of Mortgage Insurance Premiums as Deductible Qualified Residence Interest Extended

Mortgage insurance premiums paid or accrued by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's qualified residence are treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer's AGI. Under pre-Act law, this provision only applied to premiums paid or accrued before Jan. 1, 2011.

New law. The 2010 Tax Relief Act extends this provision for one year so that a taxpayer can deduct, as qualified residence interest, mortgage insurance premiums paid or accrued before Jan. 1, 2012. (Code Sec. 163(h)(3)(E), as amended by Act Sec. 759)

Temporary Exclusion of 100% of Gain on Certain Small Business Stock Extended

For 2010, a taxpayer may exclude all of the gain on the disposition of qualified small business stock acquired after Sep. 27, 2010 and before Jan. 1, 2011, and 75% of the gain from such stock acquired after Feb. 17, 2009 and before Sep. 28, 2010. Under pre-Act law, the exclusion would be limited to 50% of gain for stock acquired after Dec. 31, 2010.

New law. The 2010 Tax Relief Act extends this provision for one year so that taxpayers may continue to exclude 100% of gain from the disposition of qualified small business stock acquired before Jan. 1, 2012. (Code Sec. 1202(a)(4), as amended by Act Sec. 760)

Source:  Federal Tax Updates on Checkpoint Newsstand tab 12/17/2010 

Research Credit Reinstated and Extended Through 2011

The research credit equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount, (unless the taxpayer elected an alternative simplified research credit); (2) the university basic research credit (i.e., 20% of the basic research payments); (3) 20% of the taxpayer's expenditures on qualified energy research undertaken by an energy research consortium. Under pre-Act law, the research credit didn't apply for amounts paid or accrued after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends the research credit two years so that it applies for amounts paid or accrued before Jan. 1, 2012. ( Code Sec. 41(h)(1) , as amended by Act Sec. 731)

Indian Employment Credit Reinstated and Extended

The Indian employment credit is 20% of the excess, if any, of the sum of qualified wages and qualified employee health insurance costs (not in excess of $20,000 per employee) paid or incurred (other than paid under salary reduction arrangements) to qualified employees (enrolled Indian tribe members and their spouses who meet certain requirements) during the tax year, over the sum of these same costs paid or incurred in calendar year '93. Under pre-Act law, the credit didn't apply for any tax year beginning after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends the Indian employment credit for two years to tax years beginning before Jan. 1, 2012. ( Code Sec. 45A(f) , as amended by Act Sec. 732)

New Market Tax Credit Reinstated and Extended Through 2011

A new markets tax credit applies for qualified equity investments to acquire stock in a community development entity (CDE). The credit is: (1) 5% for the year in which the equity interest is purchased from the CDE and for the first two anniversary dates after the purchase (for a total credit of 15%), plus (2) 6% on each anniversary date thereafter for the following four years (for a total of 24%). Under pre-Act law, there was a $5 billion cap on the maximum annual amount of qualifying equity investments for 2009; a carryover was allowed where the credit limitation for a calendar year exceeded the aggregate amount allocated for the year, but no amount could be carried over to any calendar year after 2014.

New law. The 2010 Tax Relief Act retroactively extends the new markets tax credit two years through 2011. It provides a $3.5 billion cap applies for 2010 and 2011, but no amount can be carried over to any calendar year after 2016. (Code Sec. 45D(f), as amended by Act Sec. 733)

Differential Wage Payment Credit for Employers Reinstated and Extended Through 2011

Eligible small business employers that pay differential wages—payments to employees for periods that they are called to active duty with the U.S. uniformed services (for more than 30 days) that represent all or part of the wages that they would otherwise received from the employer—can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year. An eligible small business employer is one that: (1) employed on average less than 50 employees on business days during the tax year; and (2) under a written plan, provides eligible differential wage payments to each of its qualified employees. A qualified employee is one who has been an employee for the 91-day period immediately preceding the period for which any differential wage payment is made. Under pre-Act law, the credit was not available for differential wages paid after Dec. 31 2009.

New law. The 2010 Tax Relief Act retroactively extends the credit for two years through 2011. (Code Sec. 45P(f), as amended by Act Sec. 736)

15-Year Writeoff for Qualified Leasehold and Retail Improvements and Restaurant Property Reinstated and Extended for Two Years

Under pre-Act law, qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property that was placed in service before 2010 was included in the 15-year MACRS class for depreciation purpose—that is, it was depreciated over 15 years under MACRS.

New law. The 2010 Tax Relief Act retroactively extends the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class for two years through 2011. (Code Sec. 168(e)(3)(E), and Code Sec. 168(e)(8)(E), as amended by Act Sec. 737)

Enhanced Deduction for Food Inventory Reinstated and Extended

A C corporation may claim an enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property's appreciation, or (b) twice the property's basis, for contributions of food inventory that was apparently wholesome food, i.e., meant for human consumption and meeting certain quality and labeling standards. The enhanced contribution is also available for a taxpayer other than a C corporation, but the aggregate amount of contributions of apparently wholesome food that may be taken into account for the tax year can't exceed 10% of the taxpayer's aggregate net income for that tax year from all trades or businesses from which those contributions were made for that tax year. Under pre-Act law, this enhanced deduction didn't apply for contributions after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends the apparently wholesome food contribution rules for two years to contributions made in 2010 and 2011. (Code Sec. 170(e)(3)(C)(iv), as amended by Act Sec. 740)

Enhanced Deductions for Corporate Contributions of Books Reinstated and Extended

A C corporation may claim an enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property's appreciation, or (b) twice the property's basis, for qualified contributions of book inventory to certain public schools if donee certification requirements are met. Under pre-Act law, the special rules for book contributions did not apply to contributions made after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends the book inventory contribution rules for two years to contributions made in 2010 and 2011. (Code Sec. 170(e)(3)(D)(iv), as amended by Act Sec. 741)

Enhanced Deductions for Corporate Contributions of Computer Equipment Reinstated and Extended

A C corporation may claim an enhanced charitable contribution deduction equal to the lesser of (a) basis plus half of the property's appreciation, or (b) twice the property's basis, for certain contributions of computer technology or equipment (software, computer or peripheral equipment, and fiber optic cable) to schools or libraries for use in the U.S. for educational purposes that are related to the donee's purpose or function.

New law. The 2010 Tax Relief Act retroactively extends the enhanced computer contribution rules for two years to contributions made in tax years beginning before Jan. 1, 2012. (Code Sec. 170(e)(6)(G), as amended by Act Sec. 742)

7-Year Writeoff for Motorsport Racing Track Facilities Extended

A short 7-year cost recovery period applies to property used for land improvement and support facilities at motorsports entertainment complexes. Under pre-Act law, the short writeoff period only applies for property placed in service before Jan. 1, 2010.

New law. The 2010 Tax Relief Act retroactively extends the 7-year straight line cost recovery period for motorsports entertainment complexes for two years through 2011. (Code Sec. 168(i)(15)(D), as amended by Act Sec. 738)

Expensing Election for Costs of Film and TV Production Extended Through 2010

Taxpayers could elect to expense production costs of qualified film and television (TV) productions in the U.S. Expensing didn't apply to the part of the cost of any qualifying film or TV production that exceeded $15 million for each qualifying production. The limit was $20 million if production expenses were “significantly incurred” in certain low-income communities or isolated areas of distress. Under pre-Act law, the provision applied for qualified film and TV productions beginning before Jan. 1, 2010.

New law. The 2010 Tax Relief Act retroactively extends the expensing provision for two years through 2011. (Code Sec. 181(f), as modified by Act Sec. 744)

Expensing of Environmental Remediation Costs Reinstated and Extended Through 2010

Taxpayers could elect to treat qualified environmental remediation expenses that would otherwise be chargeable to a capital account as deductible in the year paid or incurred. To be deductible currently, such expense had to be paid or incurred in connection with the abatement or control of hazardous substances (including petroleum products) at a qualified contaminated site. Under pre-Act law, the expensing was available for expenses paid or incurred before Jan. 1, 2010.

New law. The 2010 Tax Relief Act retroactively extends the expensing provision for two year through 2011. (Code Sec. 198(h), as amended by Act Sec. 745)

Domestic Production Activities Deduction Available for Puerto Rico for Two More Years

The Code Sec. 199 domestic production activities deduction is available only if, among other conditions, the taxpayer has domestic production gross receipts (DPGR) from: (1) any sale, exchange or other disposition, or any lease, rental or license, of qualifying production property manufactured, produced, grown or extracted by the taxpayer in whole or in significant part within the U.S.; (2) any sale, exchange, etc., of qualified films produced by the taxpayer; (3) any sale, exchange or other disposition of electricity, natural gas, or potable water produced by the taxpayer in the U.S.; (4) construction activities performed in the U.S.; or (5) engineering or architectural services performed in the U.S. for construction projects located in the U.S. Under pre-Act law, for a taxpayer's first four tax years beginning after 2005 and before 2010, Puerto Rico was included in the term “U.S.” in determining DPGR, but only if all of the taxpayer's Puerto Rico-sourced gross receipts were taxable under the federal income tax for individuals or corporations.

New law. The 2010 Tax Relief Act retroactively extends the special domestic production activities rules for Puerto Rico for two years through 2011. Under the Act, the special domestic production activities rules for Puerto Rico apply for the first six tax years of a taxpayer beginning after Dec. 31, 2005 and before Jan. 1, 2012. (Code Sec. 199(d)(8)(C), as amended by Act Sec. 746)

Work Opportunity Tax Credit Extended Through 2011

The work opportunity tax credit (WOTC) allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($12,000 for qualified veterans; and $3,000 for qualified summer youth employees). Where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; it's 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages. Under pre-Act law, wages for purposes of the credit doesn't include any amount paid or incurred for an individual who began work after Aug. 31, 2011.

New law. The 2010 Tax Relief Act extends the WOTC four month to include individual who began work before Jan. 1, 2012. (Code Sec. 51(c)(4)(B), as amended by Act Sec. 757)

Two Year Extension for Subpart F Exception for Active Financing Income

Under pre-Act law, certain income from the active conduct of a banking, financing or similar business, or from the conduct of an insurance business (collectively referred to as “active financing income”), was temporarily excluded from the definition of Subpart F income, but only for tax years of foreign corporations beginning after Dec. 31, '98 and before Jan. 1, 2010, and for tax years of U.S. shareholders with or within which any such tax year of the foreign corporation ended.

New law. The 2010 Tax Relief Act extends the exclusions for active financing income for two years. Thus, this rule applies to tax years of a foreign corporation beginning before Jan. 1, 2012, and tax years of U.S. shareholders with or within which such tax years of foreign corporations end. (Code Sec. 953(e)(10) and Code Sec. 954(h)(9), as amended by Act Sec. 750)

Look-Through Rule for Payments Between Related CFCs under Foreign Personal Holding Company Income Rules Extended Two Years

Under pre-Act law, for tax years beginning before Jan. 1, 2010, dividends, interest, rents, and royalties received by one controlled foreign corporation (CFC) from a related CFC were not treated as foreign personal holding company income (FPHCI) to the extent attributable or properly allocable to non-subpart-F income, or income that was not effectively connected with the conduct of a U.S. trade or business of the payor (look-through treatment).

New law. The 2010 Tax Relief Act retroactively extends look-through treatment for related CFCs for two year. Thus, the above rule applies to tax years of a foreign corporation before Jan. 1, 2012, and tax years of U.S. shareholders with or within which such tax years of foreign corporations end. (Code Sec. 954(c)(6)(C), as amended by Act Sec. 751)

Two-Year Extension for Rule Providing That S Corporation Contributions Result in Lower Shareholder Basis Adjustments

Before the Pension Protection Act of 2006 (PPA), if an S corporation contributed money or other property to a charity, each shareholder took into account his pro rata share of the fair market value of the contributed property in determining his own income tax liability. The shareholder reduced his basis in his S stock by the amount of the charitable contribution that flowed through to him. The PPA amended this rule to provide that the amount of a shareholder's basis reduction in S stock by reason of a charitable contribution made by the corporation is equal to his pro rata share of the adjusted basis of the contributed property. Under pre-Act law, the PPA rule did not apply for contributions made in tax years beginning after Dec. 31, 2009.

New law. The 2010 Tax Relief Act retroactively extends the PPA rule for two years so that it applies for contributions made in tax years beginning before Jan. 1, 2012. (Code Sec. 1367(a)(2), as amended by Act Sec. 752)

Special Rule for Payments to a Charity From a Controlled Entity Reinstated and Extended

For 2006–2009, interest, rent, royalties, and annuities paid to a tax-exempt organization from a controlled entity were excluded from the unrelated business taxable income (UBTI) of the tax exempt organization. Under pre-Act law, this exclusion didn't apply to payments received or accrued after Dec. 31, 2009, and such payments were to be treated as UBTI to the extent that the payments reduce the “net unrelated income” of the controlled entity.

New law. The 2010 Tax Relief Act retroactively extends the special rule for two years to that it applies for payments received or accrued by a tax-exempt organization from Dec. 31, 2009 through Dec. 31, 2011. (Code Sec. 512(b)(13)(E)(iv), as amended by Act Sec. 747)

Qualified Zone Academy Bond Limitation Extended, and Refundable Credit Repealed

Qualified zone academy bonds are qualified tax credit bonds designed to allow low-income populations to save on interest costs associated with public financing school renovations, repairs, and teacher training. For 2010, the national bond volume limitation on qualified zone academy bonds was $1.4 billion. Under pre-Act law, except for carryovers of unused issuance limitations, the limit for years after 2010 was zero.

New law. The 2010 Tax Relief Act provides a $400 million national bond volume limitation for 2011. The Act also repealed the provision in Code Sec. 6341(f) allowing a bond issuer to elect to claim a payment in lieu of any tax credit otherwise allowed to the bondholder as it pertained to qualified zone academy bonds issued in 2011. (Code Sec. 54E(c)(1) and Code Sec. 6431(f)(3)(A)(iii), as amended by Act Sec. 758)

Empowerment Zone Tax Breaks Extended for Two Years

The 2010 Tax Relief Act extends for two years, through Dec. 31, 2011, the period for which the designation of an empowerment zone is in effect. (Code Sec. 1391(d) and Code Sec. 1391(h), as amended by Act Sec. 753. Thus, the Act extends for two years the empowerment zone tax incentives, including: the 20% wage credit under Code Sec. 1396; liberalized Code Sec. 179 expensing rules ($35,000 extra expensing and the break allowing only 50% of expensing eligible property to be counted for purposes of the investment based phaseout of expensing); tax-exempt bond financing under Code Sec. 1394 ; and deferral under Code Sec. 1397B of capital gains tax on sale of qualified assets sold and replaced.

For a designation of an empowerment zone, the nomination for which included a termination date which is Dec. 31, 2009, termination shall not apply with respect to that designation if the entity which made such nomination amends the nomination to provide for a new termination date in such manner as IRS may provide. (Act Sec. 753(c))

The Act also extends for two years, through Dec. 31, 2016, the period for which the percentage exclusion for qualified small business stock (of a corporation which is a qualified business entity) acquired on or before Feb. 17, 2009 is 60%. (Code Sec. 1202(a)(2), as amended by Act Sec. 753(b)) Gain attributable to periods after Dec. 31, 2016 for qualified small business stock acquired on or before Feb. 17, 2009 or after Dec. 31, 2011 is subject to the general rule which provides for a 50% exclusion. (Committee Report)

Two-Year Extension for District of Columbia Tax Breaks

The 2010 Tax Relief Act retroactively reinstates and extends the designation of the District of Columbia Enterprise Zone (DC Zone) under Code Sec. 1400(f) to apply for two years (through Dec. 31, 2011). ( Code Sec. 1400(f) , as amended by Act Sec. 754(a)) Under pre-Act law, the designation of the DC Zone ended on Dec. 31, 2009. Thus, the Act extends for two years: (1) the additional $35,000 of Code Sec. 179 expensing allowed to DC Zone businesses under Code Sec. 1397(a) (and the break allowing only 50% of expensing eligible property to be counted for purposes of the investment based phaseout of expensing); and (2) the 20% wage credit under Code Sec. 1396 for eligible DC Zone employers.

The Act also:

·         Extends DC tax-exempt financing authority under Code Sec. 1400A(a) through 2011 (Code Sec. 1400A(b), as amended by Act Sec. 754(b)) Under pre-Act law, the ability to issue such financing ended on Dec. 31, 2009. The Act also extends for two years, through December 31, 2011, the special $15 million per-user bond limitation and the relief from resident and employee requirements for certain tax-exempt bonds issued in the DC Zone. (Committee Report)

·         Extends for two years (through 2016) the zero percent capital gains rate applicable under Code Sec. 1400B to capital gains from the sale of certain qualified DC Zone assets acquired or substantially improved before Jan. 1, 2012 and held for more than five years (Code Sec. 1400B(b), as amended by Act Sec.754(c)) Under pre-Act law, the zero percent rate didn't apply to periods after Dec. 31, 2014.

·         Retroactively reinstates and extends the first-time homebuyer credit for the District of Columbia (DC) under Code Sec. 1400C so that it is available for eligible property purchased before Jan. 1, 2012 (Code Sec. 1400C(i), as amended by Act Sec. 754(c)). Under pre-Act law, the credit was not available for property purchased after Dec. 31, 2009.

Exemption for RIC Interest-Related Dividends and Short-Term Capital Gains Dividends Extended Two Years

Under pre-Act law, a regulated investment company (RIC) could designate and pay (1) interest-related dividends out of interest that would generally not be taxable when received directly by a nonresident alien individual or foreign corporations and (2) short-term capital gains dividends out of short-term capital gains. RIC dividends designated as interest-related dividends and short-term capital gains dividends were generally not taxable when received by a nonresident alien individual or foreign corporation and weren't subject to the withholding tax imposed on nonresident alien individuals and foreign corporations. These provisions didn't apply to dividends with respect to any tax year of a RIC beginning after Dec. 31, 2009.

New law. The 2010 Tax Relief Act extends for two years the rules exempting from gross basis tax and withholding tax the interest-related dividends and short term capital gain dividends received from a RIC, for dividends with respect to tax years of a RIC beginning before Jan. 1, 2012. (Code Sec. 871(k), as amended by Act Sec. 748)

Treatment of RIC As Qualified Investment Entity Reinstated and Extended for Two Years

Gain from the disposition of a U.S. real property interest (USRPI) by a foreign person is treated as income effectively connected with a U.S. trade or business and subject to tax and to Code Sec. 1445 withholding under Foreign Investment in Real Property Tax Act (FIRPTA) provisions. A USRPI does not include an interest in a domestically controlled “qualified investment entity.” Under pre-Act law, a RIC that met certain requirement could be treated as a “qualified investment entity” before Dec. 31, 2009.

New law. The 2010 Tax Relief Act extends the inclusion of a RIC within the definition of a “qualified investment entity” for two years, through 2011. (Code Sec. 897(h)(4)(A), as amended by Act Sec. 749(a)) The Act doesn't impose a withholding requirement under Code Sec. 1445 for any payment made before the enactment date, but a RIC that withheld and remitted tax under Code Sec. 1445 on distributions made after Dec. 31, 2009 and before the enactment date isn't liable to the distributee for such withheld and remitted amounts. (Act Sec. 749(b))

Miscellaneous Other Provisions Extended

The 2010 Tax Relief Act retroactively extends

• the railroad track maintenance credit for two years through 2011. (Code Sec. 45G(f), as amended by Act Sec. 734)
• the mine rescue team training credit for two years through 2011. (Code Sec. 45N(e), as amended by Act Sec. 735)
• accelerated depreciation for qualified Indian reservation property for two years for property placed in service through 2011. (Code Sec. 168(j), as amended by Act Sec. 739) 
• the election to expense 50% of the cost of advanced mine safety equipment for two years through 2011. (Code Sec. 179E(g), as amended by Act Sec. 743)
• the increase in the limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands for two years through 2011. (Code Sec. 7652(f), as amended by Act Sec. 755)
• the American Samoa economic development credit. (Sec. 119 of P.L. 109-432, as amended by Act Sec. 756)

Source:  Federal Tax Updates on Checkpoint Newsstand tab 12/17/2010 

Rev Proc 2011-12, 2011-2 IRB; IR 2010-127

A new revenue procedure carries IRS's official 2011 inflation-adjusted figures for tax provisions that were in limbo until passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act, P.L. 111-312). These include the tax rate brackets, the standard deduction amounts and the phaseout ranges for education credits.

Background. In late October, IRS issued a revenue procedure carrying a listing of official inflation-adjusted tax figures for 2011, but the listing was only partial because of uncertainty, at that point, over whether legislation would be passed extending the Bush-era tax cuts and various other tax breaks (Rev Proc 2010-40, 2010-46 IRB 663, see Federal Taxes Weekly Alert 11/04/2010). Reacting quickly to passage of the 2010 Tax Relief Act, IRS has now issued a follow-up revenue procedure carrying the 2011 figures for the inflation-adjusted tax figures not covered in Rev Proc 2010-40.

Tax rate tables. Under Sec. 101 of the 2010 Tax Relief Act, the tax rate schedules for individuals will remain at 10%, 15%, 25%, 28%, 33% and 35% for two additional years, through 2012. In addition, the size of the 15% tax bracket for joint filers and qualified surviving spouses will remain at 200% of the 15% tax bracket for individual filers through 2012. Rev Proc 2011-12, carries the official tax rate tables for 2011 for individuals as well as for estates and trusts, and reflects these 2010 Tax Relief Act changes. The tables are the same as the tax rate tables for 2011 carried in the RIA Special Study on the 2010 Tax Relief Act's sunset relief provisions (see Newsstand e-mail 12/20/2010 or Federal Taxes Weekly Alert 12/23/2010), and the same as the tax rate tables calculated earlier by RIA, based on consumer price index (CPI) figures, after the framework agreement between the President and Republicans had been announced (see Federal Taxes Weekly Alert 12/09/2010).

Standard deduction. Under Sec. 101 of the 2010 Tax Relief Act, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) remains at 200% of the standard deduction for single taxpayers for two additional years, through 2012. Rev Proc 2011-12, carries the standard deduction for marrieds for 2011 ($11,600 for joint filers, $5,800 for marrieds filing separately), as well as all of the other standard deduction figures. The figures are the same as those carried in the RIA Special Study on the 2010 Tax Relief Act's sunset relief provisions (see Newsstand e-mail 12/20/2010 or Federal Taxes Weekly Alert 12/23/2010), and the same as those previously calculated by RIA based on CPI figures (see Federal Taxes Weekly Alert 09/23/2010).

Personal exemption amount. Under Rev Proc 2011-12, the personal exemption amount for 2011 will be $3,700, identical to the figure previously calculated by RIA based on CPI figures (see Federal Taxes Weekly Alert 09/23/2010).

RIA observation: Thanks to the 2010 Tax Relief Act, personal exemptions of higher income taxpayers won't be phased out for 2011 or 2012.

Education credit phaseouts. The Code Sec. 25A American opportunity tax credit (AOTC)/Hope scholarship credit was kept in place for 2011 and 2012 by the 2010 Tax Relief Act. The AOTC/Hope credit is equal to 100% of up to $2,000 of qualified higher-education tuition and related expenses (including course materials), plus 25% of the next $2,000 of expenses paid for education furnished to an eligible student in an academic period—i.e., a maximum credit of $2,500 a year for each eligible student. The AOTC/Hope credit phases out ratably if modified adjusted gross income (MAGI) exceeds an inflation-adjusted level. For 2011, under Rev Proc 2011-12, the AOTC/Hope credit phases out ratably for taxpayers with MAGI of $80,000 to $90,000 ($160,000 to $180,000 for joint filers). These phaseout ranges are unchanged from 2010.

Under Code Sec. 25A(a)(2), taxpayers may elect a Lifetime Learning credit equal to 20% of up to $10,000 of qualified tuition and related expenses paid during the tax year. The maximum credit is $2,000. Unlike the American opportunity tax credit (AOTC)/Hope credit, which is available for the qualifying expenses of each qualifying student, the Lifetime Learning credit is available only per taxpayer.

Under Rev Proc 2011-12, for 2011, the Lifetime Learning credit phases out ratably for taxpayers with MAGI of $51,000 to $61,000 ($102,000 to $122,000 for joint filers). For 2010, the Lifetime Learning credit phased out ratably for taxpayers with modified AGI of $50,000 to $60,000 ($100,000 to $120,000 for joint filers).

RIA observation: The Lifetime Learning credit was not affected by the 2010 Tax Relief Act.

Earned income tax credit (EITC). Rev Proc 2011-12, reflects the 2010 Tax Relief Act's extension for 2011 and 2012 of various liberalized EITC rules (see Newsstand e-mail 12/20/2010 or Federal Taxes Weekly Alert 12/23/2010). For example, for 2011, the maximum EITC for low- and moderate- income workers and working families rises to $5,751, up from $5,666 in 2010. The maximum income limit for the EITC rises to $49,078, up from $48,362 in 2010. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Other figures stay the same. Thanks to the 2010 Tax Relief Act:

• The monthly limit on the value of qualified transportation benefits (parking, transit passes, etc.) provided by an employer to its employees will remain at $230 for 2011.
• The up-to-$2,500 above-the-line deduction for interest paid on qualified education loans under Code Sec. 221 will continue to be available for 2011 (and 2012). For 2011, the maximum deduction for interest paid on qualified education loans begins to phase out for taxpayers with MAGI in excess of $60,000 ($120,000 for joint returns), and is completely phased out for taxpayers with modified adjusted gross income of $75,000 or more ($150,000 or more for joint returns), unchanged from the 2010 phaseout figures. (Rev Proc 2011-12)

The text of IR-2010-127 which carries a link to Rev. Proc 2011-12 can be viewed on the IRS website at http://www.irs.gov/newsroom/article/0,,id=233465,00.html.

Source:  Federal Tax Updates on Checkpoint Newsstand tab 12/27/2010 

IR 2010-126

Many taxpayers planning to file their 2010 tax returns early have been advised by IRS to cool their heels and wait until mid- to late-February, 2011. Affected taxpayers are those planning to file Schedule A, or claim above-the-line deductions for higher-education tuition and fees or educator expenses. The culprit is Congress's late passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act, P.L. 111-312). IRS said it needs time to reprogram its computers to reflect the 2010 Tax Relief Act's changes.

Taxpayers affected by the hold-up are those claiming:

(1)  Itemized deductions on Schedule A. What's holding things up is the choice to deduct state and local general sales and use taxes instead of state and local income taxes. This election was extended for 2010 and 2011 (along with the deductions in (2) and (3), below) by the 2010 Tax Relief Act. Because of late Congressional action to enact tax law changes, IRS says anyone who itemizes and files a Schedule A will be affected.

(2)  The above-the line deduction for higher education tuition and fees. This deduction of up to $4,000 of tuition and fees paid to a post-secondary institution is claimed on Form to arrive at adjusted gross income (AGI) and is claimed on Form 8917 (Tuition and Fees Deduction). However, IRS noted that there would be no delays for taxpayers claiming other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.

(3)  The above-the-line deduction for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250.

Wait for the word. Those affected by the delay are told to wait until mid- to late-February, 2011, to file their individual returns. IRS said it will announce a specific date in the near future when it can start processing tax returns impacted by the late tax law changes.

The text of IR-2010-126 can be viewed on the IRS website at http://www.irs.gov/newsroom/article/0,,id=233449,00.html.

Source:  Federal Tax Updates on Checkpoint Newsstand tab 12/27/2010 

In re FedEx Ground Package System, Inc., (DC IN 12/13/2010)

In a multidistrict litigation (MDL) in which delivery drivers from 26 states sought determinations that they were employees of FedEx for purposes including reimbursement of business expenses and entitlement to overtime pay, a district court held that the majority of the drivers were independent contractors. The court engaged in a state-by-state analysis and concluded, that in most instances, the drivers weren't employees because FedEx didn't retain on a nationwide basis the right to either control the means by which the drivers perform their work or terminate the drivers at will.

RIA observation: As a result, FedEx won't have to withhold income taxes, withhold and pay Social Security and Medicare taxes, or pay unemployment tax on payments to the drivers. On the other hand, the drivers will be able to deduct expenses incurred in the performance of services on Schedule C without the limitations applicable to employees but will have to pay self-employment tax. Note that under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the OASDI tax rate under the SECA tax for 2011 is reduced two percentage points to 10.4% percent for self-employed individuals on self-employment income up to $106,800.

Procedure and case history. The district court noted as a preliminary matter the “procedural uniqueness” of this case, largely stemming from the fact that it was a MDL consisting of class actions with plaintiffs from 26 different states. The posture of the case also limited the scope of evidence available to the court in determining the drivers' generalized employment status, and the court's analysis was based mainly on the operating agreement and FedEx's policies and procedures. The court also stated that, given the nature of the case, it would have limited preclusive effect in subsequent proceedings involving personal injury or workers' compensation.

The district court had previously granted summary judgment in favor of FedEx in an earlier decision involving drivers from Kansas (the “Kansas decision”). Following the Kansas decision, the parties were ordered to file supplementary briefs for each of the outstanding class cases addressing why the outcome in each such case should be the same as, or different from, the Kansas decision.

The Kansas decision held that there was no “reasonable inference” that FedEx retained, on a class-wide basis, the right to control the means and methods of the drivers' work or terminate the drivers at will. In so holding, the court distinguished between retained control with respect to the results of the drivers' work and retained control as to how such work is performed. The court also found that FedEx afforded its drivers with certain entrepreneurial opportunities that were indicative of independent contractor status.

Judgment independent of the motion. In cases involving 11 of the states with pending summary judgment motions filed by the drivers, FedEx didn't file its own motions for summary judgment, arguing instead that a trial was required on the employment classification issue. However, in light of the Kansas decision, FedEx now requested that the district court enter judgment in its favor.

The district court found, under the new F.R.Civ.P. 56(f)(1) provision (effective Dec. 1, 2010) for “judgment independent of the motion,” that granting judgment in favor of FedEx: (i) was permissible so long as the drivers had notice that FedEx would seek such judgments and a reasonable opportunity to respond; and (ii) would best serve judicial economy.

Background. Under the common law rules, whether a worker is an independent contractor or employee generally is determined primarily by whether the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it. In certain instances, workers seek declarations that they are employees instead of independent contracts in order to vindicate statutorily created rights (such as overtime pay) or shift certain duties to the putative employer.

The tests used to evaluate whether a worker is an independent contractor or employee vary somewhat from state to state, but are generally comprised of a number of the following factors:

(1) The degree of control retained by the principal;

(2) whether the principal can discharge the individual;

(3) the opportunity of the individual for profit or loss;

(4) which party invests in work facilities used by the individual;

(5) whether the work is part of the principal's regular business;

(6) the permanency of the relationship;

(7) the relationship the parties believed they were creating;

(8) the provision of employee benefits;

(9) where the work is performed; and

(10) the method and regularity of payments.

In addition, certain states have other tests for determining employee status for purposes of, for example, a state law wage or worker's compensation statute. These statutes generally construe employee status more broadly than common law.

Facts. The drivers in the multistate action had entered into independent contractor agreements with FedEx to provide package delivery services, and FedEx was contractually bound to provide them with work. The drivers were responsible for acquiring their own delivery trucks and equipment, and they were permitted to hire assistants with FedEx's consent.

Generally, the drivers sought determinations that they were employees under various state laws and were accordingly entitled to reimbursement of business expenses, backpay for overtime, and other wages. Certain individual drivers and classes also alleged, among other things: fraud; breach of contract; employment discrimination; violations of a number of state laws; ERISA claims; and violations of several federal statutes, including the Fair Labor Standards Act (FLSA) and the Family Medical Leave Act (FMLA).

The drivers' argued primarily that, despite the contrary language in their agreements, FedEx exercised sufficient control over their work so as to support an employer-employee relationship. Specifically, they claimed that FedEx supervised their work, assigned them an amount of work to be completed within a certain timeframe, and could decline to renew or cancel for cause a driver's contract.

Conclusion. The district court analyzed the law of each state and the claims asserted by each class of drivers (and some individuals) and largely granted summary judgment or judgment independent of the motion, in whole or in part, in favor of FedEx that the drivers were independent contractors.

In many cases, the court found that all or many of the claims turned on the employment classification issue (or the drivers didn't assert otherwise), examined the operative employment classification test of the state, and concluded that the test was sufficiently similar to that in the Kansas decision so as to resolve those claims against the drivers.

The following distinctions were highlighted throughout the court's decision on the workers' employment classification:

·         The court based its decision on controls that were institutionally retained by FedEx, and not those which were exercised in various instances.

·         In evaluating the control retained by FedEx, the court focused on control over the manner in which the drivers performed their work. In contrast, the court said that the right to control what is ultimately to be accomplished (“results-based control”) doesn't necessarily indicate employee status.

·         The court emphasized the difference between employment classification for personal injury-type cases and others, such as this case. In personal injury cases, the term “employee” is often construed in a broader manner so as to justify holding the employer liable for the worker's injuries.

However, drivers from several states were granted partial summary judgment as to their employee status under state statutes, and their claims based on those statutes were accordingly entitled to proceed.

The court also remanded a number of the claims of individuals or certain classes that were not resolved by the employee classification issue. Remanded issues included FLSA and FMLA claims, various state law statutory claims, and employment discrimination based on age and disability. In addition, the employee status of one driver wasn't resolved because it wasn't clear whether he was a member of and thus bound by an adverse decision in respect to a separate class.

RIA Research References: For determining who is an employee, see FTC 2d/FIN ¶ H-4250; United States Tax Reporter ¶ 34,014.37; TaxDesk ¶ 535,001.

The recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. Here's a look at the key elements of the package:

• The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
  
  
• Employees and self-employed workers will receive a reduction of two percentage points in Social Security payroll tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.
  
  
• A two-year AMT “patch” for 2010 and 2011 will keep the AMT exemption near current levels and allow personal credits to offset AMT. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.
  
  
• Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.
  
  
• Businesses can write off 100% of their equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.
  
  
• Many of the “traditional” tax extenders are extended for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit.
  
  
• After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules.
  
  
• Omitted from the new law: Repeal of a controversial expansion of Form 1099 reporting requirements.
  
  
• Also not included: Extension of the Build America Bonds program, which permits state and localities to issue federally-subsidized municipal bonds.

If you would like more details about these provisions, other aspects of the new law, or other matters, please do not hesitate to contact us.