Historically, the real estate lobby has been very strong against taxing a carried interest as ordinary income instead of capital gain.  I personally believe the arguments against it are more compelling than the arguments for it.  However, in politics, strange things happen as bills are negotiated because there are sometimes trades amongst the politicians that result in some seemingly unusual or unfair provisions becoming tax law.  With so many differences between the political parties, I personally think that the Carried Interest Fairness Act of 2012 proposed in February 2012 by Congressman Carl Levin will not pass.  What do you think?

If you want to contribute to this or any other CRE discussion on Twitter, follow me @KurtzCPA.  Thanks to @RetailJeff and @Michael_MBA for great conversation.

1. If a corporation, limited liability company, limited partnership and certain joint ventures or general partnerships owned Texas CRE during 2011, Texas Franchise Tax Reports are due May 15^th, 2012.
2. Extensions of time to file are permitted, but a tax payment equal to prior year’s Texas Franchise Tax or current year’s Texas Franchise Tax must be paid as the penalties are high for not doing so.
3. Reporting is required whether or not the legal entity owning Texas CRE was formed, or is registered to do business, in Texas.
4. If multiple legal entities have common ownership of more than 50%, combined Texas Franchise Tax Reports may need to be filed.
5. If an entity owning Texas CRE has gross rental income plus net capital gain(s) on sale(s) of its Texas CRE during 2011 exceeding $1,030,000, Texas Franchise Tax will be due.

Congratulations if you were a part of 2011 Texas's CRE boom.  We hope the trend continues.  If your team has any state or federal income tax related questions, feel free to give us a call at 972.383.7300.  Our goal is to help you with worry free income tax return preparation, compliance and planning services that increase cash flow.

 Late filing penalty. A $50 late filing penalty will be assessed on reports filed after the due date, regardless of whether the report is subsequently filed or any tax is due for the period covered by the late-filed report. The $50 penalty is in addition to any other penalties assessed for the reporting period.

 No-tax-due threshold. The legislature has extended the $1 million no-tax-due threshold through December 31, 2013. The Consumer Price Index adjustment requirement under Tex. Tax Code Ann.§ 171.006(b) increases the no-tax-due threshold to $1,030,000 for reports due on or after January 1, 2012, and before January 1, 2014. The threshold will be $600,000 for reports filed on or after January 1, 2014.

Compensation deduction limit. The limit on the compensation deduction is adjusted to $330,000 per person for reports originally due on or after January 1, 2012, and before January 1, 2014.

Passive entity reporting. Effective for franchise tax reports originally due on or after January 1, 2011, a passive entity that is registered, or required to be registered, with the Comptroller's Office or the Secretary of State's Office must file Form 05-163 (Franchise Tax No Tax Due Information Report) to affirm that the entity qualifies as passive for the period upon which the tax is based. An entity that qualifies as passive is not required to file an Ownership Information Report.

Extensions and mandatory EFT. An extension of time to file may be requested by an entity unable to file its annual report by the original due date. If granted, the extension for a non-EFT payor will be through November 15, 2012. The extension payment must be at least 90% of the tax that will be due with the 2012 report or 100 % of the tax reported as due on the 2011 franchise tax report provided the prior report was filed on or before May 14, 2012. The extension request must be made on Form 05-164 and must be postmarked on or before May 15, 2012. If a timely filed extension request does not meet the payment requirements, then penalty and interest will apply to any part of the 90 % not paid by May 15, 2012, and to any part of the 10 % not paid by November 15, 2012. A taxable entity that became subject to the franchise tax during the 2011 calendar year may not use the 100 % extension option.

Special provisions apply regarding filing extensions for taxpayers required to pay by EFT (mandatory EFT). The law provides for a first extension, from May 15 to August 15, and for a second extension until November 15. For 2012, mandatory EFT taxpayers who submit an extension request by May 15 have an extended due date of August 15 to file their reports or to request a second extension of time to file. If a mandatory EFT taxpayer does not request the second extension, a report filed after August 15 is not timely, and the taxpayer cannot claim the temporary credit on the 2012 report and is subject to penalty and interest. EFT payments must be initiated by 6 p.m. CST Monday, May 14, 2012, in order to be timely on Tuesday, May 15, 2012.

Combined group extensions. A combined group may only use the 100 % extension option if the combined group has lost a member or if the members of the combined group are the same as they were on the last day of the period upon which the report due in the previous calendar year was based. A combined group must timely submit Forms 05-164 and 05-165 (Franchise Tax Extension Affiliate List) along with the required payment to request an extension of time to file its report. 

As always, should you have any questions, please feel free to ask in comments or give us a call. 

Thank you,

David Kurtz

I will be speaking on Thursday, May 17^th at 3:55 PM.  We will be discussing the following topic:

Compliance Issues for US Partnerships with Foreign Partners and US Partners in Foreign Partnerships

The presentation will focus on the issues regarding foreign partnerships and foreign partners.  The IRS is focusing a large amount of its resources and efforts on foreign activities.  Therefore, it is very important that taxpayers and tax professionals involved in foreign related transactions or entities, understand all the potential issues to avoid being subject to significant penalties.

I hope to see you in Dallas on May 17 and 18 at the Westin Galleria in Dallas, Texas.  If you are going to be there, please let me know in comments or give me a call.  I would love to hear from you.

Thank you,

David Kurtz

The requirements under IRC Sec. 6038D for reporting specified foreign financial assets on Form 8938 (Statement of Foreign Financial Assets) do not replace or affect a taxpayer's obligation to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts).

The IRS posted a helpful chart at www.irs.gov/businesses/article/0,,id=255986,00.html that compares the two forms and their requirements. The chart also identifies various types of foreign assets and whether they are reportable.

Form 8938 should be considered by all Form 1040 filers and certain Form 1040NR filers (i.e. certain nonresident alien individuals) because the penalties for not filing are huge!

Thank you,

David Kurtz

Amnesty is available to taxpayers that failed to file a tax report originally due before April 1, 2012, underreported tax on a previously filed report, or do not have a permit to report and remit Texas taxes.

A taxpayer who has signed a settlement agreement or voluntary disclosure agreement before the beginning of the amnesty period is ineligible. The amnesty does not apply to filing periods under audit or identified for an audit.

The amnesty is available for all state and local taxes and fees administered by the Comptroller's office, with the exception of Public Utility Commission gross receipts assessments. City, county, metropolitan transit authority and other local sales taxes are included in the program. Amnesty also applies to International Fuel Tax Agreement (IFTA) taxes but it only covers taxes due to Texas, as shown on the IFTA tax report supplement (Form #56-102); taxes due to other states, Mexican states or Canadian provinces are not eligible.

To apply for amnesty, a taxpayer must file an original report by submitting a paper return, with “Amnesty” written across the top of the return and on the check or money order. If amending a report, the taxpayer must submit the corrected figures on a paper return, and write “Amnesty” across the top of the return and on the check or money order. If submitting a tax application and registering for the first time, the taxpayer must write “Amnesty” on the application, as well as the return and check or money order.

Returns and payments must be made payable to the Comptroller of Public Accounts and sent to: Taxpayer Amnesty, Comptroller of Public Accounts, P.O. Box 13232, Austin, Texas 78711-3232. Amnesty payments can also be made at a Comptroller field office.

The Texas taxpayer number must be included on the check or money order. Taxpayers that do not have a permit or are not registered to collect Texas taxes and fees, or do not have an account with the Comptroller's Office, must write their Federal Employer Identification number or Social Security number on the check or money order.

Installment plans are not available. To be eligible for the amnesty, a taxpayer must pay all taxes or fees due, in full, related to the amnesty returns filed.

All amnesty reports and payments must be submitted via a paper return to facilitate the waiver of penalty and interest. The return cannot be filed electronically. Neither can payment be made electronically. Taxpayers otherwise required to file and pay electronically will not be penalized.

Taxpayers that fail to pay taxes or fees owed during the amnesty period will be responsible for all taxes, fees, penalties and interest owed. Penalties and interest are determined as follows: payments from one to 30 days late result in a penalty of 5% of tax due, payments 31 to 60 days late result in a penalty of 10% of tax due, and, for payments more than 60 days late, interest accrues beginning on the 61st day after the due date in addition to penalties. An additional 50% fraud penalty can also be assessed.

Taxpayers with questions about the amnesty program can call (800) 252-1390, or visit one of the Comptroller's local field offices.

The FY2013 Greenbook Includes Policies that:

• Boost Near-Term Growth and Job Creation by: 
  • Extending the two percentage point payroll tax cut through the end of 2012.
  • Extending the 100-percent bonus depreciation provision through 2012.
  • Providing a 10-percent tax credit for new jobs and payroll increases focused on small business through 2012.
  • Providing tax credits to support domestic clean energy manufacturing.

• Provide Permanent Tax Relief for Middle-Class Families by:
  • Making the American Opportunity Tax Credit permanent, providing up to $10,000 per student over four years and $137 billion in additional higher education tax relief over the next 10 years.
  • Permanently expanding the Earned Income Tax Credit to support working families.
  • Permanently increasing the tax credit for child and dependent care by up to 75 percent.
  • Improving retirement security by providing for automatic enrollment in IRAs.

• Draw Manufacturing Investments to our Shores and Help Onshore Jobs by:
  • Providing tax incentives for locating jobs and business activity in the United States and prohibiting tax deductions for shipping jobs overseas.
  • Creating a new “Manufacturing Communities” tax credit to encourage investments in communities affected by military base closures, plant closures, and mass layoffs.   
  • Focus the domestic production activities deduction on manufacturing, with a larger deduction for advanced manufacturing activities, and disallowing the deduction for oil and other fossil fuel production.
  • Enhancing the research and experimentation (R&E) credit and making it permanent.

• Add to the 17 Small Business Tax Cuts the President has Already Signed into Law by:
  • Permanently eliminating the capital gains tax on certain small business investments.
  • Doubling the amount of currently deductible start-up expenditures. 
  • Expanding and simplifying the Small Business Health Care Tax Credit. 

• Ask the Most Fortunate to Contribute to Balanced, Credible Deficit Reduction by:
  • Allowing the 2001 and 2003 tax cuts to expire (including taxing dividends as ordinary income) for households making more than $250,000 per year.
  • Restoring the estate tax to 2009 levels. 

•  Limit Incentives to Shift Income and Assets Overseas by:
  • Limiting tax expenditures for the affluent by capping itemized deductions and certain other deductions and income exclusions at 28 percent.
  • Eliminating the carried interest loophole for hedge fund managers and other similar investment service providers. 
  • Eliminating a special depreciation loophole for corporate jets.
  • Closing loopholes and ending abuses—like transfer pricing abuses that shift intangible income and assets overseas—to produce $148 billion in savings over the next 10 years.

Thanks,

David

The “President's Framework for Business Tax Reform” says a corporate tax overhaul is necessary because of the following flaws in the current tax system:

... Today's system, which trades off a high corporate rate and a base that's narrowed by tax breaks, is uncompetitive relative to other countries, distorts business decision making, and slows economic growth.

... The complexity of today's tax rules increases compliance costs for businesses, increases enforcement costs for IRS, and invariably leads to disputes between businesses and IRS, requiring significant expenses to adjudicate these disputes.

... Industry-specific tax preferences produce a wide disparity in average tax rates across industries, resulting in a tax system that distorts investment decisions.

... Current corporate rules encourage corporations to finance themselves with debt (because interest payments are deductible) instead of equity (because corporate dividends aren't deductible). The resultant “outsize reliance” on debt financing can raise the risk of financial distress and thus raise the risk of bankruptcy.

... Large companies are increasingly avoiding corporate tax liability by organizing themselves as pass-through businesses. The ability of large pass-through entities to take advantage of preferential tax treatment has placed businesses organizing as C-corporations at a disadvantage. By allowing large pass-through entities preferential treatment, the tax code distorts choices of organizational form, which can lead to losses in economic efficiency.

... Current incentives to shift income abroad significantly erode the U.S. tax base and leads to lower corporate tax receipts.

The President's “Framework for Business Tax Reform” carries the following proposals to overhaul the corporate tax rules.

• Reduce the top corporate tax rate from 35% to 28%.
• Cut the top corporate tax rate on manufacturing income to 25% and to an even lower rate for income from advanced manufacturing activities. This would be accomplished by reforming the Code Sec. 199 domestic production activities deduction to: focus more on manufacturing activity; increase the credit to 10.7%; and increase it even more for advanced manufacturing.
• Eliminate tax breaks for specific industries “with the few exceptions that are critical to broader growth or fairness.” Tax breaks that would be targeted would include the following: last-in, first out (LIFO) accounting; tax breaks for the oil and gas industry; interest deductions allocable to life insurance policies (would be disallowed unless the contract is on an officer, director, or employee who is at least a 20% owner of the business); current rules allowing “carried interest” to be taxed at preferential capital gains rates (would be taxed as ordinary income); and special depreciation rules that allow owners of non-commercial planes to depreciate them more quickly (over five years) than commercial aircraft (over seven years).
• Revise current depreciation schedules that generally overstate the true economic depreciation of assets.
• Reduce the deductibility of interest by corporations.
• Establish greater parity between large corporations and large noncorporate counterparts.
• Require greater disclosure of annual corporate income tax payments, to improve transparency and reduce accounting gimmicks.
• Overhaul the current research tax credit, which makes businesses choose between using a complex formula to calculate their R&E credit at a 20% rate, and a much simpler approach that provides a 14% credit. The rate of the simpler credit would be increased to 17% and the credit would be made permanent to increase certainty and effectiveness.
• Extend, consolidate, and enhance key tax incentives to encourage investment in clean energy. The tax credit for production of renewable electricity would be made permanent and would be refundable.
• Subject income earned by subsidiaries of U.S. corporations operating abroad to an unspecified minimum rate of tax. This would stop the tax system from rewarding companies that move profits offshore. Thus, foreign income deferred in a low-tax jurisdiction would be subject to immediate U.S. taxation up to an unspecified minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country.
• Create a 20% income tax credit for the expenses of moving business operations back to the U.S., and disallow deductions for moving business operations abroad.
• Taxing currently the excess profits associated with shifting intangibles to low-tax jurisdictions.

Small business tax proposals. In an effort to show the tax problems of small businesses haven't been overlooked, the President's proposal calls for simplifying the tax rules that apply to them and adding incentives to help build “innovation and entrepreneurship.” Specifics include: allowing small businesses to expense up to $1 million under Code Sec. 179; allowing cash method accounting for businesses with up to $10 million in gross receipts (up from current law's $5 million); doubling the amount of currently deductible start-up costs from $5,000 to $10,000; and expanding the health insurance credit for small businesses.

Have questions or concerns?  Give us a call at 972.383.7300

Thank you,

David

If you have any questions, please give us a call or post in comments.  We are always happy to hear from you.

David Kurtz

Prior to these temporary regulations, costs were currently deductible as a repair expense as long as they were incidental in nature and neither materially added to the value of the property or appreciably prolonged its useful life.  On the other hand, costs would be capitalized if they were for permanent improvements or betterments that increased the value of the property, restored its value or use, substantially prolonged its useful life, or adapted it to a new or different use.

Some specific retained and changed rules include the following.

• Repairs:  Repairs and maintenance costs can be deducted unless otherwise required to be capitalized.  

• Rentals and leased property:  Costs to acquire a leasehold interest (e.g. lease commissions and legal costs) are amortized over the life of the lease, but leasehold improvement costs are depreciated over the applicable cost recovery period, not amortized over the life of the lease, whether incurred by the lessor or lessee.      

• Dispositions:  Retirement of a structural component of a building (e.g. roof, HVAC) that has been replaced or leasehold improvement that has been abandoned can be written off at the time of replacement or abandonment instead of continuing to be depreciated.  There may be an opportunity to go back abandoned and retired assets in prior years by filing Form 3115.        

• Compliance:  Changes to comply may be a change in accounting method, which would require filing Form 3115 and require an adjustment in the current tax year and might require IRS consent.  Additional guidance is forthcoming from the IRS and/or the U.S. Treasury.         

These new temporary regulations are comprehensive and will require significant analysis of costs incurred to acquire, produce, improve, maintain and repair real and personal property, plus deducting retired and abandoned depreciable assets.

Please let us know if you have any questions or comments, or would like to meet to discuss this in more detail.

Thank you,

David