Doug Stives
Doug Stives

2010: The Tax Year of the Good, Bad and Complicated

Truths divulged, myths debunked.

May 11, 2011
by Doug Stives, CPA

Last year was a wild year for tax legislation. Some changes are good, while others are totally ridiculous and there's more guessing necessary than ever to figure out what will happen to income and estate taxes after 2012.

Federal Tax Law

Let's start with some of the downright absurd areas of Federal Tax Law. One that always brings down the house is the "Uniform Definition of a Child" that came online in 2005 and says your brother or sister can be your child. Have you ever tried to explain this to a client or even a colleague? Hold on, because in 2010, Congress decided to encourage businesses to spend money for vehicles, equipment and other depreciable personal (not real estate) property.
IRC Section 168 (k) was modified to allow 100 percent (up from 50%) of first year bonus depreciation for qualifying assets put in service after September 8, 2010 and before January 1, 2012.

Remember 168 (k) is much kinder than 179 because there are no dollar limits, phase-outs or inability to generate a loss. The expanded version of 168 allows businesses to deduct unlimited amounts. For example, a company with a $1 million per-year profit for 2009, 2010 and 2011 can wipe out all three years of income-tax liabilities by purchasing $3 million of qualifying equipment this year, which would be totally deductible. This 168 deduction will eliminate 2011 profit and carryback a $2 million net operating loss (NOL) to generate full refunds of taxes paid for 2009 and 2010.

Luxury Car Limits

The law has severely limited depreciation on luxury cars for several years, but now the limits are even more restrictive. Under expanded 168, a business can buy a 6,000-pound sport utility vehicle (SUV) like a Land Rover, and deduct the entire cost this year. If instead, a business owner buys a socially responsible car, such as a hybrid Toyota Prius, the deduction is far more limited and in some instances zilch.

The Rover buyer gets to deduct the full purchase price plus his business-use percentage. This is a true incentive to buy big expensive gas guzzling SUVs. Meanwhile our Prius buyer gets a lousy $11,060 as a deduction for his attempt to save the world from pollution and reduce the use of fossil fuels.

Wait it gets crazier. If you buy a low-end luxury car for say $20,000, you will still get $11,060 of deprecation this year, but you will only receive $3,200 of depreciation in 2012 and $1,920 in 2013. When the 100-percent bonus depreciation came online, the Internal Revenue Service (IRS) said there would not be any depreciation allowed on Year Two through Year Six for luxury cars. To partly fix the problem, Rev. Proc. 2011-26 issued on March 29 gave back some depreciation to the above numbers. So despite the price of gas, green initiatives and common sense, Congress continues to encourage the purchase of big wasteful SUVs for businesses.

PTIN Registration

Other annoying changes in the "what's next" department are the annual Preparer Tax Identification Number (PTIN) registration and mandatory e-filing requirements. We now need to go online once a year and fork over $64.25 to be able to prepare returns after January 1, 2011.

For those fortunate enough to outsmart the site, you most likely got told to keep using the same PTIN you've had for years, but that's after they extract $64.25.

Exam Requirement Removed

CPAs, lawyers and enrolled agents were always intended to be exempt from the examination. What the IRS wanted was that all practitioners who were not CPAs, lawyers or enrolled agents be required to take the exam, even if they worked for and were supervised by one of the above. This is what the AICPA lobbied hard and fast to remove for us and succeeded.

The Healthcare Act

Obama Care looks like it's here to stay. For those who thought you didn't really need to learn about the tax increases coming in 2013 and the credits available for small businesses starting in 2010, it's time to hunker down and figure out the many complicated provisions of the law. As the media reported last year after former speaker Nancy Pelosi told her colleagues to go home and learn what the law says, the IRS will need about 50,000 more agents to police the Healthcare Act. Our profession will have more work and will also need to hire more people to help clients comply.

Bankers Strike Gold

Meanwhile the banking industry got another boost from Congress with the expansion of IRC 1202 that now provides for a tax exemption for gains of selling small business stock. Apparently, many banks that bought out some regional banks applied pressure on Congress to change the law so they wouldn't pay any tax on the sale of regional bank stock.

Tax Cuts for 2011 and 2012

The media also hyped the "tax cuts" the December 17, 2010 legislation brought us. Actually, all they did was leave the 2003 tax rates in place for two more years. While they were at it, they pushed the estate, gift and generation-skipping exemptions up to $5 million for 2011 and 2012 and restored the "step up" in basis to date of death value.

For 2010 deaths, the rules allow executors to pick out the best of the 2010 and 2011 laws. Practitioners need to sort out the confusion and not become satisfied and unconcerned about estate planning. To simply leave current estate plans in place may miss some great opportunities before Congress rethinks what they are going to do with Estate and Gift taxation after 2012. The current law offers opportunities for aggressive gifting prior to 2013 and urgently requires revisions to many estate plans.

Some changes with silver linings to consider:

  1. Cell phone usage is no longer "listed property" effective January 1, 2010. This means a diary to keep track of personal and business use is no longer necessary.
  2. The alternative minimum tax (AMT) exemption for 2011 is $74,450. For the first time in many years we know the exemption before the year started.
  3. All employees and self-employed taxpayers are enjoying a Social Security tax reduction this year. Those of us making more than $106,800 (the Federal Insurance Contributions Act (FICA) maximum) are saving $2,136 this year. Thanks Congress!
  4. Although the SUV versus luxury car rules are crazy, don't lose sight of the huge advantage of the 100 percent first-year bonus depreciation. It's only around until December 31, 2011, so buy computers and other equipment now and save taxes. Even if a company reports a loss, the loss can be carried back to generate refunds of prior year's taxes.

To learn more about these tax changes, some recent court cases and ruling, and meet the author, don't miss his session on Individual Federal Income Tax Update at the upcoming AICPA Practitioners Symposium in Las Vegas on June 13 – 15, 2011.

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Doug Stives, CPA, MBA, is professor of accounting at West Long Beach, NJ-based Monmouth University. He teaches tax law updates to CPAs nationwide.