TaxWorks Blog

ILLINOIS CREATES ANGEL INVESTMENT TAX CREDIT

The new Angel investment tax credit is a nonrefundable credit that is available for tax years 2011 through 2016. The maximum amount of each investment that may be used to calculate the credit is 25% of each qualified investment (up to $2 million) made directly in a qualified new business venture. The aggregate amount of credit for qualified investments that can be claimed is $10 million per calendar year. Any amount that cannot be used in the year it is claimed may be carried forward for five years.

The Angel investment tax credit can be claimed by businesses, including a corporation, partnership, LLC, as well as by individuals that make an investment in a qualified new business venture.

• A qualified business venture is a business that is registered with the Department of Commerce and Economic Opportunity (DCEO) and that meets the following requirements:

o is headquartered in Illinois,
o at least 51% of its employees must work in Illinois,
o increases jobs and/or capital investment in Illinois,
o is principally engaged in either innovation in certain industries (e.g., manufacturing, clean energy) or undertakes research and development of new products, processes, or services that rely on the application of proprietary technology,
o is not principally engaged in development of real estate, insurance, banking, lending, lobbying, political consulting, professional services, wholesale or retail trade, leisure, hospitality, transportation, and most construction activities,
o has less than 100 employees,
o did not operate in Illinois for more than 10 consecutive years prior to certification, and
o has not received more than $10 million in aggregate private equity investment in cash or $4 million in investments that qualified for tax credits.
• The credit cannot be claimed if a related entity or individual has a direct or indirect ownership interest of at least 51% of the new business venture investment.
• The credit is subject to recapture if the investment is held for less than 3 years or is moved out of state within 3 years. The Department of Commerce and Economic Opportunity must certify applicants annually to show that the investment was made and remains in the business for at least 3 years.
• By March 1 of each year, the Illinois Department of Revenue will issue a report on the credit certifications that have been awarded for the prior year including:
o The name of the applicant and the amount of credit awarded
o The name and address of the qualified new business venture that gave rise to the credit, and
o The date of approval of the application for the tax credit certificate.

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Tax Pro Certification Update – Registration Fee

The IRS announced yesterday the fees involved with being a registered tax preparer. See the link below for the official IRS announcement.

View IRS Announcement Here

Also, do not forget that tax preparers must take an IRS certification test. More information on this will be posted here as it becomes available.

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FLORIDA UNEMPLOYMENT TAX UPDATE

The Florida Department of Revenue has issued Tax Information Publication 1060BB-03 explaining legislative changes affecting the unemployment tax. The publication discusses the following changes:

Compliance Penalties. Beginning with the third quarter 2010 Employer’s Quarter Report (UCT-6), a penalty on erroneous, incomplete, or insufficient reports equal to the greater of $50 or 10 percent of any tax due up to the $300 maximum (per report). The penalty will be waived if a corrected, complete, and accurate report is filed within 30 days of the penalty notice date. Note: the penalty may not be waived more than one time in a 12 month period.

Penalty for Failure to E-file. Effective July 1, 2010, the Florida Department of Revenue will assess employer penalties of $50 plus $1 for each employee if the report is not filed electronically using an approved filing method. Agents who prepared and reported for 100 or more employers in any quarter during the prior fiscal year will be assessed the same penalty for each quarterly report that was filed by an unapproved method.
Single Member LLCs. Limited Liability Companies (LLCs) are treated as the employer for Florida unemployment tax purposes.

The new law clarifies that a single member LLC must register and report wages for Florida unemployment tax separately from the owner.

Response deadlines for benefit claims. Employers have only 20 days from the mailing date to respond to an initial notice (Form UCB-412) regarding benefit claims if they want to remain eligible for noncharging of any benefit claim payments.

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TAX EXCLUSION FOR QUALIFIED HEALTH PROFESSIONALS

The Affordable Care Act provides for an exclusion for certain amounts received by health care professionals under programs intended to increase the availability of health care services in areas the state determines are either undeserved or that have a shortage of health professionals. The exclusion, which is retroactive to 2009, applies to amounts received by health professionals under state loan repayment and state loan forgiveness programs.

In IR-2010-74, the IRS provides guidance to taxpayers who may qualify for the exclusion. Health care professionals who received assistance in 2009 should consult their state loan program to verify whether the program qualifies for the exclusion. Health care professionals who received Form W-2 or Form 1099 reporting excludable amounts as taxable income should request a corrected form from the issuer. If employment taxes were withheld, affected health professionals should ask their employer to request a refund of employment taxes on their behalf.

Affected taxpayers who already filed 2009 returns reporting income that qualifies for the exclusion should file amended returns to claim this exclusion and write “Excluded student loan amount under 2010 Health Care Act” in the Explanation of Changes section of the amended return. An amended return may be filed with or without a corrected information document. Taxpayers who have not yet filed 2009 returns should not include eligible loan repayment or forgiveness amounts as income on their returns.

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EMANCIPATION DAY AND TAX SEASON 2011

For Tax Season 2011, the due date for the 1040 family of returns for 2010 is April 18, 2011.

Although April 15 falls on a Friday in Tax Season 2011, Washington, D.C. will observe the Emancipation Day holiday on that day. All federal and municipal offices will be closed.

Emancipation Day, a legal holiday in D.C., is observed annually on April 16. Under D.C. statutes, if a legal holiday falls on a Saturday, the holiday is observed the preceding non-holiday day.

Under §7503 of the IRC, when the last day for “performing any act” falls on a Saturday, Sunday, or legal holiday, the performance of that act is considered timely if it is performed on the next succeeding day which does not fall on a weekend or legal holiday. “Legal holiday” for this purpose includes a legal holiday in Washington, D.C. Thus individual tax returns and all returns that are normally due on April 15 will be considered timely filed if they are in fact filed on or before April 18, 2011.

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FIRST-TIME HOMEBUYER CREDIT CLOSING DATE EXTENDED TO SEPTEMBER 30, 2010

The Homebuyer Assistance Improvement Act of 2010 was signed into law on July 2, 2010. This legislation was enacted in response to the backlogs of lenders and federal programs providing mortgage loans which, in turn, has caused a delay in processing loans. This legislation is designed to provide relief to those homebuyers who meet the requirements to claim either the firsttime homebuyer or the long-time resident credit, but were prevented from doing so solely because they could not get closed on the home under contract before July 1, 2010.

The extension allows taxpayers who entered into written, binding contracts before May 1, 2010 that were scheduled to close before July 1, 2010 an additional three months to close on the home under contract and remain eligible for the credit. Although they must now close before October 1, 2010, the written binding contract must specify that the purchase was to be completed before the original July 1, 2010 deadline.

Example 1: A written, binding contract entered into on March 31, 2010 specifies a closing date of September 15, 2010. The contract was not a qualifying contract under prior law because the closing date was after June 30, 2010. Further, the taxpayer’s eligibility for the credit is not changed by the closing date extension. This contract is not a qualifying contract because the closing date was not originally scheduled to occur prior to July 1, 2010.

Example 2: A written, binding contract entered into on March 31, 2010 specifies a closing date of June 20, 2010. Because of a backlog in loan processing, the taxpayer was unable to close on the home under contract until September 15, 2010. Assuming all other requirements are met, the taxpayer is eligible for a homebuyer credit.

Documentation requirements. In response to the new legislation, the IRS released IR-2010-80, which explains the additional documentation requirements that are necessary to claim the credit. In addition to attaching a HUD-1 or equivalent settlement statement, taxpayers who are claiming the credit for a home purchased after April 30, 2010 must also provide a copy of the pages of their written, binding contract which must state that the purchase will be completed before July 1, 2010. In addition to the closing date, the pages submitted must also show the names of all parties, their signatures (if required by local law), the property address, the purchase price, and the date of the contract.

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Additional Tax on Net Investment Income – Individual Provision Effective 2013

Taxpayers with high income will be subject to a 3.8% tax on net investment income. The tax will be limited to the lesser of 3.8% times the net investment income or the taxpayer’s modified adjusted gross income, according to the applicable threshold. For MFJ, the threshold is $250,000; for MFS, the threshold is $125,000, and for all other filing statuses, the threshold is $200,000.

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New First-time Homebuyer Credit Rule

The Section 36 First-Time Homebuyer Credit applies to principal residence purchases occurring after 4/8/08 and before 5/1/10. Under current law, the purchase of a principal residence will qualify for the credit if the taxpayer entered into a binding written contract before 5/1/10 to close on the purchase by 7/1/10. Because of a backlog in closing these purchases, thousands of homebuyers risked losing the credit. So, on 6/30/10 the Senate passed the Homebuyer Assistance and Improvement Act of 2010 (H.R. 5623), which replaces “7/1/10″ with “10/1/10.” As a result, taxpayers who entered into a written binding contract prior to 5/1/10 will have until 9/30/10 to complete their home purchase. The House passed the Act on 6/29/10, so it now goes to the President for his signature.

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How Health Care Reform Can Affect Your Taxes

Earlier this year President Obama signed the new health care bill into law. There are several provisions of this health care reform that will become effective over the next several years. Here are a few that may have a significant impact on you and your clients.

Small Business Health Care Premium Credit –Business Provision Effective 2010
In order to qualify for this credit, small businesses must have 25 or fewer full-time employees, have an annual employee payroll on average of under $50,000, and pay premiums for health insurance for its employees.

Likewise, small businesses with up to 10 employees and annual wages averaging $25,000 or less are eligible to receive 100% of the credit. The credit begins to phase out as the number of employees surpasses 10 and the amount of average annual wages exceeds $25,000.

Adoption Credit – Individual Provision Effective 2010
The current adoption credit is $12,170. Under the new health care law, this amount will increase to $13,170 and it will become a fully refundable credit. The sunset period of the adoption credit is also postponed to December 31, 2011.

FSA/HSA Qualified Medical Expense Definition Change–Individual Provision Effective 2011
Only prescription drugs and insulin will be eligible for reimbursement through a flexible spending account (FSA) or health savings account (HSA) beginning in 2011. For FSA and HSA purposes, qualified expenses will no longer include over-the counter medications or first-aid and other medical items.

HSA Penalty for Non-qualified Withdrawals – Individual Provision Effective 2011
The penalty for non-qualified distributions from an HSA will be increased from 10% to 20%.

Medical Expense Deduction Threshold Increase – Individual Provision Effective 2013
The threshold for deducting medical expenses on Schedule A will increase from 7.5% of the adjusted gross income to 10% for 2013 through 2016. However, the 7.5% limitation remains in place for individuals 65 and older by the end of the year.

Medicare Tax Increase – Individual Provision Effective 2013
The employee portion of Medicare tax will be increased from 1.45% to 2.53% for taxpayers whose earned income is greater than $200,000 ($250,000 for MFJ). If any portion of the tax is not collected by the employer via withholdings, the employee must pay the tax through his/her tax return. This also applies to self-employment income.

Additional Tax on Net Investment Income – Individual Provision Effective 2013
Taxpayers with high income will be subject to a 3.8% tax on net investment income. The tax will be limited to the lesser of 3.8% times the net investment income or the taxpayer’s modified adjusted gross income, according to the applicable threshold. For MFJ, the threshold is $250,000; for MFS, the threshold is $125,000, and for all other filing statuses, the threshold is $200,000.

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Traditional IRA Conversion to Roth IRA

Roth IRA rollovers are now available to high income taxpayers. The income limit of $100,000 MAGI has been removed for 2010. An added benefit of converting in 2010 is the extra time to pay the tax. Upon conversion, half of the income can be reported on the 2011 tax return and the rest on the 2012 return. Taxpayers in higher income tax brackets may wish to elect to pay the tax in 2010 rather than in 2011 and 2012 as tax rates are likely to increase beginning in 2011. Several other factors should be considered prior to converting from a Traditional IRA to a Roth, so make sure to review the new law in full before making this decision.

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