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Many important tax changes go into effect this year. Most are the result of new rules in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) as well as in six other tax laws enacted in 2008—2010, while others are triggered by various regulations. This M&Q Newsletter reviews non-extender, non-indexing changes for return preparers, businesses, and investors.
Information reporting for real estate. For payments made after December 31, 2010, except as provided below, a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more during the tax year to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider.)
The rental property expense payment reporting does not apply to:
- any individual who receives rental income of not more than a minimal amount, as determined under IRS regulations;
- any individual (including one who is an active member of the uniformed services or an employee of the intelligence community) if substantially all rental income is derived from renting the individual's principal residence on a temporary basis;
- any other individual for whom these requirements would cause hardship, as determined under IRS regulations to be issued.
Increased information return penalty and failure to furnish payee statement penalty. For information returns required to be filed after December 31, 2010, the Small Business Jobs Act of 2010 increases the penalty for failure to file and the penalty for failure to furnish payee statements.
Shorter S corp built-in gain period. For S corporation tax years beginning in 2011, no tax is imposed on the net unrecognized built-in gain of an S corporation if the fifth year in the recognition period preceded the 2011 tax year.
New basis and character reporting rules. Generally effective on January 1, 2011, every broker required to file an information return reporting the gross proceeds of a “covered security” must include in the return the customer's adjusted basis in the security and whether any gain or loss with respect to the security is short term or long term under Code Sec. 1222. A covered security is any specified security acquired on or after the applicable date if the security: (i) was acquired through a transaction in the account in which the security is held, or (ii) was transferred to the account from an account in which the security was a covered security, but only if the broker received a statement regarding the transfer. January 1, 2011 is the applicable date for stock in a corporation (other than stock in a regulated investment company or stock acquired in connection with a dividend reinvestment plan).
A specified security is: (a) any share of stock in a corporation (including regulated investment company (RIC), or RIC shares), (b) any note, bond, debenture, or other evidence of indebtedness, (c) any commodity, or contract or derivative with respect to the commodity, if IRS determines that adjusted basis reporting is appropriate, and (d) any other financial instrument with respect to which IRS determines that adjusted basis reporting is appropriate.
New-for-2011 tax return preparer requirements. New regulations require tax return preparers to obtain a preparer tax identification number (PTIN) for tax returns or refund claims filed after December 31, 2010. In some cases, return preparers may obtain a provisional PTIN.
EFT rules now in place. Beginning January 1, 2011, employers must use electronic funds transfer (EFT) to make all federal tax deposits (such as deposits of employment tax, excise tax, and corporate income tax). Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used after December 31, 2010.
E-filing by return preparers. For returns filed after 2010, specified tax return preparers who expect to file more than 10 individual returns must file them electronically. For this purpose, an individual income tax return also includes income tax returns for estates and trusts. In December of 2010, IRS announced that it was phasing in the new e-filing requirement over 2 years. Accordingly, for calendar year 2011, a tax return preparer must file electronically if he expects to file—or if he is a member of a firm that reasonably expects in the aggregate to file—100 or more individual income tax returns during the year. A hardship waiver is available.
Up-to-$1,000 credit for “retained workers” in 2011. For any tax year ending after March 18, 2010, the Hiring Incentives to Restore Employment Act provides an up-to-$1,000 increase (retention credit) to the general business credit for “retained workers.” A retained worker is any qualified individual (as defined for purposes of the employer payroll tax holiday that was in effect for hiring unemployed workers) who makes a proper certification on Form W-11 and:
- who was employed by the taxpayer on any date during the tax year,
- who was employed by the taxpayer for a period of not less than 52 consecutive weeks, and
- whose wages for that employment during the last 26 weeks of the period (described in item (2) above) equaled at least 80% of the wages for the first 26 weeks of that period.
The retained worker must have begun employment with a qualified employer after February 3, 2010, and before January 1, 2011.
Corporate actions that affect stock basis must be reported. Effective January 1, 2011, issuers of specified securities must file a return according to IRS forms or regulations describing any organizational action (e.g., stock split, merger, or acquisition) that affects the basis of the specified security, the quantitative effect on the basis of that specified security, and any other information required by IRS. The issuer's return (and information to nominees or certificate holders) must be filed within 45 days after the date of the organizational action or, if earlier, by January 15 of the year following the calendar year during which the action occurred. Nominees or certificate holders must (unless IRS waives this requirement) be given a written statement showing (1) the name, address, and telephone number of the information contact of the person required to file the return, (2) the information required to be included on the return with respect to the security, and (3) any other information required by IRS.
Reporting requirement for payment card and third-party payment transactions. After 2010, banks are generally to file an information return with IRS reporting the gross amount of credit and debit card payments a merchant receives during the year, along with the merchant's name, address, and TIN. Similar reporting is also required for third party network transactions (e.g., those facilitating online sales).
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