A bipartisan bill was introduced to the Senate to repeal the much maligned expanded Form 1099 reporting requirement.

On January 25, Max Baucus, Senate Finance Committee Chairman (D-MT) and Harry Reid, Senate Majority Leader (D-NV) introduced a bill that if enacted would repeal the recent Form 1099 reporting requirements for businesses that would have otherwise become effective commencing in 2012. The bill would repeal the expanded requirements for businesses to report payments made for goods and certain services above the existing requirements. The Act being repealed has been widely maligned by businesses who fear the new paperwork requirements would be too cumbersome and too costly to complete the extra 1099 forms.
If this bill does not become law, Sec. 9006 of the recently enacted Patient Protection and Affordable Care Act would require payments of amounts in consideration for property and goods would be added to the list of payments required to be reported. It would also provide that starting in 2012, payments to taxable corporations which had previously been exempt from the Form 1099 reporting requirement, would become subject to the Form 1099 requirement.
This Bill comes as a major relief to businesses and conversely as a blow to accountants and payment processors who would have enjoyed new business coming from the extra reporting requirements.

Tax Planning under the New Act

President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "Act") into law on December 17, 2010. The Act provides several tax and estate planning opportunities. Keep in mind that the Act sunsets on January 1, 2013, so its opportunities will only last for two years and some for only one year. Therafter, the provisions of prior law reappear unless Congress makes more changes. Clients should therefore take advantage of these opportunities while they last.
One important change made by the Act is the unification of the gift, estate, and generation-skipping transfer (GST) tax lifetime exemption - all at $5 million per individual or $10 million for a married couple. Another important change is the reduction of the top estate, gift, and GST tax rates to 35%.
Since these rates are much lower than the previous rates which could exceed 55%, for the next two years, clients should consider lifetime transfers during these next two years, 2011 and 2012. For persons who had used up their $1,000,000 exemption through gifts prior to 2011, such person can give another $4,000,000 in assets without paying any gift tax (a gift tax return must be filed for the gift). Better yet, the gift can be to grandchildren or to a dynasty trust for the benefit of children and their descendants, not only are estate and gift taxes avoided, but generation skipping taxes are avoided too as long as the total lifetime gifts do not exceed $5,000,000 per donor.
Assuming there are no changes to the tax laws before 2013, the exempt amount for estate and gift tax purposes will revert to $1,000,000 per donor and the GST exemption will revert to $1,300,000 per donor. The maximum marginal rate will revert to 55%. This is therefore a tremendous opportunity for gift planning now.
A totally new concept to the estate laws that was introduced for the next two years by the Act is called "portability." Portability permits the use of an unused exempt amount in a predeceasing spouse's estate in the surviving spouse's estate. To achieve portability, an estate tax return must be filed by the estate of the first spouse to die and such estate must elect the portability option. With portability, couples can pass a total of $10,000,000 to the next generation free from federal estate tax regardless of the size of each respective estate. Portability does not apply for purposes of the GST tax.
For estates of decedents dying in 2010, the Act provides beneficial options. Such estates may elect to either subject the estate to the estate tax, with a $5,000,000 exemption amount and a maximum tax rate above that amount of 35%. If such election is made, the Estate also receives a step-up in basis of the decedent's assets from the decedent’s basis to their fair market value on the date of death. Otherwise, the Estate may elect not to pay estate tax at all but receive only the limited basis step-up of up to $1,300,000 of the appreciation inherent in the estate, and an additional $3,000,000 of stepped up basis for assets passing to the surviving spouse. The decision regarding which election to make is based upon a number of factors including the size of the estate, the amount of estate tax that would be due, the amount of appreciation in the assets and the time frame that the assets would be anticipated to be sold.
The use of discounting through family limited partnerships and family limited liability companies are still not disallowed by the Act though there had been a great deal of speculation that these devices would be legislated out of estate planners’ tool kits. Also Irrevocable Life Insurance Trusts ("ILITs") for multiple generations can be accomplished by leveraging the $5,000,000 exemption for even more spectacular savings. The premiums can be paid with GST exempt dollars so that when the policy matures and pays out, they are received estate, gift, income, and GST tax free. Grantor retained annuity trusts (GRATs) with less than a ten-year term and "zeroed-out GRATs" (those with no gift component) were also not legislated out.
New Jersey like many states, has decoupled their estate tax from the federal estate tax. New Jersey allows only $675,000 of an estate to pass estate tax free for its estate tax. That leaves a $4,325,000 spread between the amount allowed by the federal exemption and the amount allowed by New Jersey. If not properly planned, the estate may be subjected to a state estate tax on the death of the first spouse, even if the couple desired to defer all taxes until the death of the second spouse.
Congress had various bills pending (but never enacted) that would have eliminated discounts, and short term GRATs but the Act does not do so. The fact that those restrictions were not enacted is yet another reason to act now to revise one’s estate plan.
The time for planning is now.

S corp built-in-gain period temporarily shortened

For C corporations holding appreciated property, there is a double tax on its sale.  First the corporation pays tax on the sale of its appreciated property equal to the difference between the sale price and the property’s basis, multiplied by the corporate tax rate.  Then, when the corporation distributes the proceeds to its shareholders as a dividend, the individuals pay a second level of tax on dividends received.  To avoid this second level of tax, the C corporation could (if eligible) file an election under Subchapter S and wait ten years and sell the property and only one level of tax on the gain would be paid.

In order to attempt to spur the economy, Congress has temporarily shortened the ten year built-in-gain holding period.  Beginning in 2011, the “Small Business Jobs Act of 2010,” the tax title of H.R. 5297, the Small Business Lending Funding Act ( P.L. 111-240 ) provided that 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.  Code Sec. 1374(d)(7)(B)(ii).  Thus, if a corporation converts now to an S corporation, the built in gain property cannot be sold for 10 years, but if a conversion was done in 2005 or earlier, the built-in-gains tax on S corporations will not apply to the sale and thus the second level of tax can be avoided.  For companies who filed S elections in 2005 and earlier, they are now free to sell their appreciated property and only be subject to a single level of tax.

The Hiring Incentives to Restore Employment Act adds credit for hiring new workers

In an effort to jump start the economy and employment, Congress is providing a credit of up to $1,000 for so called  “retained workers” in 2011 pursuant to Section 102 of the HIRE Act, P.L. 111-147, for any tax year ending after Mar. 18, 2010.  A “retained worker” is defined as 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 began employment with a qualified employer after Feb. 3, 2010, and before Jan. 1, 2011 and
    (1) who was employed by the taxpayer on any date during the tax year,
    (2) who was employed by the taxpayer for a period of not less than 52 consecutive weeks, and
    (3) whose wages (as defined for income tax withholding in Code Sec. 3401(a) ) 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. (HIRE Act §102(b))
Make sure to file the Form W-11 to claim this credit for each such worker hired.


Shorter S corp built-in gain period. For tax years beginning after Dec. 31, 2010, the “Small Business Jobs Act of 2010,” the tax title of H.R. 5297, the Small Business Lending Funding Act ( P.L. 111-240 ) provided that 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. ( Code Sec. 1374(d)(7)(B)(ii) )