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Miscellaneous Topics

Explore LLCs as partnerships, NOLs, landlords' 1099 reporting, & §1411 tax imposition in California and federal taxation. Analyze major tax reforms and laws affecting business entities.

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Miscellaneous Topics

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  1. Miscellaneous Topics Bus 225K – Advanced Individual Taxation

  2. Agenda • California differences • LLCs as partnerships • Landlords and 1099 reporting • §1411 Imposition of the 3.8% tax • §469 proposal • Major federal tax reform Plus – will be a newsletter for sharing your assigned special topic with classmates.

  3. California Differences - NOL • NOLs • FTB Form 3805V • For NOLs incurred in tyba 12/31/07 NOL carryforward period is 20 years (rather than 10) • NOLs for tyba 12/31/10 can be carried back 2 years. Percent of NOL that can be carried back phases in until by 2013, 100% of the NOL incurred in that year can be carried back. • Budget problems can lead to legislature suspending use of NOLs. • NOL based on CA deductions (such as depreciation)

  4. California Differences - AMT • No preference for interest from private activity bonds. • Depreciation adjustments

  5. California Differences – Passive Activity • Form 3801 (similar to Form 8582) • CA does not conform to the special rule for real estate professionals • Section 179 expensing amounts differ • K-1 items may differ between federal and CA • SS benefits not taxable in CA (relevance in measuring AGI), but CA uses federal MAGI for 469 purposes.

  6. LLCs treated as partnership • If checked the box to be so treated or have more than one member and defaulted to that status (by not checking the box). • Thompson, 87 Fed. Cl. 728 (2009), acq in result only, AOD 2010-02 • Owner of LLC is not an interest in a limited partnership as a limited partner. • Thus, not restricted in applying MP tests as would a limited partner in a limited partnership, so can use any of the 7 MP tests. • Query – will IRS modify the -5T regulations to provide guidance on how the MP rule/tests apply to owners of an LLC?

  7. Small Business Jobs Act of 2010 (P.L. 111-240; 9/27/10) • Economic stimulus provisions paid for by a few provisions including a modification to information reporting rule of §6041 for landlords. • (h) Treatment of Rental Property Expense Payments . — • (1) In general. — Solely for purposes of subsection (a) and except as provided in paragraph (2), a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property. • (2) Exceptions. — Paragraph (1) shall not apply to — • (A) Any individual, including any individual who is an active member of the uniformed services or an employee of the intelligence community (as defined in section 121(d)(9)(C)(iv)), if substantially all rental income is derived from renting the principal residence (within the meaning of section 121) of such individual on a temporary basis, • (B) any individual who receives rental income of not more than the minimal amount, as determined under regulations prescribed by the Secretary and • (C) any other individual for whom the requirements of this section would cause hardship, as determined under regulations prescribed by the Secretary.

  8. Health care - §1411 Imposition of the 3.8% tax • Effective in 2013 • Applies to: • Individuals – MAGI exceeds $250,000 if MFJ ($125K if MFS) and $200,000 for other taxpayers • Estates and trusts – AGI (§67(e)) exceeds amount at which highest tax bracket in §1(e) begins for the tax year. • In 2010, that dollar amount is $11,200.

  9. §1411 - continued • Individuals: • Tax of 3.8% on lesser of: • Net investment income for year • Excess of MAGI – threshold amount • Estates and trusts • Tax of 3.8% on lesser of: • Undistributed net investment income for year • Excess of AGI – dollar amount of where highest income tax rate begins • NII defined at §1411(c) • Can reduce investment income by allowable deductions “properly allocable to such gross income or net gain” Includes rents and other passive activities • Per legislative history – does not include such excluded items as: • Interest on tax-exempt bonds • Veterans’ benefits • Excluded gain on sale of principal residence

  10. §1411 – Example 1 (MFJ) • Dividends $ 15,000 • Interest income $ 32,000 • Gain from sale of stock $126,000 • Income from passive activity $ 17,000 • Gain on sale of principal res $140,000 (excluded) • MAGI $325,000 • Lesser of: • (A) NII $190,000 • (B) MAGI - $250,000 = $ 75,000 • Tax = $2,850 ($75,000 x 3.8%)

  11. §1411 – Example 2 • Modification to Example 1: • Dividends $ 15,000 • Interest inc $ 32,000 • Gain from sale of stock $126,000 • Income from passive activity $ 17,000 • Gain on sale of principal residence $140,000 (excluded) • MAGI $925,000 • Lesser of: • (A) NII $190,000 • (B) MAGI - $250,000 = $675,000 • Tax = $7,220 ($190,000 x 3.8%)

  12. §1411 – Example 3 • Modification to Example 1; T only has NII: • Dividends $ 65,000 • Interest inc $ 92,000 • Gain from sale of stock $196,000 • Income from passive activity $ 37,000 • Gain on sale of principal residence $140,000 (excluded) • MAGI $390,000 • Lesser of: • (A) NII $390,000 • (B) MAGI - $250,000 = $140,000 • Tax = $5,320 ($140,000 x 3.8%)

  13. §469 and §1411 Medicare tax on unearned income (eff. 2013) • §1441(c)(1) and (2) – net investment income includes: • Gross income from rents • Other gross income derived from a passive activity (within the meaning of §469) • Gains from property dispositions other than used in a T or B • Less – “the deductions allowed by this subtitle which are properly allocable to such gross income or net gain”

  14. §469 and §1411 Planning • Rentals – likely automatically investment income for 1411 purposes. • Non-rental passive activities – MP to avoid investment income extra tax, but likely to be subject to the extra .9% tax for high-income employees and self-employed.

  15. §469 proposal • President Obama FY 2011 revenue proposals include: • Repeal §469 exception for working interests in oil and gas properties • Why: • Distorts markets by encouraging investment in oil and gas • Can lead to overproduction which can be bad for the environment

  16. Major federal tax reform - 1 • Flat tax • No deduction for mortgage interest • No AMT • Unlimited carryforward of excess of deductions over income. • Carryforward amount increased by an interest factor to recognize time value of money of postponed deductions. • H.R. 1040 (110th Cong.), a version of the flat tax, is similar, but converts the loss into a credit. • Other consumption taxes, such as sales tax • No deduction for interest expense (and interest income not taxable)

  17. Major federal tax reform - 2 • Income tax reform may include: • Repeal of AMT • Paid for with elimination or reduction in some of the deductions and special rules that can lead to owing AMT • Reduction in home mortgage interest deductions • Possible conversion to a credit • Rarely do such discussions include any changes to passive activity loss limitation rule

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