by NFS | Dec 15, 2010 | Archives
From hot air balloons to bagels, 2010 proved to be yet another year in which states and municipalities passed some strange tax laws in a desperate bid to raise revenues and close their budget gaps.
The Tax & Accounting business of Thomson Reuters has compiled a sampling of some of the year’s quirkiest sales and use tax changes, emphasizing the importance of technology and expertise to help navigate the dynamic sales and use tax landscape.
A few of the “quirky” sales and use tax highlights of 2010 include:
• Candy without flour in Washington: In June, Washington State enacted legislation that made candy without flour taxable. According to a list published by the Washington Department of Revenue, “Rainbow Whirly Pops” and “Lemon Drops” were taxable, but “Twizzlers” and “Peppermint Bark Shortbread” remained exempt. However, because the law caused so much confusion, and after push-back from voters and large candy makers, Initiative 1107 was passed, repealing the tax on candy effective Dec. 2, 2010.
• Belt buckles in Texas: Every year before it is time to go back to school, several states allow for a tax holiday on school supplies and clothing, with several oddities seemingly infiltrating the exemptions. In Texas, belts are exempt, but belt buckles are not. Cowboy boots and hiking boots are also exempt, but rubber boots and climbing boots are taxable.
• Bagels in New York: In 2010, New York cracked down on its enforcement of the tax on prepared food, specifically targeting a New York staple: bagels. If you buy a whole bagel and take it home with you, it is exempt from tax. However, if you purchase that same bagel, but eat it at the bagel shop (even without cream cheese), bagel shops must charge sales tax on the purchase price. Apparently, the mere slicing of a bagel kicks your bagel purchase into a taxable transaction. As a result, New Yorkers are paying approximately 8 to 9 cents more per bagel.
• Cup lids in Colorado: Effective March 1, 2010, Colorado eliminated the exemption for non-essential food items and packaging provided with purchased food and beverage items. So, while cups are considered essential, lids are not.
• Hot air balloons in Kansas: On June 30, the Kansas Department of Revenue issued a private letter ruling discussing the taxability of hot air balloon rides. Kansas generally taxes sales of admissions to “any place providing amusement, entertainment or recreation services.” The question was not whether or not balloon rides are entertaining, but whether or not federal law pre-empts the imposition of state sales tax on sales of those rides. Under the Anti-Head Tax Act, 29 U.S.C. Section 40116, states and local jurisdictions are prohibited from imposing fees and charges on airlines and other airport users. The department determined that un-tethered balloon rides where the balloon is actually piloted somewhere “some distance downwind from the launching point” would be considered carrying passengers in air commerce and would be pre-empted by the law. However, state sales tax can be imposed on tethered balloon rides.
• Haunted houses in New York: According to TSB-A-10(11)S, admissions to haunted houses are subject to the New York sales tax.
By Accounting Today Staff
by NFS | Dec 14, 2010 | Archives
WASHINGTON DC – The Bush tax cut and unemployment benefit extension legislation passed a key procedural hurdle in the Senate on Monday, overcoming the 60-vote threshold needed to come up for a vote later in the week.
The measure advanced Monday evening by a vote of 83 to 15, with 45 Democrats and 37 Republicans voting to invoke cloture and cut off debate. A final vote on the legislation is expected on Tuesday in the Senate, and then it will be sent to the House.
The status of the $858 billion bill in the House is in question, however, as a majority of House Democrats voted in a resolution within their caucus last week to express their disapproval of the bill.
Many congressional Democrats are upset that President Obama struck a deal with Republican congressional leaders to extend the Bush-era tax rates for two years even for those earning over $250,000 a year, violating a campaign pledge. Another possible deal breaker is that the estate tax will be set at 35 percent, with a $5 million exemption for individuals, instead of the 55 percent rate for estates over $1 million that it was scheduled to return to at the beginning of next year. Democrats will try to introduce amendments to increase the estate tax and add other provisions, but Republicans have warned that they are not open to allowing many changes in the legislation.
The bill includes some provisions that are seen as favorable trade-offs by the Obama administration, including a 13-month extension of unemployment benefits and a 2 percent cut in the Social Security payroll tax for a year, lowering the rate from 6.2 percent to 4.2 percent.
The bill also extends the Research & Experimentation Credit, the Child Tax Credit, the Earned Income Tax Credit, and the American Opportunity Tax Credit for college tuition, along with patching the alternative minimum tax to prevent it from affecting millions more taxpayers. Obama has argued that it is necessary to pass the legislation to extend tax cuts for the middle class and avoid jeopardizing the economic recovery.
By Michael Cohn
Accounting Today
by NFS | Dec 13, 2010 | Archives
Effective January 1, 2011, businesses with a payroll tax deposit are required to make those payments by using the Electronic Federal Tax Payment System (EFTPS). If you are not currently enrolled in the EFTPS program you probably received a letter regarding this in the last week. A 10% penalty may be applied if EFTPS is not used in 2011.
We can answer any of your questions and help you set up the EFTPS program. Call us at 800-560-4NFS immediately. The approval process can take 4-6 weeks. We can initiate this on-line. We will need the following information – business name, address, EIN, bank name, routing #, account #, and authorized signer.
We have found that the EFTPS system works much better than the old system of depositing the payroll taxes at the bank – you can schedule payments from any computer with internet access. The only drawback is you cannot wait until the day the taxes are due to schedule a payment. You must schedule your payments by the day before the due date and the money is transferred from your checking account on the due date that you schedule.
We recommend that semi-weekly depositors schedule their payments the day the payroll is computed and that monthly depositors schedule their deposit when they run their first payroll of the following month. Schedule these payments in advance as we have found that those who wait until the deadline tend to miss deadlines and incur penalties.
Employers who have $2,500 or less in quarterly payroll tax liability and pay their liability when filing their tax returns (i.e. Forms 941 or 944) are the primary exception. Otherwise, employers and sole proprietors who file payroll tax returns must use the EFTPS System.
Do not procrastinate in initiating the application process or you will incur penalties in 2011.
by NFS | Dec 10, 2010 | Archives
WASHINGTON – The Internal Revenue Service today announced that interest rates for the calendar quarter beginning January 1, 2011, will decrease by one percentage point. The rates will be:
three (3) percent for overpayments [two (2) percent in the case of a corporation];
three (3) percent for underpayments;
five (5) percent for large corporate underpayments; and
zero and one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.
The interest rates announced today are computed from the federal short-term rate during October 2010 to take effect November 1, 2010, based on daily compounding.
by NFS | Dec 9, 2010 | Archives
WASHINGTON BUREAU — House Democrats today passed a non-binding resolution rejecting a tax-cut package negotiated by Obama administration officials and congressional Republicans.
The House Democrats were especially critical of a provision in the agreement that would provide a $5 million per-person estate tax exemption.
The resolution passed by a voice vote, according to House Ways and Means Committee staffers.
Rep. Lloyd Doggett, D-Texas, said the resolution was adopted by a “very loud voice vote” and that he believes House Speaker Nancy Pelosi, D-San Francisco, will respect the views of the caucus.
The package, “in the form that it was negotiated, it is not acceptable to the House Democratic caucus,” Rep. Chris Van Hollen, D-Md., said. “It’s as simple as that.”
The House Democrats’ action came as Senate Democrats weighed options for having the package come up for a vote there Monday.
Senate Democrats must resort to a parliamentary maneuver because tax measures are supposed to originate in the House.
The House Democratic Caucus is “very upset” about the package negotiated by the White House, and there is a push to not vote on the package, regardless of what the Senate does, Ways and Means staffers said.
The estate tax provision in the package would provide a $5 million exemption and a 35% tax maximum estate tax rate. The provision would expire in two years.
Democrats support a provision backed by Rep. Earl Pomeroy, D-N.D. That provision, passed in 2009, would set a $3.5 million exemption and a 45% maximum tax rate. Pomeroy was defeated for reelection last month.
Other package features opposed by House Democrats include payroll tax language, the Ways and Means staffers said.
After the caucus vote, Obama administration officials said they remain confident that “the major components” of the tax compromise will pass, according to White House representative Jen Psaki.
A Democratic advisor to the White House said that Senate Democrats “have several vehicles they can use” as the legislative base for the tax package, and that they are working on a plan to pass a tax bill and “then jam the House” with that legislation.
The White House-Republican tax package includes a 2-year extension of the Bush-era tax cuts. This extension could cost about $314 billion, according to the Congressional Research Service.
The Association for Advanced Life Underwriting (AALU), Falls Church, Va., has been active in estate tax negotiations.
“We continue to work with lawmakers to reiterate the importance of sustainable estate tax reform in the range of 2009 law, as well as the importance of reunifying the gift and estate tax levels as these important discussions move forward,” AALU President Nat Perlmutter says in a statement.
by NFS | Dec 9, 2010 | Archives
The 2010 Small Business Jobs Act, enacted on Sept. 27, 2010, provides a new opportunity for Roth 401(k) plan participants to convert their existing 401(k) plan balances into Roth 401(k)s.
“The Act also allows participants making the conversion in 2010 to spread the tax hit over a two-year period,” said Richard O’Donnell, a senior retirement plan analyst at the Tax & Accounting business of Thomson Reuters.
A Roth 401(k) plan has a “qualified Roth contribution program” that allows participants to make “designated Roth contributions” in lieu of all or some of the elective deferrals that they could otherwise make under a 401K plan. For example, if a participant defers $10,000 to his 401(k) plan that has a Roth program, he can elect to have some (or all) of his $10,000 deferral placed in the Roth portion of the plan. The downside is that amounts contributed to the Roth portion are not made on the pre-tax basis that typically applies to 401(k) contributions. The upside is that when the participant takes a distribution, those contributions, plus their associated earnings, are received free of federal income tax. So, the Roth 401(k) acts similar to a Roth IRA in that there is no tax advantage for contributions made to the plan, however, distributions from the plan are tax-free.
Some limits apply to Roth 401(k)s, for example, employer-matching contributions are not allocated to the Roth portion of a 401(k) plan. Further, once a deferral is contributed to the Roth portion of the plan, it must remain there. Unlike contributions made to regular Roth IRAs, there is no “recharacterization” provision to undo it. Therefore, a contribution to the Roth portion of a 401(k) plan is irrevocable.
O’Donnell notes that the 2010 Small Business Jobs Act provides new rules for Roth 401(k) plans that can provide plan participants with tax planning opportunities:
• The Act allows plan participants to convert in-service distributions from the non-Roth portion of their plan into Roth contributions. Participants who are eligible for an in-service distribution under their 401(k) plan (typically, once a participant reaches age 59 ½, or becomes disabled) can transfer qualifying, eligible rollover distributions to the Roth portion of the plan. Distributions that were not previously taxed will need to be included in taxable income. However, once distributed from the Roth portion of the 401(k) plan, these amounts and their earnings will be tax-free.
• This provision allows participants to “convert” their pre-tax employee deferrals and employer contributions into post-tax Roth contributions, without needing to take a distribution from the plan and then contribute that amount to a Roth IRA.
• However, amounts in a 401(k) plan account subject to distribution restrictions cannot be converted to Roth 401(k) contributions. Therefore, if a plan does not allow for in-service distributions or distributions before normal retirement age, Roth 401(k) conversions cannot be made.
• The 10 percent tax on early withdrawals (which generally applies to the taxable portion of a plan distribution made before the participant has reached age 59 ½, unless an exception applies) does not apply to distributions that are made as part of a Roth 401(k) conversion. However, “this relief comes with a caveat — a ‘recapture’ rule applies to distributions within a specified five-tax-year holding period,” said O’Donnell. “So, amounts contributed to the Roth portion of the 401(k) plan must remain there for five years to avoid this tax.”
• As an additional benefit, a participant may elect to spread the tax hit from the Roth contribution over two years for conversion distributions made in calendar year 2010. Under this provision, the participant includes one-half of the distribution that is subject to tax in income in 2011 and the other half in 2012. This defers taxes on the conversion and may lower the tax rate that would otherwise apply to the amount converted.
• This two-year tax-deferral tax must be accelerated, however, if the participant receives a distribution from the Roth portion of the 401(k) plan in 2010 or 2011. Acceleration is also required if the participant dies before 2012, unless a surviving spouse acquires the entire account and elects to continue the deferral.
• Instead of electing this two-year deferral, a participant may elect to include the entire taxable amount of the distribution in 2010 gross income. “This may be the best option for those who expect to be in higher tax brackets in 2011 and 2012,” said O’Donnell. Once made, a participant may not revoke this election after the due date, including extensions, of his 2010 federal income tax return.
Plan sponsors must amend their plans to permit Roth 401(k) conversions. However, sponsors have until the later of the last day of the year in which the amendment takes effect or December 31, 2011, to make the amendment for participants to take advantage of the tax deferral for 2010 conversions.
• Bagels in New York: In 2010, New York cracked down on its enforcement of the tax on prepared food, specifically targeting a New York staple: bagels. If you buy a whole bagel and take it home with you, it is exempt from tax. However, if you purchase that same bagel, but eat it at the bagel shop (even without cream cheese), bagel shops must charge sales tax on the purchase price. Apparently, the mere slicing of a bagel kicks your bagel purchase into a taxable transaction. As a result, New Yorkers are paying approximately 8 to 9 cents more per bagel.
