April
2002
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The Arkansas Public Accountant is the monthly publication of the Arkansas Society of Public Accountants. The society is a professional organization composed of Licensed Public Accountants, Enrolled agents and persons holding out to be accountants or tax preparers with their services available to the public. This organization is dedicated to helping our members give the best possible service to their clients. We are happy to accept articles and/or advertising that would be of interest to our members and ask that you submit any thing for publication by the 25th of the month to be included in the next month’s publication.
Please send to: LaVERNE
LONG, Editor |
The Arkansas Public Accountant
OFFICERS & GOVERNORS 2001 - 2002
OFFICERS
President President Elect 1st Vice-President 2nd Vice-President Executive Secretary |
DeQueen Hot Springs Newport |
BOARD OF GOVERNORS
District I District II District III District IV District V District VI |
Pocahontas Searcy West Memphis Little Rock Prescott Nashville |
FROM THE PRESIDENT’S PEN
Dear Members:
I hope everyone survived another tax season without too many bumps and bruises. I Certainly am glad to have my 33rd tax season behind me. I only have about 10 or 15 to go.
I hate to bring up subjects that make your head hurt this time of year, but this is something you all need to consider if you haven't already. The Economic Growth and Tax Relief Reconciliation Act of 2001 raised limits, starting January 1, 2002 on retirement plan contributions and college savings plans and allowed more fluid pension portability. Some states did not change their tax codes to reflect these changes. Do not use the new limits in the following states: Arizona, Arkansas, California, Hawaii, Idaho, Iowa; Kentucky, Maine, Massachusetts, Mississippi, North Carolina, Pennsylvania, South Carolina and Wisconsin. States do not always follow the Internal Revenue Code. If you are in one of the states noted above, you might want to contact your state legislators and urge them to bring the state law on retirement plans into line with the federal law. If any of you have any influence with your legislators, please take a few minutes to drop them a note, email or give them a quick call and explain what is happening. I received the above information from my NSA email alert. Hope this information helps to head off problems with some of your clients.
With all of the scandal going on with Enron and Arthur Anderson, it is no wonder some people are losing faith in the accounting profession. This is all the more reason for us to remain vigilant in our efforts to be independent with our clients.
I hope everyone finished tax season with a small portion of his or her mind still functioning. It is about time to think about starting our annual round of seminars. The first of which will be the Gear Up Accounting Seminar on May 29 and 30 at the Holiday Inn Select in Little Rock. I bet you can't wait to go spend two days listening to lectures.
I hope to see you all in May
Sincerely,
James C. Hodge, President
Arkansas Society of Public Accountants
NEWS FLASH!!!
Extension For Renewal of Enrolled Agent Status
The Service has announced that it has extended the enrolled agent card expiration date from March 31, 2002, to April 30, 2002.
RENEWAL OF ENROLLED AGENT STATUS
SUMMARY
The Service has announced (Announcement 2002-41) that it has extended the enrolled agent card expiration date from March 31, 2002, to April 30, 2002, because all of the cards for the upcoming three year cycle will not be mailed out by March 31.
FULL TEXT
Enrolled agent cards will expire on March 31, 2002. However, all cards for the upcoming three year cycle will not be mailed out by that date. Therefore, the Director of Practice has extended all current enrollment cards until April 30, 2002. Anyone not receiving their enrollment card by that date should call (313) 234-1280 or e- mail the Enrolled Practitioner Unit at epp@irs.gov. Enrolled agents may continue to use their existing enrollment card until April 30, 2002.
TAX INFORMATION FROM IRS
APRIL 2002
Provided by SB/SE Taxpayer Education and Communication
Nashville, TN
Job Creation & Worker Assistance Act of 2002
On March 9. 2002 the President signed H.R. 3090, the Job Creation and Worker Assistance Act of 2002., which provides a 13 week extension of unemployment benefits as well as a number of tax breaks designed to encourage investment. The Act also provides technical corrections for recently enacted legislation and a two year extension (through December 31, 2003) of many of the expiring tax provisions. Listed below we have listed a brief summary of some of the tax provisions contained in the Act.
BUSINESS PROVISIONS
30 Percent First-Year Depreciation- The Act allows 30 percent additional first-year depreciation, for both regular tax and alternative minimum tax, for property placed in service after September 10, 2001, in taxable years ending after that date. To qualify for the additional first-year depreciation deduction the property must be: (1) property to which general rules of MACRS apply with an applicable recovery period of 20 years or less (i.e. vehicles, computers, office equipment, etc.), (2) water utility property, (3) certain computer software, or (4) qualified leasehold improvement property. In addition, the property generally must be new property acquired after September 10, 2001 and before September 11, 2004. Note, this provision applies t o2001 calendar year filers. Taxpayers entitled to this additional 30 percent depreciation for 2001 who have already filed will have to file amended returns. Guidelines on how to claim the additional 30 percent deprecation for 2001 are forthcoming.
Five-Year Carry back of Net Operating Losses (NOL) - The Act temporarily extends the general NOL carry back period to five years (from two years, or three years in certain cases) for NOLs arising in 2001 and 2002. The Act also allows an NOL arising in or carried forward to taxable years ending in 2001 and 2002, to offset 100 percent of a taxpayer's alternative minimum taxable income (AMTI). Note the five-year carry back provision is effective for NOLs generated in taxable years ending after December 31, 2000. The provision allowing the use of Nol carry backs and carry forwards to offset 100 percent of AMTI is effective for taxable years ending before January 1, 2003.
MISCELLANEOUS AND TECHNICAL PROVISIONS
Allow Form 1099 to be Furnished Electronically - The Act removes the statutory impediment to providing copies of specified information returns to taxpayers electronically. Accordingly, these copies may be furnished electronically to consenting recipients and copies may be furnished in a similar manner to Form W-2 in another manner provided by the Secretary.
Discharge of S Corporation Indebtedness - The Act provides that income from the discharge of indebtedness of an S corporation that is excluded from the S corporation's income does not increase the basis of any stockholder's stock in the corporation (i.e., the Act reverses the Supreme Court decision in Gitlitz vs. Commissioner). The provision applies generally to discharges after October 11, 2001.
Deduction for Classroom Materials - The Act provides an above-the-line deduction in 2002 and 2003 for up to $250 annually of expenses incurred by teachers, instructors, counselors, principals, etc. for books, supplies, computer equipment, and materials used in the classroom.
Technical Corrections and Clerical Amendments - The Act provides numerous technical corrections and clerical amendments to recently enacted tax provisions. Some of the more notable provisions are:
- Clarifications and transition rules for the 2001 adoption tax credit changes;
- Clarification to the 2001 pension-related amendments.
Ed. note: There are also a number of extensions of certain expiring provisions included in this Act. I cannot list all of any of the provisions in my limited space, so therefore I again furnish you with the Web site to look these up and see them in their entirety. www.irs.gov or call toll free (800) TAX-FORM
The IRS has posted to its web site revised forms related to depreciation and new instructions for claiming net operating losses. The materials, for tax year 2001, reflect changes made by the recently enacted Job Creation and Worker Assistance Act. You may download the revised materials from the aforementioned site and use them immediately.
PRACTITIONER ALERT:
This has just come in from Gregory O. Metcalf, who is the new person in Little Rock IRS District. He will be in touch with us through this newsletter and on our Web site.
Electronic filing of Corporate Returns in January 2003:
The IRS is moving forward in its continuing efforts to provide electronic alternatives to filing paper returns by its business customers. The latest work in progress is for Form 1120, U.S. Corporation Income Tax Return and Form 1120S, U.S. Corporation Income Tax Return for an S Corporation. The IRS has established partnerships and working groups with software developers, accounting firms and tax practitioners to ensure the unique issues and needs of each market segment are addressed. If you are interested in filing form 1120/1120S electronically, please ask your software developer if they are planning to offer this feature in future releases of their tax preparation software packages.
Initial release of the Form 1120/1120S electronic filing program is planned for January 2003 and will include 14 of the most commonly used forms and schedules. Keep watching for future updates and developments as the IRS continues to work on its IRS e-file for business programs and services.
MISCELLANEOUS TAX INFORMATION
IRS states the amount of income exempt from tax levy. The IRS has published tables showing the amount of wages and other income that an individual who owes back taxes can keep exempt from an IRS levy. The exempt amount varies by level of income, filing status, and number of exemptions claimed on the tax return. Example: A taxpayer who is married, files jointly, is paid by-weekly, and claims two exemptions (including one for himself) can exempt $532.69 from each pay period. Details: See IRS notice 2001-83, published in Internal Revenue Bulletin, 2001-52, available on the IRS Web site, www.irs.gov.
Easier accounting rules for restaurants and taverns. The IRS has adopted simpler accounting rules for "smallwares" - glassware, utensils, pots, small appliances, etc. These items are a large cost for these businesses, and accounting for them has been a frequent source of disputes. The IRS says the new rules will ease accounting and avert costly audit disputes. To take advantage of the new rules, review IRS Revenue Procedure 2002-12, IRB2002-3.
IRAs, SEPs and Simple retirement plans must be amended during 2002. The Tax Relief Act of 2001 changed many important rules for these plans, and the IRS has just issued "guidance" telling how they must be amended to comply with the law. "Prototype plans" sponsored by financial institutions must receive IRS opinion letters indicating that required changes have been made. The IRS has made model forms available for taxpayers who want to use pre-approved documents to set up one of these plans without using a prototype document.
Details: IRS Revenue Procedure 2002-10, Internal Revenue Bulletin 2002-4.
Profit motive survives 14 years of losses. An individual started a business as a proprietorship and incurred 14 consecutive years of losses, which he deducted on his personal tax return, before making it soundly profitable. The IRS disallowed his deductions for the loss years, saying he had no profit motive during that period.
TAX COURT: From the start, the individual operated in a businesslike manner, keeping good business records and continually revising his business plan to become profitable. The fact that his efforts eventually succeeded demonstrated his profit motive. The losses remained deductible. Jeffery Tamms, TC Memo 2001-210.
Entrepreneur's large pay is reasonable. An individual took over a business worth $200,000, built it up to be worth $12.5 million, then sold it, but he stayed on to run it as an employee of the buyer. While he owned the business, he took year end bonuses of 10% of gross sales and his total annual pay exceeding $1 million. The IRS said the pay was excessive and cut the company's deduction for it. It said reasonable pay was about half that much - what the individual earned later to run the business as an employee.
TAX COURT: The business provided superior investment returns even after paying the owner's compensation, so investors would have been happy with the pay and it was reasonable. The individual's lower pay rate was irrelevant because he no longer had the duties of an owner. Damron Auto Parts, Inc. TC Memo 2001-197.
Day Traders "Loophole": Make the "market to market" election under Section 475 of the tax code. This gives a person engaged in day trading several tax advantages over long-term investors, including....
- Full deductibility of investment interest. For long-term investors, investment interest is deductible only to the extent of the investment income.
- Full deductibility of investment losses. For long-term investors, write-offs are restricted. Losses must first be used to offset capital gains, with only $3000 of excess losses deductible against ordinary income each year. Unused losses can be carried over into future years.
- Full deductibility of investment expenses. Investment expenses are generally considered "miscellaneous expenses," deductible only to the extent they exceed 2% of adjusted gross income.
- Reporting catch up contributions: Starting in 2002, employees 50 and older can make extra "catch-up contribution" elective deferrals to 401(k) plans and other retirement plans in excess of normal contribution limits.
IRS: For 2002, employers are required to report employees' elective pension deferrals on Form W-2 in box 12 using Codes D thru H and code S.
ALSO: Reporting for catch-up contributions will be addressed in the 2002 "Instructions for Forms 1099-R and 5498. IRS Announcement, 2001-93' IRB 2002-44, 416.
Partner under investigation can't bind others. The IRS began a criminal investigation of the managers of a partnership that it suspected o being an illegal tax shelter. It obtained a waiver of the statute of limitations from the partnership's designated "tax matters partner: (TMP), which gave it extra time to conduct the investigation. Later it assessed taxes against the partnership's other investors.
COURT: When the TMP became the subject of a criminal investigation, a clear conflict of interest arose between him and the other partners - so he lost his authority to bind them with the tax waiver. Thus, the limitation period had expired for the other partners and they were safe from tax. Alan L. Wechsier, DC SD NY, No.99 Civ 1578; 87 AFTR2d p.2001- 922.
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