As a result of having gone through the process of the first financial statement audit of their 403(b) plans last year, many 403(b) plan sponsors have been confronted with operational errors discovered during the audit and are now wondering how to correct these errors without jeopardizing the tax favored status of their plans. The following is a general discussion of which errors may be corrected and how they may be corrected utilizing Internal Revenue Service (“IRS”) guidelines and correction programs.
Plan Document Errors
The IRS does not currently offer a program for 403(b) plan sponsors to correct plan document errors; however, they are in the process of updating their current correction programs under Revenue Procedure 2008-50, Employee Plans Compliance Resolutions System (“EPCRS”), to provide 403(b) plans with a correction procedure. What this means for now is that if 1) a 403(b) plan sponsor did not adopt and execute a written plan document that satisfied the legal requirements of Internal Revenue Code (“IRC”) section 403(b) and the final regulations thereunder by December 31, 2009, or 2) the plan sponsor had a plan document, but failed to operate the plan in accordance with the written provisions of the plan document, then the plan sponsor cannot, currently, submit such errors to IRS to correct the errors, which would give the sponsor assurance that such issues will not be raised by IRS during a future audit of the plan.
What a plan sponsor can do currently if they discover plan document errors is to contact their plan adviser to discuss a process for correcting the errors in a manner similar to what IRS would require of a plan sponsor that could utilize EPCRS to correct such errors. If a plan sponsor takes such action and documents the corrections, they have at least demonstrated a good faith effort to correct the error and comply with the law. The IRS will, generally, look favorably on such correction efforts and will be willing to work with the plan sponsor if the plan is audited.
Operational Failures
403(b) plan sponsors that have discovered errors in their plan’s operation may currently use EPCRS to correct the following types of errors:
1. Excluding eligible employees from the plan
2. Failure to make salary deferrals universally available to employees
3. Failure to limit participant salary deferrals to the IRC section 402(g) limit (currently $16,500)
4. Failure to limit employer matching contributions under IRC section 401(m)
5. Failure to limit participant compensation for plan purposes to the IRC section 401(a)(17) limit
(currently $245,000)
6. Failure to pay required minimum distributions to plan participants
7. Failure to satisfy distribution restrictions on salary deferrals and employer contributions under IRC
sections 403(b)(7) and 403(b)(11)
8. Problems with direct rollovers of participant distributions
9. Failure to meet the general nondiscrimination rules under IRC section 401(a)(4) as applied to 403(b)
plans
10. Failure to meet the minimum coverage requirements of IRC section 410(b).
The correction of these types of operational failures may be pursued in a manner similar to that outlined in Revenue Procedure 2008-50 and may or may not require the plan sponsor to submit the errors to the IRS for review and approval. Plan sponsors should contact their plan advisers to determine how best to correct an operational failure under the IRS’ correction program and whether the situation requires a formal submission to the IRS to correct the problem.
Conclusion
Sponsors of 403(b) plans whose plans are required to file a Form 5500 and/or have audited financial statements for their plans should not ignore problems with their plans should they be uncovered in a future IRS audit. Rather a plan sponsor should take advantage of the programs available through EPCRS to mitigate their risk of penalties should the IRS audit their plan in the future.
For further information or assistance, please contact Saltmarsh, Cleaveland & Gund, (850) 435-8300.
© 2011 EisnerAmper LLP
This publication is intended to provide general information to our friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
Wednesday, June 15, 2011
Friday, June 10, 2011
Dodd-Frank Implementation Update: SEC Listing Standards Regarding Compensation Committee and Advisor Independence
The Dodd-Frank Act was a game-changing event in executive pay – and a new season is underway. The Dodd-Frank Wall Street Reform and Consumer Protections Act of 2010 (“Dodd-Frank”) was initially about financial institutions reform but was expanded to address the executive pay policies and practices at all publically held companies.
The SEC has proposed listing rules for comment in reaction to Dodd-Frank that would apply to proxy filings made after July 16, 2012 pending the resulting rules by each independent exchange. The reality, however, is that institutional investors and shareholder groups may react sooner than this timeframe in their say-on-pay votes.
This is just the first installment by the SEC to address the provisions of Dodd-Frank. The issues that remain on the 2011 regulatory docket include pay equity, pay for performance, incentive payment clawbacks and stock option award hedging prohibitions. 2011 is shaping up to be a very memorable year in the history books of executive pay legislation and regulation.
What Has the SEC Proposed?
Section 952 of Dodd-Frank requires:
• compensation committee independence,
• compensation committee advisor independence,
• funding that will allow the compensation committee to retain independent advisors, and
• proxy statement disclosures on independence issues of compensation advisors to the compensation committee, conflicts of interest, and how those issues were resolved.
Who Does this Impact?
The SEC listing rules would only apply to companies with equity securities that are listed on public exchanges. The independence standards apply only to directors on the board serving on a committee that oversees executive compensation issues. The SEC calls this a “compensation committee” but this could be any committee that addresses executive compensation issues and the committee could address other additional functions or issues. The SEC’s committee independence requirements have five categories of companies that can be exempt from these standards:
• controlled companies (those owned 50% or more by another company or entity – this is a departure from the definition used for Audit Committee independence),
• limited partnerships.,
• companies in bankruptcy proceedings,
• open-end management investment companies registered under the Investment Company Act of 1940, and
• any foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee.
In addition, the proposed rules could authorize the exchanges to exempt a particular relationship from the independence requirements that apply to compensation committee members.
Compensation Committee Independence
The proposed SEC listing rules prohibit an exchange from listing an equity security for a company that does not meet certain independence standards. To consider the independence of a director, the exchanges must consider:
• the sources of compensation of a director, including any consulting, advisory or compensatory fee paid by the company to such member of the board of directors and
• whether a member of the board of directors of a company is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company.
As with all listing standards, the exchanges would seek the approval of the SEC before adopting them. The exchanges could add to or broaden how director independence will be determined beyond those listed in these guidelines. Similar to the rules for audit committees, a compensation committee would have one year to cure a defect should a committee member cease to be independent for reasons outside of their control.
These proposed listing rules are generally similar to the mandates of Dodd-Frank. Unfortunately, we all may have to wait for the modified listing rules established by the exchanges before we get a complete picture the rules that will be in effect for each exchange and registrant.
Compensation Committee Advisor Independence
The proposed rules also would require the exchanges to adopt listing standards providing that a compensation committee may select a compensation consultant, legal counsel or other adviser only after considering the following five independence factors:
1. Whether the compensation consulting company employing the compensation advisor is providing any other services to the company.
2. How much the compensation consulting company who employs the compensation advisor has received in fees from the company, as a percentage of that person’s total revenue.
3. What policies and procedures have been adopted by the compensation consulting company employing the compensation advisor to prevent conflicts of interest.
4. Whether the compensation advisor has any business or personal relationship with a member of the compensation committee.
5. Whether the compensation advisor owns any stock of the company.
Again, the SEC has essentially mirrored the requirements of Dodd-Frank, thus allowing the exchanges themselves the ability to impose additional considerations. If the compensation committee determined that a conflict of interest did exist with its advisor, the company would be required to describe the conflict clearly, concisely and in a manner that can be easily understood. They would also have to describe how the conflict was addressed on a case-by-case basis (a generic reiteration of corporate policies and procedures will not be viewed as satisfactorily addressing this requirement).
Note that while advisor independence is not mandatory, the optics of a perceived lack of independence would likely have a very negative impact on future mandatory say-on-pay shareholder votes.
Compensation Committee Funding
The proposed SEC listing rules would require the exchanges to adopt listing standards providing that the compensation committee of a listed company:
• may, in its sole discretion, retain or obtain the advice of a compensation advisor,
• is directly responsible for the appointment, payment and oversight of compensation advisors, and
• must be appropriately funded by the listed company.
This funding requirement essentially places the responsibility of advisory independence and the resolution of possible conflicts with the compensation committee.
Proxy Statement Disclosures
Note that Exchange Act registrants subject to the federal proxy rules are already required to disclose information about their use of compensation consultants, including specific information about fees paid to consultants that the SEC added in late 2009. The proposed rules would modify existing rules to require disclosure about whether:
• the compensation committee has retained or obtained the advice of a compensation consultant and/or.
• the work of the compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.
The proposed rules also would eliminate the current disclosure exception for services that are limited to consulting on broad-based plans and the provision of non-customized benchmark data, but would retain the fee-disclosure requirements, including the exemptions from those requirements.
Conclusion
The rules of the game have changed: The best approach is to make sure you have a trusted advisor who understands and can relate the regulatory revolution that is approaching, is independent from other management advisors, and will offer advice that is grounded in business. An SEC registrant effectively has less than a year to coordinate advisors between management and the Board. The SEC’s proposed listing rules places the onus on the Board to find advisors they trust. The following is a list of questions a Board/Compensation Committee may find useful in this selection process:
• Which business advisory service firms have existing or recent historic relationships with management that would impair or might give shareholders/regulators the perception that there are independence problems?
• Do we need a second outside opinion to make sure the advice we are receiving makes sense and best fits our unique needs and circumstances?
• Can we stay with our existing advisors or do we need to find another source of business advice and review for the Board/Compensation Committee?
o Do the alternative providers under consideration have the horsepower to
Remain in business over the long-term or does their viability depend on the talents
of less than a handful of specialists?
Track key accounting, tax and legal trends as they apply to executive pay issues?
Stand up to the demands of management and other dissenting directors?
Look for future updates as other major executive pay provisions of Dodd-Frank are enacted this year. Expect to hear more on pay equity, pay for performance, incentive payment clawbacks and stock option award hedging prohibitions as rules and requirements develop.
© 2011 EisnerAmper LLP
This publication is intended to provide general information to our friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
The SEC has proposed listing rules for comment in reaction to Dodd-Frank that would apply to proxy filings made after July 16, 2012 pending the resulting rules by each independent exchange. The reality, however, is that institutional investors and shareholder groups may react sooner than this timeframe in their say-on-pay votes.
This is just the first installment by the SEC to address the provisions of Dodd-Frank. The issues that remain on the 2011 regulatory docket include pay equity, pay for performance, incentive payment clawbacks and stock option award hedging prohibitions. 2011 is shaping up to be a very memorable year in the history books of executive pay legislation and regulation.
What Has the SEC Proposed?
Section 952 of Dodd-Frank requires:
• compensation committee independence,
• compensation committee advisor independence,
• funding that will allow the compensation committee to retain independent advisors, and
• proxy statement disclosures on independence issues of compensation advisors to the compensation committee, conflicts of interest, and how those issues were resolved.
Who Does this Impact?
The SEC listing rules would only apply to companies with equity securities that are listed on public exchanges. The independence standards apply only to directors on the board serving on a committee that oversees executive compensation issues. The SEC calls this a “compensation committee” but this could be any committee that addresses executive compensation issues and the committee could address other additional functions or issues. The SEC’s committee independence requirements have five categories of companies that can be exempt from these standards:
• controlled companies (those owned 50% or more by another company or entity – this is a departure from the definition used for Audit Committee independence),
• limited partnerships.,
• companies in bankruptcy proceedings,
• open-end management investment companies registered under the Investment Company Act of 1940, and
• any foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee.
In addition, the proposed rules could authorize the exchanges to exempt a particular relationship from the independence requirements that apply to compensation committee members.
Compensation Committee Independence
The proposed SEC listing rules prohibit an exchange from listing an equity security for a company that does not meet certain independence standards. To consider the independence of a director, the exchanges must consider:
• the sources of compensation of a director, including any consulting, advisory or compensatory fee paid by the company to such member of the board of directors and
• whether a member of the board of directors of a company is affiliated with the company, a subsidiary of the company, or an affiliate of a subsidiary of the company.
As with all listing standards, the exchanges would seek the approval of the SEC before adopting them. The exchanges could add to or broaden how director independence will be determined beyond those listed in these guidelines. Similar to the rules for audit committees, a compensation committee would have one year to cure a defect should a committee member cease to be independent for reasons outside of their control.
These proposed listing rules are generally similar to the mandates of Dodd-Frank. Unfortunately, we all may have to wait for the modified listing rules established by the exchanges before we get a complete picture the rules that will be in effect for each exchange and registrant.
Compensation Committee Advisor Independence
The proposed rules also would require the exchanges to adopt listing standards providing that a compensation committee may select a compensation consultant, legal counsel or other adviser only after considering the following five independence factors:
1. Whether the compensation consulting company employing the compensation advisor is providing any other services to the company.
2. How much the compensation consulting company who employs the compensation advisor has received in fees from the company, as a percentage of that person’s total revenue.
3. What policies and procedures have been adopted by the compensation consulting company employing the compensation advisor to prevent conflicts of interest.
4. Whether the compensation advisor has any business or personal relationship with a member of the compensation committee.
5. Whether the compensation advisor owns any stock of the company.
Again, the SEC has essentially mirrored the requirements of Dodd-Frank, thus allowing the exchanges themselves the ability to impose additional considerations. If the compensation committee determined that a conflict of interest did exist with its advisor, the company would be required to describe the conflict clearly, concisely and in a manner that can be easily understood. They would also have to describe how the conflict was addressed on a case-by-case basis (a generic reiteration of corporate policies and procedures will not be viewed as satisfactorily addressing this requirement).
Note that while advisor independence is not mandatory, the optics of a perceived lack of independence would likely have a very negative impact on future mandatory say-on-pay shareholder votes.
Compensation Committee Funding
The proposed SEC listing rules would require the exchanges to adopt listing standards providing that the compensation committee of a listed company:
• may, in its sole discretion, retain or obtain the advice of a compensation advisor,
• is directly responsible for the appointment, payment and oversight of compensation advisors, and
• must be appropriately funded by the listed company.
This funding requirement essentially places the responsibility of advisory independence and the resolution of possible conflicts with the compensation committee.
Proxy Statement Disclosures
Note that Exchange Act registrants subject to the federal proxy rules are already required to disclose information about their use of compensation consultants, including specific information about fees paid to consultants that the SEC added in late 2009. The proposed rules would modify existing rules to require disclosure about whether:
• the compensation committee has retained or obtained the advice of a compensation consultant and/or.
• the work of the compensation consultant has raised any conflict of interest and, if so, the nature of the conflict and how the conflict is being addressed.
The proposed rules also would eliminate the current disclosure exception for services that are limited to consulting on broad-based plans and the provision of non-customized benchmark data, but would retain the fee-disclosure requirements, including the exemptions from those requirements.
Conclusion
The rules of the game have changed: The best approach is to make sure you have a trusted advisor who understands and can relate the regulatory revolution that is approaching, is independent from other management advisors, and will offer advice that is grounded in business. An SEC registrant effectively has less than a year to coordinate advisors between management and the Board. The SEC’s proposed listing rules places the onus on the Board to find advisors they trust. The following is a list of questions a Board/Compensation Committee may find useful in this selection process:
• Which business advisory service firms have existing or recent historic relationships with management that would impair or might give shareholders/regulators the perception that there are independence problems?
• Do we need a second outside opinion to make sure the advice we are receiving makes sense and best fits our unique needs and circumstances?
• Can we stay with our existing advisors or do we need to find another source of business advice and review for the Board/Compensation Committee?
o Do the alternative providers under consideration have the horsepower to
Remain in business over the long-term or does their viability depend on the talents
of less than a handful of specialists?
Track key accounting, tax and legal trends as they apply to executive pay issues?
Stand up to the demands of management and other dissenting directors?
Look for future updates as other major executive pay provisions of Dodd-Frank are enacted this year. Expect to hear more on pay equity, pay for performance, incentive payment clawbacks and stock option award hedging prohibitions as rules and requirements develop.
© 2011 EisnerAmper LLP
This publication is intended to provide general information to our friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
Monday, June 6, 2011
Temporary Decrease in Self Employment Taxes
Did you know for 2011 the FICA portion of self-employment tax has decreased 2% for 2011? The temporary rate is 10.4% (down from 12.4%) up to the social security limit of $106,800 on net earnings from self-employment. If you expect to owe at least $1,000 in tax for 2011 after taxes withheld, you are generally expected to pay quarterly estimated tax payments. If you base your quarterly estimated tax payments on 90% of the tax expected to be shown on your 2011 tax return, you may be able to reduce your quarterly estimated tax based on your net income from self-employment by the 2% temporary FICA tax reduction. Consult your tax advisor to see if you can reduce your quarterly estimated tax payments.
Wednesday, June 1, 2011
Report of Foreign Bank and Financial Accounts (FBARs)
U.S. persons are required to file FBARs Form TD F 90-22.1 annually if they have a financial interest in or signature authority over financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.
Tuesday, May 24, 2011
You never know who you will meet at a PKF Conference...
This past week at the PKF Management Conference, Charles met Joe Thiesmann (former Redskins QB)!
Saltmarsh's Relay For Life Team
Looks like a great time was had by all who participated in this years' Relay for Life! Congrats Team Saltmarsh!
Audit girls take-on Warrior Dash
The other weekend, some of our Audit girls completed the first Warrior Dash in Mountain City, Georgia. The Dash consisted of an extreme run and 11 obstacles to complete that included: the Muddy Mayhem, Great Warrior Wall, Warrior Roast and the Menacing Minefield.
Great job girls!
 |
| Diane, Jen, Laura (Saltmarsh Alum) and Angelika after the Dash |
Great job girls!
Friday, May 20, 2011
Revenue Pharmaceutical Manufacturers or Importers of Branded Prescription Drugs – IRS Offers Dispute Resolution Process for the Preliminary Fee Calculation for the 2011 Annual Fee
On May 2, 2011, the IRS issued rules (Rev. Proc. 2011-24), which provide an exclusive process available to covered entities, which are certain manufacturers and importers of branded prescription drugs, to dispute the 2011 preliminary fee calculation and obtain any change to data that would be reflected in the final fee allocation. In order to participate in the dispute resolution process, a covered entity must submit a written error report to the IRS that is postmarked no later than June 1, 2011.
On May 16, the IRS was scheduled to mail a preliminary fee calculation to the taxpayers and taxpayers will have until June 1, 2011 to dispute the calculation.
The nondeductible annual fee on branded prescription drugs was enacted by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (the Acts). The aggregate annual fee will be $2.5 billion for 2011, increases to $4.1 billion for 2018, and decreases to $2.8 billion for 2019 and later. The aggregate annual fee will be allocated by the IRS to each covered entity based upon its proportionate share of branded prescription drug sales incurred during the preceding calendar year. Covered entities with branded prescription drug sales that are $5 million or less are exempt from this fee.
The fee will be calculated based on the proportion of each covered entity’s sales to any specified government programs which are: the Medicare Part D program, the Medicare Part B program, the Medicaid program, and any program under which branded prescription drugs are procured by the Department of Veterans Affairs, Department of Defense, and TRICARE retail pharmacy program.
IRS Notice 2011-9 asked taxpayers to submit a Form 8947 to the IRS by February 11 to provide data on branded prescription drugs, orphan drugs, and rebates. The Notice 2011-9 also provided methodology and the approach for the preliminary 2011 fee allocation to each covered entity.
Accounting Implication:
In December 2010, the FASB has issued Accounting Standards Update (“ASU”) No. 2010-27, Other Expenses (Topic 720): Fees Paid to the Federal Government by Pharmaceutical Manufacturers. This ASU provides guidance on how pharmaceutical manufacturers should recognize and classify in their income statement fees mandated by the Acts.
The amendments in this ASU specify that the liability for the fee should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The annual fee should be presented as an operating expense.
The amendments in this ASU are effective for calendar years beginning after December 31, 2010, when the fee initially becomes effective.
Tax Implications:
An entity’s portion of the annual fee is not tax deductible. The branded prescription drug sales do not include sales of any drug or biological product with respect to which a tax credit was allowed for any taxable year under IRC Section 45C.
If you require any assistance with the filing of written error report, Form 8947, or identification of Section 45C credit opportunities, please contact Saltmarsh, Cleaveland & Gund, (850) 435-8300.
Timelines Table:
February 11, 2011 (December 15 of each year in subsequent years):
IRS Notice 2011-9 asked taxpayers to submit a Form 8947 to the IRS by February 11 to provide data on branded prescription drugs, orphan drugs, and rebates.
May 16, 2011:
IRS will mail preliminary calculations to taxpayers
June 1, 2011:
If taxpayer believes that preliminary calculation contains error, it must make written error report to IRS postmarked by June 1 for claim to be considered.
August 15, 2011:
The IRS will mail final fee calculations to taxpayers by August 15 after making any necessary adjustments
September 30, 2011:
The payment of the fee from each taxpayer will be due no later than September 30.
© 2011 EisnerAmper LLP
On May 16, the IRS was scheduled to mail a preliminary fee calculation to the taxpayers and taxpayers will have until June 1, 2011 to dispute the calculation.
The nondeductible annual fee on branded prescription drugs was enacted by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (the Acts). The aggregate annual fee will be $2.5 billion for 2011, increases to $4.1 billion for 2018, and decreases to $2.8 billion for 2019 and later. The aggregate annual fee will be allocated by the IRS to each covered entity based upon its proportionate share of branded prescription drug sales incurred during the preceding calendar year. Covered entities with branded prescription drug sales that are $5 million or less are exempt from this fee.
The fee will be calculated based on the proportion of each covered entity’s sales to any specified government programs which are: the Medicare Part D program, the Medicare Part B program, the Medicaid program, and any program under which branded prescription drugs are procured by the Department of Veterans Affairs, Department of Defense, and TRICARE retail pharmacy program.
IRS Notice 2011-9 asked taxpayers to submit a Form 8947 to the IRS by February 11 to provide data on branded prescription drugs, orphan drugs, and rebates. The Notice 2011-9 also provided methodology and the approach for the preliminary 2011 fee allocation to each covered entity.
Accounting Implication:
In December 2010, the FASB has issued Accounting Standards Update (“ASU”) No. 2010-27, Other Expenses (Topic 720): Fees Paid to the Federal Government by Pharmaceutical Manufacturers. This ASU provides guidance on how pharmaceutical manufacturers should recognize and classify in their income statement fees mandated by the Acts.
The amendments in this ASU specify that the liability for the fee should be estimated and recorded in full upon the first qualifying sale with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. The annual fee should be presented as an operating expense.
The amendments in this ASU are effective for calendar years beginning after December 31, 2010, when the fee initially becomes effective.
Tax Implications:
An entity’s portion of the annual fee is not tax deductible. The branded prescription drug sales do not include sales of any drug or biological product with respect to which a tax credit was allowed for any taxable year under IRC Section 45C.
If you require any assistance with the filing of written error report, Form 8947, or identification of Section 45C credit opportunities, please contact Saltmarsh, Cleaveland & Gund, (850) 435-8300.
Timelines Table:
February 11, 2011 (December 15 of each year in subsequent years):
IRS Notice 2011-9 asked taxpayers to submit a Form 8947 to the IRS by February 11 to provide data on branded prescription drugs, orphan drugs, and rebates.
May 16, 2011:
IRS will mail preliminary calculations to taxpayers
June 1, 2011:
If taxpayer believes that preliminary calculation contains error, it must make written error report to IRS postmarked by June 1 for claim to be considered.
August 15, 2011:
The IRS will mail final fee calculations to taxpayers by August 15 after making any necessary adjustments
September 30, 2011:
The payment of the fee from each taxpayer will be due no later than September 30.
© 2011 EisnerAmper LLP
Wednesday, May 18, 2011
New Employee - Whitney Harrington
On Monday, Whitney Harrington joined the Pensacola office. Whitney is a recent graduate of UWF, where she received her Bachelor’s Degree in Accounting. She will be joining our team of Financial Institution Auditors and we are happy to have her. She will be sitting upstairs in the audit department, next to Brad Mostert.
Welcome Whitney!
Welcome Whitney!
Monday, May 9, 2011
IRS Provides Guidance on 100% Bonus Depreciation
On March 29, 2011, the IRS released Rev. Proc. 2011-26 providing much-needed guidance on 100% bonus depreciation and associated issues. This effectively clarifies a number of issues including two which may be of interest to our clients: the ability to elect alternative 50% bonus depreciation; and the ability to depreciate components of self-constructed property.
Background
The Obama Administration’s Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“the Act”) granted an additional 100% first-year depreciation for certain “qualified property” acquired or placed in service after September 8, 2010 and prior to January 1, 2012. The prior definition of “qualified property” remained intact – generally as acquired and placed in service after December 31, 2007 and prior to January 1, 2013 with original construction commencing with the taxpayer.
The Rev. Proc. provides much-welcomed guidance, inter alia, on self-constructed property in the context of 100% bonus depreciation; and on the ability to elect 50% bonus depreciation in lieu of 100% bonus depreciation or standard statutory depreciation deductions.
Self-Constructed Property
In general, for 100% depreciation purposes, self-constructed property is acquired when significant construction begins. Even if the construction of a property begins before the September 9, 2010 eligibility date, specific components of the project, with a proper election, may be eligible for 100% bonus depreciation if the component’s self-construction began or acquisition occurred after September 8, 2010.
Election of 50% Bonus Depreciation
Prior to the issuance of Rev. Proc. 2011-26, there was no ability to elect 50% bonus depreciation rather than 100% depreciation due to no affirmative guidance. For eligible property, taxpayers either opted for 100% bonus depreciation or elected out of the bonus depreciation regime entirely.
Fortunately, the new guidance permits taxpayers to elect – if preferable due to their particular tax positions – 50% bonus depreciation instead of 100% bonus depreciation. Because this has been released very close to the April 15, 2011 tax return filing deadline, taxpayers who have already filed their 2010 returns may opt for 50% bonus depreciation on an amended return filed prior to next year’s return or file an automatic accounting method change for either the first or succeeding years.
If the taxpayer elected out of bonus depreciation for a class of property, the taxpayer may revoke the election by June 17, 2011 or, if later, by the time it files next year’s tax return.
If you have any questions about this Alert, please contact Saltmarsh, Cleaveland & Gund (850) 435-8300.
© 2011 EisnerAmper LLP
Background
The Obama Administration’s Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“the Act”) granted an additional 100% first-year depreciation for certain “qualified property” acquired or placed in service after September 8, 2010 and prior to January 1, 2012. The prior definition of “qualified property” remained intact – generally as acquired and placed in service after December 31, 2007 and prior to January 1, 2013 with original construction commencing with the taxpayer.
The Rev. Proc. provides much-welcomed guidance, inter alia, on self-constructed property in the context of 100% bonus depreciation; and on the ability to elect 50% bonus depreciation in lieu of 100% bonus depreciation or standard statutory depreciation deductions.
Self-Constructed Property
In general, for 100% depreciation purposes, self-constructed property is acquired when significant construction begins. Even if the construction of a property begins before the September 9, 2010 eligibility date, specific components of the project, with a proper election, may be eligible for 100% bonus depreciation if the component’s self-construction began or acquisition occurred after September 8, 2010.
Election of 50% Bonus Depreciation
Prior to the issuance of Rev. Proc. 2011-26, there was no ability to elect 50% bonus depreciation rather than 100% depreciation due to no affirmative guidance. For eligible property, taxpayers either opted for 100% bonus depreciation or elected out of the bonus depreciation regime entirely.
Fortunately, the new guidance permits taxpayers to elect – if preferable due to their particular tax positions – 50% bonus depreciation instead of 100% bonus depreciation. Because this has been released very close to the April 15, 2011 tax return filing deadline, taxpayers who have already filed their 2010 returns may opt for 50% bonus depreciation on an amended return filed prior to next year’s return or file an automatic accounting method change for either the first or succeeding years.
If the taxpayer elected out of bonus depreciation for a class of property, the taxpayer may revoke the election by June 17, 2011 or, if later, by the time it files next year’s tax return.
If you have any questions about this Alert, please contact Saltmarsh, Cleaveland & Gund (850) 435-8300.
© 2011 EisnerAmper LLP
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