There are situations where partnerships consider partners to be employees. However, members of a partnership are not employees of the partnership within the meaning of the Federal Insurance Contributions Act, the Federal Unemployment Act, and other provisions relating to wages. Accordingly, the partner is not subject to FICA taxes or withholding requirements and should not be receiving a W-2. The IRS generally provides that income derived from any trade or business carried on through a partnership is considered self-employment income and subject to self-employment taxes. Furthermore, there are several other areas of the tax law that are affected by the distinction between self-employment income and wages including the areas of fringe benefits and estimated taxes.
Service Sheds Light on Sufficient Documentation of Investment Banking Fees
In a taxpayer favorable technical advice memorandum, the IRS National Office confirms that spreadsheets prepared by accounting firms, and the documents used to prepare the spreadsheets represent documentation that may support deductibility of success-based fees. Not only does TAM 201002036 provide a potential roadmap for documentation gathering, it is a useful tool when defending a taxpayer’s deduction under exam. The IRS has asserted under exam that detailed time records are required to support an allocation of success-based fees between deductible non-facilitative costs and facilitative costs subject to capitalization. However, the TAM clarifies the IRS National Office’s position that (i) the regulations under IRC section 263(a) do not require time records, but rather sufficient documentation, and (ii) under exam the IRS needs to consider all records the taxpayer has to support the treatment of its success-based fees.
Tax Treatment of Prepaid FDIC Assessments by Insured Depository Institutions
Questions have arisen from insured depository institutions regarding the proper tax treatment of the prepaid FDIC assessment that was invoiced on Dec. 15, 2009 and due by Dec. 30, 2009 for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, and whether there is an opportunity to accelerate a deduction into 2009 for assessments applicable to 2010. Read more in our extended article, Tax Treatment of Prepaid FDIC Assessments by Insured Depository Institutions.
Government Accounting Office Puts Spotlight on S Corporations
The Government Accountability Office (GAO) recently issued a report to the Senate Finance Committee titled “Tax Gap - Actions Needed to Address Noncompliance with S Corporation Tax Rules.” GAO had been asked to analyze and report on S corporation noncompliance and the revenue lost as a result.
After studying several years of S corporation returns and examination reports, GAO concluded that there were three mains areas of noncompliance: i) inadequate compensation of shareholders, ii) under reporting of income, and iii) deduction of losses in excess of shareholder basis. GAO reports the potential revenue loss as billions of dollars per year, so look for Congress and the IRS to take action to close the gap. More information on this topic is available in our extended article, Government Accounting Office Puts Spotlight on S Corporations.
Research Tax Credit for Prototype Development
In another partial taxpayer victory, Trinity Industries (Trinity), in U.S. District Court in Texas won a portion of their research credit claim for refund denied by the IRS. Trinity claimed the research credit for prototype development for special order ships. The IRS assertion that the prototypes were not a “business component” because they were not held for sale as inventory was correctly overturned by the court. Unfortunately, due to lack of records caused by events beyond the taxpayer’s control, only two of the six prototype projects were deemed to meet the “substantially all” rule in which 80 percent or more of the activities related to the business component constitute a process of experimentation. For more information, read our extended article, Research Tax Credit Allowed on Prototype Development for Special Order Products.
Second Chance for Deferred Compensation Plan Compliance
The IRS announced it is giving companies a second chance to get their non-qualified deferred compensation, severance pay, change in control, and nonqualified stock plans into compliance with existing laws. If such plans are not in compliance, participants are required to include benefits in taxable income at the time of vesting rather than upon receipt. In addition, the benefits are subject to a 20 percent penalty tax plus interest charges. The IRS had previously set a Dec. 31, 2008 deadline for bringing these plans into compliance. Plans that are amended by Dec. 31, 2010 in accordance with the Notice will generally be considered to have been timely amended retroactive to the prior deadline. For these reasons, this should be viewed as a second chance opportunity to bring such plans/agreements into compliance. More details on this opportunity can be found in our extended article, Second Chance to Bring Plan Documents into 409A Compliance.