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- Worker, Homeownership and Business Assistance Act of 2009
- New U.S. Tax Proposals Regarding Foreign Accounts and Investments
- Uncertainties About State Taxation Of E-Commerce and Licensing Income
WORKER, HOMEOWNERSHIP AND BUSINESS ASSISTANCE ACT OF 2009
On November 6, 2009, President Obama signed the Worker, Homeownership and Business Assistance Act of 1009 (the “Act”). In addition to extending unemployment compensation benefits, the Act extended and expanded two tax benefits that were originally enacted to stimulate the economy.
Net Operating Loss Carryback
The Act provides an election for most taxpayers (not just small businesses) to increase the carryback period for a net operating loss (“NOL”) to 3, 4, or 5 years from 2 years. The amount of the NOL that can be carried back to the 5th tax year before the loss year may not be more than 50% of the taxpayer’s taxable income for that 5th preceding tax year determined without taking into account any NOL carrybacks. (This limitation does not apply to a qualified small business that made a five-year carryback election under the American Recovery and Reinvestment Act of 2009.) The provision applies to NOLs incurred in either 2008 or 2009, but not for both years. However, a qualified small business that elected to carry back a 2008 NOL under the American Recovery and Reinvestment Act of 2009 can also make an election to carryback a 2009 NOL for 5 years.
The Act suspends the 90% limitation on the use of any alternative minimum tax NOL deduction attributable to the carryback of an applicable NOL for which the extended carryback period is elected.
Taxpayers who incurred an NOL in 2008 should consider whether to amend their returns in order to benefit from these new carryback provisions.
Homebuyer’s Tax Credit
Prior law provided a tax credit of 10 percent of the purchase price of a new home by a first-time home buyer, with an $8,000 maximum credit, which expires at the end of November 2009. The Act extends the provision to cover purchases made before May 1, 2010. However, if a purchaser signs a binding contract by that date, the purchase will still qualify as long as the closing takes place before July 1, 2010.
The income range for eligible purchasers has been expanded. For purchases after November 6, 2009, the credit doesn’t begin to phase out until the modified adjusted gross income of the purchaser exceeds $125,000 for single filers, $225,000 for joint filers. (The old phase out thresholds were $75,000 and $125,000, respectively.)
The credit is also expanded to cover purchases of a new principal residence by individuals who have lived in their current principal residences for at least five consecutive years out of the last eight years. However, they will only be eligible for a $6,500 maximum credit.
The law caps the purchase price of eligible homes at $800,000.
A taxpayer may elect to treat a qualifying home purchase after 2008 as made on December 31 of the calendar year preceding the purchase for purposes of claiming the credit on the prior year’s tax return. Thus, someone who buys a home early in 2010 could take the credit on the 2009 tax return.
Revenue Raisers
Congress hopes to make these new tax benefits revenue neutral by including certain revenue raising provisions in the Act. These include: mandatory electronic filing of individual income tax returns filed after 2010, where the return is prepared by a preparer who normally prepares at least 10 individual income tax returns; higher penalties for failure to file partnership and S corporation returns; delaying until 2018 a generally favorable provision for allocation of worldwide interest in determining foreign source taxable income; and accelerating certain estimated tax payments for very large corporations.
NEW U.S. TAX PROPOSALS REGARDING FOREIGN ACCOUNTS AND INVESTMENTS
In late October 2009, the Chairmen of both the U.S. House Ways and Means and the Senate Finance Committees, as well as other senior committee members, announced proposed legislation entitled the Foreign Account Tax Compliance Act (FATCA). In view of its broad senior sponsorship, enactment of FATCA may be quite likely to move forward.
Brief Summary
FATCA would affect those dealing with foreign financial and non-financial entities (likely including hedge funds and private equity funds) by, inter alia:
1. Imposing a 30% U.S. withholding tax on the gross amount of income payments from U.S. financial assets to a foreign financial entity, unless it has entered into an agreement with the U.S. Internal Revenue Service (IRS) to obtain and report information about its U.S. investors, including those investing via foreign entities with substantial U.S. owners.
2. Imposing a similar withholding requirement on payments from U.S. sources to a foreign non-financial entity, unless it discloses to the payor the identity of all U.S. investors with a greater than 10% direct or indirect interest in the foreign entity and this information is in turn reported by the payor to the IRS.
3. Expanding current Foreign Bank Account Reporting (FBAR) reporting requirements and penalties.
4. Subjecting so-called dividend equivalent payments (e.g., pursuant to a notional principal contract) paid to a foreign person to a 30% U.S. withholding tax, unless reduced by treaty.
5. Requiring advisors that provide material assistance with respect to the formation of or acquisition of interests in foreign entities by U.S. individuals to report those transactions to the IRS.
Additional Matters & Questions
FATCA also would, inter alia:
• extend tax sanctions, such as non-deductibility of interest payments by the issuer, to bearer bonds designed for foreign markets (not just those marketed to U.S. investors), to mirror U.S. requests to other countries to restrict issuance of bearer bonds to U.S. investors;
• extend the statute of limitations for non-reporting of foreign assets to six years from filing of the required report;
• require annual reports of U.S. shareholdings in a passive foreign investment company (PFIC) even when no income from it is recognized; and
• add clarifications and presumptions to treat a foreign trust as having a U.S. beneficiary, provide that any use of trust property by a U.S. grantor, beneficiary or related person is a deemed distribution of the fair market value of the use of the property, and impose minimum penalties with respect to failure to report on certain foreign trusts.
Among other questions raised by FATCA are the ability of a foreign financial entity to know whether a foreign entity investing with it has substantial U.S. owners, and the ability of a U.S. withholding agent making a payment to a foreign non-financial entity to know whether the payee has identified all substantial U.S. owners, in order to avoid the 30% U.S. withholding tax requirements noted above.
UNCERTAINTIES ABOUT STATE TAXATION OF E-COMMERCE AND LICENSING INCOME
Even after more than ten years since the internet boom, state tax laws have not provided certainty around how they tax e-commerce. In addition, due to lack of definitive guidance from the states, diversity exists around the taxation of licensing income and sales of intangible property.
The problem is that most state tax laws are based on systems that tax tangible personal property. These laws are also geared toward situations where it is easily determined where the sale is made, where the seller is located, and where the customer is located. Those factors are not always easily determined when the product is digital (think music or electronic books) or when the customer is in motion. For example, I recently bought a best-selling thriller on my iPhone’s Kindle e-book reader at an airport connection. I live in New Jersey, Amazon is based in Washington, and the download took place in Georgia. So which, if any, of these three states is entitled to tax the income from this sale?
Two key issues to examine are nexus – does the state have the right to tax a company or individual? And if so, how is the income sourced to the state?
States generally tax a company if it is conducting business activities in the state. This is usually indicated by a company having property or people in such state. However, Public Law 86-272 provides that a state cannot levy an income tax on a company that is merely soliciting sales of tangible personal property in a state when the sales are accepted and fulfilled in another state. Thus, you can have a salesman soliciting orders without creating nexus in a state. This protection does extend to sales taxes but does not apply to intangible property and thus leaves open the question whether a state can tax sales of intangible property such as digital music downloads, sales of e-books, or web-based subscriptions.
To create even more diversity, several states have enacted so-called "economic nexus" statutes. These states would consider that companies have nexus, and should therefore file a tax return in that state, if they have intangible property which is being used in that state. Thus, just licensing a trademarked logo to a T-shirt company can cause the licensor to have nexus in the state where the licensee is located. This kind of transaction is not protected by P.L. 86-272.
Once nexus is established, states only tax a portion of a company’s income based on each state's apportionment rules. States typically use a three-factor approach which apportions income to that state based on the percentage of sales, property, and payroll located in that state. But many states have recently moved to a single-factor apportionment that is only based on sales made in the state. This is meant to capture more income from companies that sell into a state but have very little property or payroll in that state. However, single sales-factor apportionment also greatly benefits companies headquartered in such a state.
This leads to the next level of confusion in the e-commerce and intangible property sales areas. How are such sales to be apportioned to a state? Some states apportion intangible sales based on where the activities take place to generate the income (known as "cost of performance"). Other states apportion these types of sales based on where the intangible is used (known as "market-based" approach). Both methods 5 present difficulties in their application to e-commerce and intangible sales.
In a cost-of-performance state, it is sometimes difficult to source e-commerce sales because the online sales or services and related business activities can take place in many different states and at the same time. Market-based states present difficulties in sourcing intangible licensing income because it is sometimes impossible for a licensor to know where exactly its trademarks are being used.
Of all the states, New York seems to be providing more clarity than others. Companies will find some of the guidance to be beneficial and some not so much. The bad news first: New York passed legislation last May, which would require web-based companies to collect New York sales tax if it pays any unrelated New York-based web site a referral payments for sending it business. This is notwithstanding that the web-based company has no physical presence in New York.
For the good news, New York recently issued an advisory opinion in which it would allow a New York licensing company to apportion its licensing sales based on the address of its licensees. New York is a market-based state when it comes to apportioning intangible sales and recognized the difficulty in determining where intangibles are used. New York companies that license to out-of-state licensees will find this methodology to be very beneficial, particularly since New York State is a single-sales factor state and New York City also began phasing in single-sales factor apportionment beginning on January 1, 2009. |
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