Businesses Tax Updates

BUSINESSES

Retirement Savings Initiatives

With an eye towards helping Americans increase their savings, the IRS recently published guidance that would simplify procedures for employers who are willing to add enhancements to their qualified retirement plans.  The first is a series of sample plan amendments to allow for automatic enrollment in 401(k) plans and SIMPLE IRA plans.  The IRS has also provided sample language for plans with automatic contribution arrangements to increase the default percentage after the first year of participation. 

In a second series of pronouncements, the IRS has issued a ruling permitting companies that pay out unused vacation or sick pay to allow employees to direct those amounts into their 401(k) plan.  Similarly, retirement plans may be amended to permit unused vacation or sick pay that would be issued as compensation when an employee terminates, to instead be deferred into a qualified plan.  Based on who exercises discretion over the transfer to the retirement plan, the funding is categorized as either employer contributions or employee elective 401(k) contributions.

Finally, the IRS has issued safe harbor language that may be used by an employer’s qualified plan administrator to present an employee’s options when receiving an eligible rollover distribution.  This new guidance provides employers with a “rollover roadmap” that satisfies the required notice that employers must provide to employees who receive a distribution of their retirement plan account. 

For more information about all of these new initiatives, see (http://www.irs.gov/retirement/article/0,,id=212061,00.html?portlet=6).  We can also help to provide answers to your retirement plan questions.

Record Retention Policies for Businesses

You may not be aware that the IRS, in addition to providing rules for calculating tax liability and filing tax returns, also requires that taxpayers maintain for a period of time their books and records and other documents that support their tax return information.  These rules ensure that your records will be available to the IRS in the event of a future tax audit.  Generally, the record retention time period is based on the three-year statute of limitations period in which the IRS may assess a deficiency or the taxpayer may file an amended return.  This period runs from the due date of your income tax return or the date you file that return, if later.  For example, if you are a calendar year corporation and the 2009 income tax return for your business is due March 15, 2010, the three-year period will expire on March 15, 2013.  However, if you filed your return for that year on the extended due date (September 15, 2010) or late (e.g., November 1, 2010), the three-year period will lapse three years from the date you actually filed your return (September 15, 2013, or November 1, 2013, as the case may be). 

In some circumstances, the three-year period may be extended or eliminated altogether.  For example, a six-year statute of limitations will apply to taxpayers that have substantially understated their income (i.e., omitted more than 25% of the gross income required to be reported in the return).  A seven-year period applies to taxpayers who claim a bad debt or worthless stock deduction.  There is no limitations period if the IRS determines that the tax return is fraudulent or was never filed.  In that case, the IRS may assess tax at any time (e.g., 10 years after the return should have been filed).

To comply with this record retention policy, taxpayers are generally advised to add an additional year to the three-year limitations period and retain their records for a four-year period.  As an extra precaution, taxpayers may wish to retain their records for seven years, as has been informally suggested by the IRS.  Keep in mind, however, that each state may have its own set of rules for retaining records, and some businesses will have compliance obligations in multiple states.  Having business activity within a state (such as employees or property), and not reporting income tax or other taxes to that state, generally allows the state an unlimited examination and assessment period.

There are some records that taxpayers should keep for a longer period of time or indefinitely, such as records that establish the cost basis of property.  These should be retained until the property is sold or otherwise disposed of.  Certain documents, such as income tax returns, general ledgers, financial statements, results of an IRS or state tax audit, and legal documents such as insurance policies, real estate closing statements, and deeds should be retained forever.

The IRS has also published guidance for maintaining computer records (Rev. Proc. 98-25) and for maintaining records on an electronic storage system (Rev. Proc. 97-22).  The computer records maintenance rules dictate how taxpayers with at least $10 million of assets at year-end must retain their accounting and financial data on a computerized system for future IRS examination or audit, if not maintained manually.  These rules may apply to smaller taxpayers who use computers to support their tax return items or to calculate their tax liability.  Taxpayers who fail to comply with the computer record retention rules may be subject to significant penalties, including an accuracy-related penalty as well as a criminal penalty for intentionally disregarding these rules.

IRS rules permit the records to be stored electronically rather than in paper format.  A taxpayer may generally destroy its original hard copies and maintain computerized records, but state requirements may differ from the IRS rules.

As a final matter, businesses should establish document destruction policies to avoid the loss of important data and to avoid penalties imposed by the IRS and the courts.  Taxpayers should be able to show that their records were destroyed in the ordinary course of their business and that their policy complies with federal and state record retention policies.  Taxpayers may be subject to penalties if their records are destroyed and are not available for audit or litigation purposes, or if they deliberately destroyed their records to eliminate any potential incriminating information.  Please let us know if we can help you review your record retention policy.

Opportunityto Forego Bonus Depreciation to Gain Refundable Credits

The bonus depreciation rule that is in effect through December 31, 2009, permits businesses to claim an additional first year deduction equal to 50% of the adjusted basis of new property placed in service during the year.  This generally results in favorable tax consequences for most taxpayers.  Congress, however, recognized that there may be taxpayers incurring losses who would not benefit from accelerating their depreciation. 

The tax law permits corporations to make an election to forego taking bonus depreciation in order to claim, as refundable tax credits, a portion of their deferred pre-2006 tax credits (i.e., unused research tax credits and Alternative Minimum Tax credits).  These refundable credits are limited under several computations.  One of these limits requires a threshold amount of new equipment purchases during the year, based on the amount of carryover credits, in order to gain the maximum refundable credit for 2009.  For example, a corporation with $50,000 of unused credits would need to acquire about $38,000 of new equipment during 2009 to maximize its refundable credit. 

Recent IRS guidance advises how and when to make this election.  This guidance is very detailed and complex.  We can provide assistance in determining whether this new law is applicable to your business and whether you would benefit from electing not to claim bonus depreciation this year.