December 2010


There seems to be a lot of practitioner questions about who needs to get a PTIN. CPE Link recently hosted a webcast on PTIN Regulations. Here are some of the questions that speaker Charles Sparano answered on that subject:

Q. If you are a private corporation preparing your own payroll tax return, do you have to get a PTIN?
A. At this time I don’t think that applies.

Q. I have a staff person that is behind on filing their own taxes. Can they get a PTIN?
A. They need to be current on their own taxes to obtain a PTIN.

Q. Does the PTIN requirement apply to individuals who only prepare payroll or other non-1040 series returns?
A. Yes.

Q. Does the firm itself need a PTIN or can the EIN still be used?
A. The EIN is what the firm uses, PTIN is for individuals.

Q. If you only make the phone call and don’t prepare the workpapers, are you required to have a PTIN?
A. If only asking clarifying questions and not preparing, it’s okay not to have a PTIN.

Q. If you only input the numbers into the tax return are you required to get a PTIN?
A. No, administrative workers do not need a PTIN.

Q. What about staff that only copy W2 (workpaper) and keys into tax software – required to get PTIN?
A. No if they only offer clerical assistance.

Q. What does an employee do with the PTIN if they never sign a return?
A. They may need it later to sign tax returns in the future.

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If you have clients who reside in or do business in California, don’t forget these important tax planning items:

The Franchise Tax Board (FTB) continues to scrutinize and audit, taxpayers using the Head-of-Household (HOH) filing status. FTB sent audit letters to about 135,000 filers who claimed HOH filing status on 2009 returns. Thus, it is worthwhile to review the rules with clients to be sure HOH is the proper status. Also see FTB Publications 1540 and 1585. The FTB also “highly recommends” that e-filers attached Form 4803e to their return to possibly avoid a HOH audit.

California Registered Domestic Partners (RDPs) will want to consider CCA 201021050 released by the IRS. It notes that change in CA properly law regarding community property and RDPs, means that for tax years beginning after 2006, a CA RDP is to report one-half of the community income. RDPs may amend prior year returns, but are not required to. PLR201021048 also notes that withholding credits would also be split equally between the RDPs. May be advantageous for some RDPs to amend federal returns as overall tax liability could be reduced. While there is not ruling, a similar result likely applies to CA same-sex married couples. See IRS Pub 555 on community property and FTB Pub 776.

To claim either the New Home or First-Time Buyer Credit, the individual must have a Certificate of Allocation which should also state how much can be claimed. Cautions:
• Individual must have timely applied and met qualifications – application due within two weeks of close of escrow.
• Must occupy home as principal residence for at least two years following purchase or will lose the credit. Be sure to ask client in 2010, 2011 and 2012.
• If unmarried co-owners, be sure each knows their credit (should be on their certificate – may want to check those of all co-owners to verify your client’s amount is correct).
• Keep copy of the certificate in taxpayer file.

For more tax tips for California taxpayers, register for the California Tax Update webcast taught by Annette Nellen, CPA, Esq., professor at San Jose State University. Choose to attend January 6 or January 12. Earn 2 CPE hours.

For the BIG (Built-in-Gains) tax, will the 5 year recognition period continue after 2011? For example, for an S election in 2005, can the shareholder remove all assets from the S corporation when the election to S from C was done in 2005?

Here’s what EA Bill Roos says: In the first place we need to understand exactly how the big tax is figured. The “recognition period” is defined in code section 1374(d)(7) and it is the 10 year period beginning with the first day of the first taxable year in which the Corporation was an S Corporation. The regulations clarify that this is meant to be a 120 month period beginning on the effective date of the S corporation election. For example, if the first day of the S corporation existence was July 14, 2000, the last day of the recognition is July 13, 2010.

The American Recovery and Reinvestment Act of 2009 modified the 10 year recognition period For certain S corporation’s taxable years beginning in 2009 and 2010. If the seventh taxable year in the Corporation’s recognition period proceeded either 2009 or 2010, then the built-in gains tax will not apply to that taxable year.

Example: Ajax Corp. was a C corporation that made its S corporation effective in calendar year 2003. The seventh taxable year in its recognition period would be 2009. Therefore, the new law modification of Ajax’s recognition period would not be effective until calendar year 2010. The built-in gains tax would apply to Ajax’s transactions occurring in 2011 and 2012.

In the question, the first S. corporation year is 2005. The 10 year recognition period would run until January 1, 2015. Under the seven year recognition period, Knoll built in gains tax would apply for transactions occurring in 2009 or 2010 if the first seven years of its recognition. Occurred before either 2009 or 2010. For a corporation whose first year is 2005, the seventh year would be 2011 and the two year window would have passed.

The 2010 Small Business Act adds that for S corporation tax years beginning in 2011, no built in gains tax is imposed if the fifth year of the recognition period preceded the 2011 tax year. Thus a seven-year period applies for 2009 and 2010 tax years, while a five-year period will apply for the 2011 tax year. The fifth year of the corporation in the question would end on January 1, 2010 and therefore, no built in gains tax would apply to transactions occurring in 2011 only.

For more helpful information on tax issues like this one, download your free copy of the Federal Tax Update: Part 4 Q&A document offered by CPE Link. As additional questions and answers are added, the document will be updated. Those who have downloaded the original document will receive all updates automatically.

Got questions?
If you have more questions and would like to continue to participate in the discussion, visit CPE Link’s Discussion Forum. Log into your Facebook account to post a question.

A taxpayer took money from their IRA under the lifetime distribution rule, to avoid the premature distribution penalty, for two years. In the third year, they took all the remaining balance of the IRA in that year. Is the penalty based on third year withdrawal only or the total of the IRA for all three years?

According to Bill Roos, EA, premature distribution penalties are figured only on the amount reported as income in any given taxable year. Therefore, the penalty would be figured on the amount being taxed on the pension line on the tax return. When this situation happens, be sure to check all of the other penalty exceptions to see if the taxpayer inadvertently qualified to use one or more of the exceptions to the penalty.

For more helpful information on tax issues like this one, download your free copy of the Federal Tax Update: Part 2 Q&A document offered by CPE Link. As additional questions and answers are added, the document will be updated. Those who have downloaded the original document will receive all updates automatically.

Got questions?If you have more questions and would like to continue to participate in the discussion, visit CPE Link’s Discussion Forum. Log into your Facebook account to post a question.

Since IRA’s can be used for higher education, why would it be advantageous to use a college savings plan (529), versus just funding an IRA?

The key advantage of using an IRA to fund college expenses is that it is deductible (an assumption) when the money is set aside. According to Bill Roos, EA, more advantages fall in favor of the 529 plan. A few of the advantages include: a higher amount can be set aside each year and five years contributions can be made in the first year to jumpstart the plan; assuming all of the plans proceeds are used for education there is no tax on the interest earned; the student has up to age 30 to apply the funds toward education; and any balance in the plan can be passed to another qualifying student in the family.

For more helpful information on tax issues like this one, download your free copy of the Federal Tax Update: Part 2 Q&A document offered by CPE Link. As additional questions and answers are added, the document will be updated. Those who have downloaded the original document will receive all updates automatically.

Got questions?If you have more questions and would like to continue to participate in the discussion, visit CPE Link’s Discussion Forum. Log into your Facebook account to post a question.