The New York State 2009-10 budget package includes a number of provisions that were recently enacted by the legislature.  These provisions will affect personal and business income, as well as sales tax for New York State taxpayers. A summary of the most relevant tax changes is as follows:

• They have received greater tax benefits than was invested in employment and facilities within the Empire Zone (the one-to-one test), or


• Its employment and investment gains are merely transfers from other related New York entities (applicable to businesses certified before August 1, 2002), or 


• It moved out of the Empire Zone or changed ownership

• Interest rates applicable to underpayments of tax have been increased by 1.5%, with most changing from 6% to 7.5%.


• The deadline for filing the annual quarterly combined withholding, wage reporting and unemployment insurance return has been moved from February 28^th to January 31^st.


• The Commissioner can now share with the IRS any information received as a result of the Voluntary Disclosure and Compliance Program.


• Regarding sales tax refunds and credits, the State is permitted to avoid payment of any interest, if the payment of the refund is made within 3 months after the return on which the refund claim was filed.


• Any person aiding or assisting in the giving of fraudulent sales tax returns or other documents with the intent to evade tax will now be subject to a civil penalty not to exceed $5,000.
  

   

  
  

By William Prue, Director of Accounting and Auditing      

Private companies have received a temporary reprieve on an accounting rule that changes the way they will be required to account for income taxes on financial statements.  The Financial Accounting Standards Board (FASB) voted to defer the effective date of FASB FIN No. 48, Accounting for Uncertainty in Income Taxes, for all private companies to periods beginning after Dec. 15, 2008.  This means calendar year companies will be required to adopt FIN 48 on their 2009 financial statements, rather than 2008. 

FIN 48 has already gone into effect for public companies for fiscal years beginning after Dec. 15, 2007. The standard establishes a "more likely than not" threshold for the reporting of uncertain tax positions on financial statements, but has already run into high costs and difficulties at public companies.

FIN 48 Background: 

The requirements of computing and reporting uncertain income tax positions under the guidelines of FIN 48 add to the already complex standards of FAS 109 “Accounting for Income Taxes”. The purpose of FAS 109 is to recognize (a) the amount of taxes payable or refundable for the current year and (b) the deferred tax liabilities and assets of future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. FIN 48 takes the principles of FAS 109 further by requiring additional computations, documentation, and disclosures of a company’s individual tax exposures in the financial statements. FIN 48 is intended to reduce inconsistencies and increase the relevance and comparability in the application of the accounting rules related to income tax contingencies.

FIN 48 applies to all entities that prepare financial statements in accordance with GAAP with the potential to be subject to income tax. This includes both pass-through and not-for-profit entities that may be subject to state and local taxation or not-for profits subject to unrelated business income as well as the possibility of having done something to jeopardize their tax-exempt status.

The delay is viewed as a positive relief for most private companies because it affords more time to prepare. The adoption of FIN 48 by a private company will allow for a fresh look at its tax exposures and to evaluate tax planning implemented in the past so that a company can execute the appropriate steps to minimize risk in the future. 

Private companies can benefit from the experiences of public companies that were required to implement FIN 48. The process can be cumbersome and some public companies are still struggling with the implementation. It is important to start the process early. FIN 48 allows for any initial adjustments to be reflected in the opening balance sheet without an adjustment to the income statement. However, for all subsequent years beyond the initial year of adoption, adjustments as a result of the FIN 48 analysis must be reflected in the income statement. Per-forming a thorough analysis in the initial year may minimize unwanted outcomes affecting earnings in future years.

The implementation of FIN 48 for private companies has only been delayed and will not go away.  Under the guidelines of FIN 48, companies are required to inventory all previous and current tax positions that are still subject to audit within the statute of limitations.  The next step is to evaluate each position on the uncertainty and whether each position individually satisfies a more-likely than not threshold (greater than 50%) of sustainability at the full amount during an examination. After the level of uncertainty is determined, a rather complex subjective computation is required to determine the materiality of the uncertainty, financial statement impact, and potential disclosure within the financial statements presented under GAAP.

The ideal next step for a private company is to coordinate a plan of action with their tax advisors to implement FIN 48. Planning early may enable changes to be made in the filing of 2008 tax returns thereby minimizing the amount of uncertainty of income tax positions required to be disclosed.  The best way for a private company to take advantage of the delay is to be proactive and start the FIN 48 process early.

• Decision to not file a tax return (it is important to note that the statute never closes on a return not filed).


• Credits (such as foreign tax credit or research & development credit)


• State and local nexus issues


• International issues (such as transfer pricing)


• Revenue recognition policies


• Timing of deductions


• Complications inherent in mergers & acquisitions or restructuring


• Inappropriate valuations


• Poor documentation to support positions

The initial disclosures under FIN 48 for most private companies will be reported in the 2009 financial statements. However, in most cases, we recommend that the planning of FIN 48 engagements should be done much earlier. The timing and fees of a FIN 48 engagement will greatly depend on the history of the company, the complexity of the issues, and the documentation already in place.

There are concerns regarding the amount of disclosure in the financial statements and the use of the disclosures by the IRS to provide a roadmap for examinations. Currently, the IRS is taking the position of not requesting the workpapers that support the FIN 48 analysis during an examination. However, the IRS’s position is subject to change in the future.

Click here to read the tax alert in its entirety

Please click here to see the Alert in its entirety

To read the alert in its entirety click here

Click here to read the tax alert in its entirety

Click here to read about the new law in its entirety

Click here to read the newsletter in its entirety

Click here to read the article in its entirety

Click here to read the tax alert in its entirety

Click here to read the newsletter in its entirety

By Jeffrey Gold, CPA

Under a provision of the Tax Increase and Reconciliation Act of 2005 that becomes effective in 2010, anyone (regardless of income) may now convert traditional IRA accounts into Roth IRA accounts. Previously, conversions were only permitted for taxpayers whose income (not including the Roth conversion itself, which adds to income) was not more than $100,000. The new law also includes a one-time special rule that allows taxpayers to delay for up to two years the tax due on Roth conversions that occur in 2010.

Many middle- and higher-income taxpayers who were unable to take advantage of traditional-to-Roth IRA conversions in the past now have a new choice. The elimination of the income threshold to Roth conversions presents a variety of opportunities and risks.

In order to understand this change in the tax law, it is necessary to understand what a Roth IRA is, how it differs from a traditional IRA, and advantages and disadvantages of each type of account. Unlike a traditional IRA, contributions to a Roth IRA cannot be deducted from taxable income. However, the Roth IRA has many positive features not found in traditional IRAs. Foremost among these is that the income earned in the Roth IRA is never taxed. In a traditional IRA, taxation is merely deferred – tax must be paid on all distributions eventually taken. (Even if you die before the account is fully distributed, your heirs will owe income tax when they receive it). By contrast, once you have owned any Roth IRA account for at least five years and are at least 59½ years old you (and your heirs) will never pay tax on distributions from your Roth IRAs, no matter how large they have grown.

The second major benefit is the ability to leave the money in the Roth IRA, earning tax-free income, after you retire. When a taxpayer turns age 70½, he must begin taking required minimum distributions (RMDs) from a traditional IRA based on his life expectancy. There are no RMDs from a Roth IRA, so if the money is not needed for living expenses, the entire balance may continue to compound tax-free in the Roth.

Another difference from traditional IRAs is the ability to continue contributions even past age 70½. This may be a consideration as depleted retirement portfolios cause some individuals to defer retirement. For younger people, Roth IRAs allow withdrawal of original contributions (but not earnings), even before age 59½, with no tax consequences. Since the funds in the Roth IRA will continue to compound tax-free as long they remain there, removing them in this manner should be considered last, and only after all other sources of funds are considered. But if it must be done, at least it will not result in a tax bill when you can likely least afford it.

Whether a Roth or traditional IRA is the better choice depends on many factors. The younger you are, the longer the income of a Roth IRA will compound tax-free, which can dramatically increase the benefits. An older taxpayer may not receive sufficient years of tax-free income to offset the loss of the tax deduction that a traditional IRA can provide. Your expectation of future changes in tax rates may also affect the decision. By forgoing the tax deduction, you effectively choose to pay tax at the current rate. If tax rates increase in the future, you may be locking in a beneficial rate. Conversely, if you will be in a lower tax bracket after you retire than you are now, a traditional IRA may make more sense. A low-income year can also make a Roth IRA advantageous.  For example, if you have a net operating loss, or if your deductions and exemptions exceed your income in a particular year, the deduction provided by a traditional IRA may not save any tax. Contributing instead to a Roth IRA can provide the valuable Roth tax benefits at little or no cost.

For 2009 and 2010, individuals under 50 may contribute up to $5,000 of their compensation each year to an IRA (older taxpayers may contribute $6,000). This contribution can be made to either a traditional or a Roth IRA, or split between both types (as long as the total does not exceed the maximum). Contributions may be made during the year and up until April 15^th of the following year (so 2009 contributions can still be made until April 15, 2010). Certain income limits prevent higher-earning taxpayers from contributing to Roth IRAs. The allowable Roth contribution limit is reduced for joint filers with modified adjusted gross income from $167,000 to $177,000 and single taxpayers from $105,000 to $120,000.  Taxpayers with higher incomes cannot make annual Roth IRA contributions.

Besides annual contributions, another way to fund a Roth IRA is to convert all or any portion of your existing traditional IRA accounts to Roth IRAs. Your IRA custodian can do this quite easily, but it has tax consequences. The amount converted is includible in taxable income in the calendar year the conversion takes place. For example, a taxpayer who lives in New York City may pay a combined tax rate (federal, state, and city) of 45%. Converting a $100,000 traditional IRA to Roth will cost a tax outlay of $45,000. But after the conversion, neither the original $100,000 nor the future earnings on it will ever be taxed. If the taxpayer is 40 when he converts the account, and it returns an average 5%, he will have over $335,000 at age 65 – all of it completely tax-free. If the funds had remained in a traditional IRA, he would have to pay more than $150,000 of tax (assuming rates remain the same) on a distribution of those funds.

 The tax on the conversion is usually paid from funds outside the IRA, and this creates two additional tax advantages. First, it in effect allows the taxpayer to make an extra contribution to his retirement. The taxpayer in the example above will have a $100,000 IRA balance whether or not he converts – but in a traditional IRA, the account is really only worth $55,000 to him since he must pay $45,000 of tax to access it. The Roth IRA is worth the full $100,000, since there is no tax – so by converting he has essentially contributed an extra $45,000 to his IRA. Second, by paying the $45,000 tax to the government it is removed from the taxpayer’s estate for estate tax purposes. If the $100,000 account remained a traditional IRA, the taxpayer would have $145,000 in his taxable estate – the IRA and the $45,000 outside the IRA that he could have used to pay the tax on the conversion. By converting to Roth, the taxpayer owns essentially the same after-tax asset, but his taxable estate contains only the $100,000 Roth IRA. Thus, $45,000 has been removed from his estate, potentially saving $20,000 or more of estate tax.

Up until the end of 2009, a conversion was not permitted if the taxpayer’s modified adjusted gross income (generally his income before the Roth conversion itself is considered) exceeded $100,000 (this applied to both single and joint filers). Thus, many middle- and upper-income taxpayers could not take advantage of a conversion. Starting in 2010, this restriction is permanently removed. On or after January 1, 2010, all taxpayers may convert any amount of traditional IRA accounts to Roth, as long as they are willing to pay the tax on the conversion. As a result of this change, higher-income taxpayers may also bypass the income limit for annual contributions to Roth IRAs (discussed earlier) by contributing to a traditional IRA and immediately converting it into a Roth IRA.  This achieves the same result as an annual contribution, but may be done at any income level.

The law change also provides that for 2010 conversions only, the resulting income is taxable half in 2011 and half in 2012, not all in 2010 as under the normal conversion rules. A taxpayer may, however, choose to pay tax on the conversion in 2010. This may be desirable if he has excess deductions in 2010, or if he expects to be in a much higher tax bracket (or expects Congress to increase tax rates significantly) in 2011 and/or 2012.

Traditional IRA contributions are not always deductible. Taxpayers who participate (or whose spouses participate) in employer-sponsored pension plans cannot deduct IRA contributions if their income exceeds certain limits. Such taxpayers may still contribute to traditional IRAs; however, they will not get a tax deduction for this contribution. Such after-tax contributions create "basis" in the IRA – since no deduction was taken at the time of contribution, no tax is due when the amounts are later distributed. Taxpayers that have made non-deductible contributions to a traditional IRA keep track of their basis on Form 8606 in their annual income tax returns.

Unlike a Roth IRA, earnings in a nondeductible traditional IRA are taxable upon distribution. A taxpayer with a non-deductible IRA may also own a separate IRA funded with deductible contributions, fully taxable when distributed. When taking traditional IRA distributions, a taxpayer cannot choose to withdraw her non-taxable basis first – any distribution is considered to come proportionately from taxable and non-taxable funds in all traditional IRA accounts. Only the original non-deductible contributions are tax-free. For example, assume a taxpayer owns two traditional IRA accounts.  One is $60,000 IRA that was funded with only pre-tax (deductible) contributions.  The other is a $40,000 nondeductible IRA which contains $30,000 of after-tax contributions (basis) and $10,000 of earnings.  Her total IRA balance is $100,000, in which she has basis of $30,000. Thirty percent of any distribution from either (or any combination of) these IRAs is nontaxable and 70% is taxable.  It does not matter which IRA provides the funds.

When a taxpayer owns a nondeductible traditional IRA, the same pro-rata rules that apply to distributions also apply to conversions. If the taxpayer in the above example were to convert any part of either traditional IRA to a Roth IRA, 70% of the conversion would be taxable and 30% would be nontaxable.

There is a method that can be used in certain circumstances to convert (or distribute) only the non-taxable portion. Since 2002, qualified pension plans may accept rollover contributions from IRA accounts, if the plan’s terms permit it.  If a taxpayer belongs to a qualified pension plan, and that plan accepts IRA rollovers, a special rule treats the rollover as coming first from taxable funds (in fact it is impermissible to roll nontaxable amounts into a qualified plan).  Thus you can "siphon off" some or all of the taxable portion to a qualified plan and then convert (or distribute) only the remaining portion, which will be nontaxable either in full or to a larger degree.

If the taxpayer in the above example belonged to such a plan, and rolled over the $60,000 taxable IRA to her plan, she could then convert the $40,000 IRA and pay tax on only $10,000.  If she also rolled $10,000 of the $40,000 IRA into her plan, the remaining $30,000 would consist of entirely non-taxable funds (basis) and could be converted to Roth (or distributed) with no tax consequences.

Many tax and financial considerations come into play when determining whether to convert your traditional IRA to a Roth IRA. If you have any questions about these conversions and the new 2010 planning opportunity, please contact our office.

By William Prue, Director of Accounting and Auditing  

In 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 - Accounting for Uncertainty in Income Taxes. FIN 48 requires U.S. companies to recognize and measure tax positions they have taken or expect to take.  FIN 48’s effective date for privately-owned entities was deferred but the standard now covers all entities – public, privately-owned, and not-for-profit, including pass-through entities - for years beginning after December 15, 2008 (generally, calendar 2009). Its impact is significant and requires additional tracking and documentation from every entity and location.

What is a tax position?

A tax position is a position in a previously filed tax return or a position to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities in an entity’s financial statements. This analysis requires a review of an entity's tax positions taken on all of its income tax returns. If a position is uncertain, a related liability (if material) is recorded for the potential tax, plus penalties and interest. The term "tax position" also encompasses, but is not limited to:

1. A decision not to file a tax return


2. Allocation of income between jurisdictions


3. A decision to classify a transaction, entity, or other position in a tax return as tax exempt


4. An entity’s status, including its status as a pass-through entity (S-Corp, LLC, etc.) or a tax exempt not-for-profit entity 

What is an uncertain tax position?

All companies seek to legitimately reduce their overall tax burden and minimize or delay cash outflows for taxes. Positions taken in tax returns may be well-grounded and in good faith, but with the complexities and varying interpretations of the tax law, these positions may not ultimately prevail. Complexity creates uncertainty regarding the actual benefit a company will receive from a position taken on its tax return. Newly issued standards establish uniform accounting for uncertain tax positions. Common examples of uncertain tax positions include characterizing gains or losses as capital gains or losses, claiming a tax credit, allocating income between jurisdictions (or not filing a return when a company believes it does not have nexus in a state or country), excluding income the company believes is tax-exempt, and taking a tax deduction.

Entities that prepare their financial statements according to Generally Accepted Accounting Principles (GAAP) must review all of their federal and state tax positions — including decisions not to file in a particular state — and to determine whether the positions would "more likely than not" withstand a challenge by the IRS or a state tax authority. More likely than not means that there is a more than 50% possibility that the position would be sustained upon examination by taxing authorities.



If a position fails the more-likely-than-not test, the corresponding tax benefit isn’t recognized in the company’s financial statements. Entities must establish reserves for the portion of the tax benefit that isn’t recognized (or if applicable, record a liability) and make financial statement disclosures about uncertain tax positions.

Private companies would be required to disclose the following:

• The total amount of interest and penalties recognized in the financial statements.


• The nature of uncertainties that could significantly change within 12 months.


• A description of tax years that remain subject to examination by major jurisdictions.

IRS Proposes FIN 48 Disclosure in Tax Returns

On January 26, 2010, the IRS issued Announcement 2010-9, Uncertain Tax Positions. In a speech on that day, Commissioner Douglas Schulman said this proposal would apply to businesses with assets over $10 million that prepare financial statements under FIN 48. These companies will have to file a new schedule, currently under development, with their tax returns. The form will require a brief description of all uncertain tax positions taken by the taxpayer, along with the maximum dollar amount of tax exposure for the issue. It will not require the taxpayer to reveal its risk assessment or tax reserve amount (which the IRS can still seek by summons). No effective date for the new filing requirement has been determined, but Mr. Schulman told reporters it will not be in effect for the current tax season. He also mentioned penalties if, upon audit, it is found that a company did not file the required information.