Business and Corporate Changes in Tax Laws

In the final days before it adjourned for 2007, Congress passed a long-awaited AMT “patch”. It also passed two other tax laws of wide interest. These laws provide mortgage debt forgiveness tax relief, other tax breaks and technical corrections, many of which are substantive. Tax changes also were enacted as part of the energy legislation and in a special measure to aid victims of the Virginia Tech shooting in 2007. Some of the changes in the late-2007 legislation directly affect business and corporations. The key changes in this area include:

Partnership failure to file penalty increased. Under pre-Mortgage Relief Act law, any partnership required to file a return for any year, which failed to file on time (including extensions) or whose return failed to show the information required, was liable for a monthly penalty equal to $50 times the number of persons who were partners during any part of the tax year, for each month or fraction of a month for which the failure continued. However, the total penalty could not be imposed for more than five months. The Mortgage Relief Act extends the period for calculating the monthly failure-to-file-penalty for partnership returns from 5 to 12 months and increases the per-partner penalty amount from $50 to $85 per partner, effective for returns required to be filed after Dec. 20, 2007. Note also that under the Virginia Tech Victim's Relief Act, for tax years beginning in 2008 only, the dollar amount per partner is increased by $1. Thus, for tax years beginning in 2008, the per-partner penalty for failure to file a partnership return is $86.

New failure to file penalty for S corporation returns. Under pre-Mortgage Relief Act law, there was no penalty for failure to file an S corporation return. The Mortgage Relief Act imposes a monthly penalty for any failure to timely file an S corporation return or any failure to provide the information required to be shown on such a return, effective for returns required to be filed after Dec. 20, 2007. The penalty, assessed against the S corporation, is $85 times the number of shareholders in the S corporation during any part of the tax year for which the return was required, for each month (or a fraction of a month) during which the failure continues, up to a maximum of 12 months.

FUTA surtax extended through 2008. The Federal Unemployment Tax Act (FUTA) imposes a 6.2% gross tax rate on the first $7,000 paid annually by covered employers to each employee, consisting of a permanent tax rate of 6%, and a temporary surtax rate of 0.2%. Under pre-Energy Independence and Security Act of 2007 law, the temporary surtax only applied through the end of 2007. Under the Energy Act, the temporary surtax rate (which amounts to $14 per worker) is extended through Dec. 31, 2008. Thus, the FUTA rate remains at 6.2% through the end of 2008.

Lengthened amortization period for certain expenses of large integrated oil companies. Under pre-Energy Act law, major integrated oil companies (certain companies with gross receipts of more than $1 billion for their last tax year ending in 2005) were required to amortize their geological and geophysical expenditures (G&G costs) over five years (instead of the 24 month period that applies for other taxpayers). Effective for amounts paid or incurred after Dec. 19, 2007, major integrated oil companies must amortize their geological and geophysical expenditures over seven years.

Help to expand housing options for college students with children. A change in the Mortgage Forgiveness Debt Relief Act of 2007 clarifies that certain full-time students who are single parents and their children are permitted to live in housing units eligible for the low-income housing tax credit if their children are not dependents of another individual other than a parent of such children. In general, this change applies to housing credit amounts allocated before, on or after Dec. 20, 2007, and to buildings placed in service before, on or after Dec. 20, 2007.

Flexibility to help co-op tenant/owners deduct real estate taxes and mortgage insurance. The Mortgage Forgiveness Debt Relief Act of 2007 modifies the requirements for qualifying for the special rules available to cooperative housing corporations. Under pre-Act law, a cooperative housing corporation was required to meet several requirements, including a requirement that 80% or more of the cooperative housing corporation's income be earned from the corporation's tenant-stockholders. The Act provides two alternatives to this 80% rule (i.e., one based on square footage and another based on cooperative expenditures). These two alternatives, which take effect for tax years ending after Dec. 20, 2007, will make it easier to qualify as a cooperative housing corporation.

In addition, other business and corporate changes in the late 2007 tax legislation:

  • Clarify the look-through rule for related CFCs.
  • Revise the rules for a shareholder basis reduction on account of contributions of appreciated property by S corporations.
  • Modify the Code Sec. 355 active business definition.
  • Clarify the tax-exempt use loss rules.

Source: Thompson/RIA

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