Taxes and Business: Important Updates for January 2011

For your reference, here’s a disparate collection of legal alerts and articles covering various and recent developments in the world of taxes and business:

IRS Issues Guidance Relating to the Tax Treatment of Gift Cards (by Bryan Cave):

“On January 5, 2011, the IRS issued two revenue procedures that address certain federal income tax consequences relating to (1) taxpayers that issue, but do not themselves redeem, gift cards and (2) retailers that provide gift cards in exchange for returned merchandise.

Rev. Proc. 2011-18 acknowledges that many retailers that accept gift cards as payment for their goods and services are not the same legal entity as the issuer of the gift cards. Rather, such gift cards are often sold by a related entity with the special purpose of issuing gift cards that will be honored by retailers with whom the entity has a gift card service agreement. Consequently, Rev. Proc. 2011-18 clarifies that, subject to certain limitations, special purpose gift card entities may use the one-year deferral method even though another entity redeems the gift cards…” Read on»

Information Reporting for Rental Property Activities (by Green & Siefter):

“The Small Business Jobs Act of 2010 added new reporting requirements relating to rental property expenses. Pursuant to Section 6041(a) of the Internal Revenue Code, all persons engaged in a trade or business are required to report certain payments made of $600 or more, providing information regarding the recipient of such payment.

Pursuant to new Section 6041(h), a person receiving rental income from real estate is deemed to be engaged in a trade or business for purposes of Section 6041(a). The reporting burden is therefore imposed upon individuals engaged in passive real estate rental activities. This new provision will impose the reporting obligation upon significant numbers of individuals not currently subject to the requirements…” Read on»

Extension of 100% Gain Exclusion for Qualified Small Business Stock (by Sheppard Mullin):

“Included in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 signed into law on December 17, 2010, a tax incentive relating to qualified small business stock (“QSBS”) was extended for another twelve months. Pursuant to this extension, noncorporate taxpayers are allowed to exclude all (100%) of their gain from the sale or exchange of QSBS (subject to a variety of special rules), provided that the stock is acquired after September 27, 2010 and before January 1, 2012. The gain exclusion provision only applies to QSBS held for more than five years. The amount of gain from the sale of QSBS that can be excluded by a taxpayer is generally limited to the greater of $10,000,000 (in the aggregate) or 10 times the tax basis of the QSBS sold. Generally speaking, and with a few exceptions, QSBS must be acquired when it is issued in exchange for money, property (other than stock) or services…” Read on»

Nondiscrimination Rules for Insured Health Plans Put On Hold (by Christine Roberts, Mullen & Henzell):

“In late December 2010 the Internal Revenue Service issued Notice 2011-1, stating that compliance with nondiscrimination rules for insured group health plans, otherwise slated to go into effect on January 1, 2011 for non-grandfathered plans, will not be required (and no excise tax for failure to comply need be reported) until after regulations or other administrative guidance on the nondiscrimination
rules issues. The Notice has the support of the other agencies that enforce health care reform, the Department of Labor and the Department of Health and Human Services.

Further, the Service anticipates that any such regulations or guidance will not apply until plan years beginning after a specified period following publication of the new guidance (often this is a 6-month period). Before the beginning of those plan years, employers will not need to file IRS Form 8929 reporting excise taxes as a result of plan designs that discriminate in favor of highly compensated individuals. This is extremely welcome relief for plan sponsors and advisors…” Read on»

IRS Issues Guidance on Health FSA and HRA Debit Card Use for Over-the-Counter Drugs (by Ford & Harrison):

“On December 23, 2010, the Internal Revenue Service issued Notice 2011-5, new guidance regarding the use of health FSA and HRA debit cards for purchases of over-the-counter medicines or drugs. Under previously issued IRS guidance the IRS indicated that health FSA and HRA debit cards could not be used to purchase over-the-counter medicines or drugs after January 15, 2011, except with respect to “90% pharmacies.”

Notice 2011-5 modifies this previously issued guidance. Under Notice 2011-5, the health FSA and HRA debit card purchases of over-the-counter medicines or drugs after January 15, 2011 will be considered fully substantiated at the time and point of sale if the conditions set forth below are met…” Read on»

New Tax Reporting Requirements For Corporate Actions Affecting Stock Tax Basis (by Wilson Sonsini):

“Beginning on January 1, 2011, regulations1 issued under Section 6045B of the Internal Revenue Code will require any domestic or foreign corporation that undertakes an “organizational action,” such as a merger, acquisition, recapitalization (including a stock split or stock dividend), or similar transaction, that affects the tax basis of its outstanding stock2 to comply with certain tax reporting requirements. The regulations apply to both private and public corporations.

While there is currently no Internal Revenue Service (IRS) form for the information return, the regulations require, among other things, a description of the transaction and relevant Internal Revenue Code provisions, the quantitative effect of the transaction on the basis of the corporation’s stock as an adjustment per share or as a percentage of the old basis, the data supporting the calculation, and any other information necessary to implement the adjustment…” Read on»

Section 409A Again? Employers Need to Re-examine Executive Employment Contracts and Other Agreements Conditioning Severence Payments Upon a Release of Claims (by Poyner Spruil):

“Agreements that provide for payments upon termination of employment, such as employment agreements, retention agreements, severance agreements and change in control agreements, often condition payment upon the return of an executed release of claims. Since Section 409A allows agreements to provide for a payment window of up to 90 days from separation from service, it was widely believed that an agreement could provide for payments to begin upon the return of a release, provided the release was required to be returned within the 90-day window period and the company determined the time of payment. In Notice 2010-6, the IRS stated that this type of provision is not Section 409A compliant. Fortunately, at the end of last year, the IRS came out with relief that will allow companies to correct this problem without employees incurring Section 409A taxation…” Read on»

Mofo Tax Talk – Volume 3, No. 4 – January 18, 2011 (by Morrison & Foerster):

“This latest issue of TaxTalk comes to you with a slight delay. The benefit of this delay is that we can provide a timely update on the most recent federal income tax developments. Both Congress and the Internal Revenue Service (“IRS”) have been busy passing legislation and issuing regulations and other guidance. On the Congressional front, the Bush tax cuts were extended at the last possible moment and a new law modernizing the tax rules applicable to regulated investment companies (“RICs”) was enacted. The IRS also had a busy holiday season and came out with proposed regulations expanding the scope of the “publicly traded” definition and issued guidance applicable to real estate investment trusts (“REITs”) in connection with the modification of mortgage loans. We also discuss the framework of the tax system overhaul that the National Commission on Fiscal Responsibility and Reform put forward in its draft report as well as a few additional items. Due to the blizzard of current events, this issue does not include our otherwise regular feature “The Classroom,” which is scheduled to return next quarter…” Read on»

Also see:

Tax Relief Act of 2010: What Lawyers Are Saying

Small Business Incentives in the Tax Relief Act of 2010