2009 Year-End Tax Tips for Employees   As year-end approaches, taxpayers generally are faced with a number of choices that can save taxes this year, next year or both years. Employees too are faced with these choices. However, employees have some special considerations to take into account that retirees and other nonworking individuals don't face. To help our clients who are employees take advantage of these special tax saving opportunities, we have put together a list of items to consider. Please review the list and contact us if you need additional information on one or more of the items. Health flexible spending accounts. Many employees take advantage of the annual opportunity to save taxes by placing funds in their employer's health flexible spending account (health FSA). You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible. Also, a health FSA can be used to get tax-free reimbursement for over-the-counter medications and other items even though they would not be deductible as medical expenses if you paid for them outside of a health FSA. If you have set aside funds in your employer's health FSA, check your balance so that you have sufficient time to incur additional reimbursable expenditures to prevent loss of any unused amount under the use-it-lose-it feature of these plans. Don't forget you can get tax-free reimbursements for aspirin, antacids and other over-the-counter items. Your plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get a reimbursement for any such items. To avoid the lose-it-use it rule, you must incur qualifying expenditures by the last day of the plan year (Dec. 31, 2009 in the case of a calendar year plan, some plans may not be calendar year plans but fiscal year, ask your employer to be sure) unless the plan allows an optional grace period. Any grace period cannot extend beyond the 15th day of the third month following the close of the plan year (e.g., March 15 for a calendar year plan). An exception to the use-it-or lose-it rule allows FSAs to make distributions of all or part of unused health FSA benefits to military reservists who are called to active duty for a period exceeding 179 days (or an indefinite period ). Examining your year-to-date expenditures now will also help you to determine how much to set aside for next year. Don't forget to reflect any changed circumstances in making your calculation. Dependent care FSAs. Some employers also allow employees to set aside funds in dependent care FSAs. They allow employees to use pre-tax dollars to pay for dependent care. In particular cases, participating in a dependent care FSA can yield greater tax savings than foregoing participation and claiming a dependent care credit. Taxpayers who are eligible to participate in a dependent care FSA and are (a) in a high tax bracket and/or (b) have only one dependent and more than $3,000 of employment-related expenses, should use the FSA to pay for child care expenses. For these taxpayers, the FSA almost always provides greater federal tax savings than does the credit. Additionally, participating in a dependent care FSA can also save on FICA taxes. However, like health FSAs, dependent care FSAs are subject to the use-it-or lose it rule. Thus, now is a good time to review expenditures to date and to project amounts to be set aside for next year. Adoption assistance FSAs. Under an adoption assistance FSA, adoption reimbursement accounts are established for participating employees. Typically, these accounts are funded with employee pre-tax contributions uniformly withheld from each paycheck throughout the year. The balances in these accounts are used to reimburse qualified adoption expenses incurred during the year, subject to a reimbursement maximum. Like their health and dependent care FSA siblings, these accounts are subject to the use-it-or-lose-it rule. However, predicting the amount and timing of adoption expenses may be far more difficult than projecting medical and dependent care assistance expenses. As a result, the use-it-or-lose-it rule could pose a greater risk of loss with this type of FSA. This should be borne in mind in choosing the extent to which to participate in an adoption FSA. Adjustments to state withholding. If you expect to owe state and local income taxes when you file your return next year, ask your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2009. Adjustments to federal withholding. If you face a penalty for underpayment of federal estimated tax, you may be able to eliminate or reduce it by increasing your withholding. In this connection, it should be stressed that the Making Work Pay Credit, which was enacted earlier this year, automatically lowered tax withholding rates for employees. However, you should especially review your withholding to ensure that enough tax is withheld if you hold multiple jobs, you and your spouse both work, or you can be claimed as dependent by another person. 401(k) contributions. Review and make appropriate adjustments to your contributions to you employer's 401(k) retirement plan for the remainder of this year. Figure your contribution rate for next year as well.

Worker, Homeownership, and Business Assistance Act of 2009   On Nov. 6, President Obama signed H.R. 3548, the ''Worker, Homeownership, and Business Assistance Act of 2009'' (the Act) into law ( P.L. 111-92 ). The signing came just one day after the House passed it and two days after the Senate did. This Special Study highlights the tax changes for businesses, return filing, and penalties including liberalized rules for net operating losses and toughened penalties for partnerships and S corporations.   Five-Year Carryback of NOLs Extended to Include 2009 NOLs and to Apply to Most Businesses A net operating loss (NOL) is the excess of business deductions (computed with certain modifications) over gross income in a particular tax year. The loss can be deducted, through an NOL carryback or carryover, in another tax year in which gross income exceeds business deductions. In general, NOLs may be carried back two years and forward 20 years. The NOL is first carried back to the earliest tax year for which it's allowable as a carryback or a carryover, and is then carried to the next earliest tax year. A taxpayer may elect to forego the entire carryback period for an NOL and instead carry it forward. Life insurance companies may carry back losses for three years. If a corporation has a corporate equity reduction transaction (a CERT, i.e., a major stock acquisition or an excess distribution) and an “excess interest loss” (i.e., interest allocable to the CERT) for a “loss limitation year,” the loss is an NOL. It's subject to the regular NOL carryback and carryover rules, except that it can't be carried back to a tax year before the year in which the CERT occurred. The “loss limitation year” is generally the tax year in which the CERT occurred (the “CERT year”) and each of the next two tax years. For purposes of the alternative minimum tax (AMT), a taxpayer's NOL deduction cannot reduce the taxpayer's alternative minimum taxable income (AMTI) by more than 90% of the AMTI. For NOLs arising in tax years ending after Dec. 31, 2007, small businesses can elect to increase the NOL carryback period for an applicable 2008 NOL (the “applicable NOL”) from 2 years to 3, 4, or 5 years. A small business for this purpose is defined as a corporation or partnership that meets the gross receipts test of Code Sec. 448(c) ) (applied by substituting $15 million for $5 million) for the tax year in which the loss arose, or a sole proprietorship that would meet that test if the proprietorship were a corporation. This means any trade or business (including one conducted in or through a corporation, partnership, or sole proprietorship) whose average annual gross receipts (for the three-tax-year period (or shorter period of existence) ending with the tax year in which the loss arose are $15 million or less. An applicable 2008 NOL is the taxpayer's NOL for any tax year ending in 2008, or, at the taxpayer's election, any tax year beginning in 2008. Any such election is irrevocable. Additionally, any carryback election may be made only with respect to one tax year. If an eligible small business makes an election to increase the carryback period for an applicable 2008 NOL, then Code Sec. 172(b)(1)(E)(ii) (which defines “loss limitation year”) is applied by using the whole number that is one less than the number of years the taxpayer elected as the carryback for the NOL instead of “two.” New law. The Act provides an election for most taxpayers (not just small businesses) to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years. ( Code Sec. 172(b)(1)(H)(i)(I) , as amended by Act Sec. 13(a)) An applicable NOL means the taxpayer's NOL for any tax year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010. ( Code Sec. 172(b)(1)(H)(ii) , as amended by Act Sec. 13(a)) Generally, an election may be made for only one tax year. ( Code Sec. 172(b)(1)(H)(iii)(I) , as amended by Act Sec. 13(a)) However, an eligible small business that made or makes an election under the Code as in effect before Nov. 6, 2009 (the enactment date) may make an election for 2 tax years instead of just 1. ( Code Sec. 172(b)(1)(H)(v)(I) , as amended by Act Sec. 13(a)) The amount of the NOL that can be carried back to the 5th tax year before the loss year may not be more than 50% of the taxpayer's taxable income for that 5th preceding tax year determined without taking into account any NOL for the loss year or for any tax year after the loss year. ( Code Sec. 172(b)(1)(H)(iv)(I) , as amended by Act Sec. 13(a)) The amount of the NOL otherwise carried to tax years after the 5th preceding tax year is adjusted to take into account that the NOL could offset only 50% of the taxable income for that 5th preceding tax year. ( Code Sec. 172(b)(1)(H)(iv)(II) , as amended by Act Sec. 3(a)) The 50% limitation does not apply to the applicable 2008 NOL of an eligible small business with respect to which an election is made under pre-Act law even if the election is made after Nov. 6, 2009. ( Code Sec. 172(b)(1)(H)(iv)(III) , as amended by Act Sec. 13(a)) As was the case for small businesses, if an eligible business makes an election to increase the carryback period for an applicable 2008 NOL, then Code Sec. 172(b)(1)(E)(ii) (which defines “loss limitation year”) is applied by using the whole number that is one less than the number of years the taxpayer elected as the carryback for the NOL instead of “two.” ( Code Sec. 172(b)(1)(H)(i)(II) , as amended by Act Sec. 13(a)) Suspension of 90% Limitation on NOL for AMT purposes For tax years ending after 2002, the Act suspends the 90% limitation on the use of any alternative tax NOL deduction attributable to the carryback of an applicable NOL for which the extended carryback period is elected. ( Code Sec. 56(d)(1)(A)(ii)(I) , as amended by Act Sec. 13(b)) Increase in Carryback Period for Life Insurance Companies For losses from operations arising in tax years ending after Dec. 31, 2007, the Act allows life insurance companies to elect to carry back an applicable loss from operations for 4 or 5 years and not just 3 years as is provided under pre-Act law. ( Code Sec. 810(b)(4)(A) , as amended by Act Sec. 13(c)) An applicable loss from operations is the life insurance company's loss from operations for any tax year beginning or ending in 2008 or 2009. ( Code Sec. 810(b)(4)(B) , as amended by Act Sec. 13(c)) The amount of the loss that can be carried back to the 5th preceding tax year is limited to 50% of the taxable income for such preceding tax year. ( Code Sec. 810(b)(4)(C) , as amended by Act Sec. 13(c)) Transition Rules Under transition rules, a taxpayer may revoke any election to waive the carryback period under either Code Sec. 172(b)(3) or Code Sec. 810(b)(3) with respect to an applicable NOL or an applicable loss from operations for a tax year ending before Nov. 6 by the extended due date for filing the tax return for the taxpayer's last tax year beginning in 2009. Similarly, any application for a tentative carryback adjustment under Code Sec. 6411(a) with respect to such loss is treated as timely filed if filed by the extended due date for filing the tax return for the taxpayer's last tax year beginning in 2009. (Act Sec. 13(e)(4)) Businesses Ineligible to Elect Extended Carryback Period The right to elect an extended carryback period does not apply to any taxpayer if: ... the Federal government acquired an equity interest in that taxpayer under the Emergency Economic Stabilization Act of 2008. (Act Sec. 13(f)(1)(A)) ... the Federal government acquired before Nov. 6, 2009, any warrant (or other right) to acquire any equity interest with respect to the taxpayer under the Emergency Economic Stabilization Act of 2008. (Act Sec. 13(f)(1)(B)) ... the taxpayer receives after Nov. 6, 2009, funds from the Federal government in exchange for an interest described above under a program established under title I of Division A of the Emergency Economic Stabilization Act of 2008 (unless such taxpayer is a financial institution as defined in Section 3 of such Emergency Economic Stabilization Act, and the funds are received pursuant to a program established by the Secretary of the Treasury for the stated purpose of increasing the availability of credit to small businesses using funding made available under that Act. (Act Sec. 13(f)(1)(C)(1)) Additional FUTA Surtax Is Extended Through June of 2011 Under pre-Act law, the Federal Unemployment Tax Act (FUTA) tax was imposed at a rate of 6.2% through 2009 (the total of the permanent 6% tax rate, and a temporary 0.2% surtax rate), and 6.0% for calendar year 2010 and later years. New law. The Act provides that the 6.2% FUTA tax rate continues to apply through June of 2011, and the 6.0% rate applies for the remainder of calendar year 2011 and for later years. ( Code Sec. 3301 , as amended by Act Sec. 10) That is, the temporary 0.2% surtax is extended for 1½ years through June 30 of 2011. Estimated Tax Payments For Large Corporations Increased For 2014 In general, corporations must make quarterly estimated tax payments of their income tax liability. For a corporation whose tax year is a calendar year, these estimated tax payments must be made by Apr. 15, June 15, Sept. 15, and Dec. 15. Fiscal year taxpayers make quarterly payments on “corresponding” dates (i.e., the due dates are 3 1/2, 5 1/2, 8 1/2, and 11 1/2 months, respectively, after the fiscal year beginning date). The “Corporate Estimated Tax Shift Act of 2009” (Sec. 202 of H.J. Res. 56, signed into law on July 28, 2009, as P.L. 111-42 ), provides that for large corporations (those with assets of not less than $1 billion as of the end of the preceding tax year), the amount of the required installment of corporate estimated tax that is otherwise due in July, Aug., or Sept. 2014 will be 100.25% of the amount otherwise due, and the amount of the next required installment is appropriately reduced to reflect the amount of the increase to 100.25% in the earlier installment. New law. The Act provides that for large corporations, the required payment of estimated tax otherwise due in July, August, or Sept. of 2014 under the “Corporate Estimated Tax Shift Act of 2009” will be increased by 33%. The amount of the next required installment will be appropriately reduced to reflect the amount of the increase in the earlier installment. (Act Sec. 18) Delay in Application of Worldwide Allocation of Interest Under current law, foreign corporations can't be included in making interest allocations, since they aren't eligible to be included in a consolidated group. In addition, certain financial corporations that are treated as members of the affiliated group for consolidated return purposes are excluded for purposes of making interest allocations. Instead, they are treated as a separate single corporation for those purposes. For tax years beginning after Dec. 31, 2010, an election (subject to a first year transition rule) will be available under which interest can be allocated on a worldwide basis, including foreign corporations, rather than just among domestic corporations. If this election is made, certain bank and financial holding companies will be treated as includable corporations solely for purposes of applying the worldwide interest allocation rules separately to those corporations. New law. The Act delays the effective date of the worldwide interest allocation rules for seven years, until tax years beginning after Dec. 31, 2017. It also eliminates the special transition rule that applies in the case of the first tax year to which the worldwide interest allocation rules apply. ( Code Sec. 864(f) , as amended by Act Sec. 15) Increased Penalty for Failure to File Partnership or S Corporation Returns Civil penalties apply for failure to file a partnership and S corporation returns. The penalty is $89 times the number of partners or shareholders for each month (or fraction of a month) that the failure continues, up to a maximum of 12 months for returns required to be filed after Dec. 31, 2008. New law. Under the Act, the base amount on which a penalty is computed for a failure with respect to filing either a partnership or S corporation return for a tax year beginning after Dec. 31, 2009, is increased to $195 per partner or shareholder. ( Code Sec. 6698(b)(1) and Code Sec. 6699(b)(1) , as amended by Act Sec. 16) Expansion of Electronic Filing by Return Preparers IRS is authorized to issue regs specifying which returns must be filed electronically. There are several limitations on this authority. First, it can only apply to persons required to file at least 250 returns during the calendar year. Second, IRS is prohibited from requiring that income tax returns of individuals, estates, and trusts be submitted in any format other than paper, although these returns may be filed electronically by choice. New law. The Act generally maintains the current rule that regs may not require any person to file electronically unless the person files at least 250 tax returns during the calendar year. However, for returns filed after Dec. 31, 2010, it provides an exception to this rule and mandates that IRS require electronic filing by “specified tax return preparers.” This term includes all return preparers except those who neither prepare nor reasonably expect to prepare ten or more individual income tax returns in a calendar year. “Individual income tax return” is defined to include returns for estates and trusts as well as individuals. ( Code Sec. 6011(e) , as amended by Act Sec. 17)