A "qualified employee" is one who has worked less than 40 hours in the 60 days prior to employment. This gives employers a perverse incentive to make potential hires sit out a little while, getting a little more broke, before they start, just to make sure they've been out of work for 60 days. That's stupid tax policy for you. The break is unavailable for employees who replace other employees, or for relatives of 50% owners. A $1,000 tax credit will also apply to qualified employees who stay on the payroll for 52 straight weeks.

Of course, these provisions will do little or nothing to encourage hiring. You hire new employees when you need them to take care of customers. No tax break will make you hire people to stand around. But for those fortunate enough to be hiring anyway, it will be found money.

The bill also extends the $250,000 limit for Section 179 deductions -- the deduction for assets that would otherwise have to be capitalized and depreciated -- through 2010. It had been slated to fall to $136,000 for this year.

The bill also has some offshore tax enforcement provisions, including some more shoot-the-jaywalker $10,000 minimum penalties for foot-fault violations.

The TaxProf Blog has a roundup, and Kay Bell has more.

When Gov. Christie revealed his budget plans, which included painful spending cuts all around, both Republicans and Democrats alike appeared surprised to see tax cuts… for the rich. Gov. Christie’s budget failed to extend the recent increase in the state’s top income tax rate, initially put into place by then Gov. Jon Corzine (D). The result is that the top 2% of NJ taxpayers will face a reduced rate in the upcoming tax year while other taxpayer rates stay the same. The cost in lost revenue? About $1 billion.

Chart by the Tax Foundation; click for larger image

New Jersey had enacted a "temporary millionaires surtax" to help pay for the state's spending binge. Now that the Governor says that temporary really means temporary, the spenders are appalled. But for the state with the nation's worst business climate, it's good news for everyone not on the state payroll.

More from Peter Pappas.

-Short Term (demand loans and loans with terms of up to 3 years): 0.67%

-Mid-Term (loans from 3-9 years): 2.70%

-Long-Term (over 9 years): 4.40%

The Long-term tax exempt rate for Section 382 ownership changes in April 2010 is 4.03%.

Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update.]]> 2010-03-18T17:12:35Z 2010-03-18T10:30:00-06:00 tag:www.rothcpa.com,2010://1.5815 2010-03-18T16:30:00Z

The bill limiting some of Iowa's economic development credits passed the Iowa Senate yesterday on a party-line vote. One opponent said that it was bad news for Iowa businesses, reports O. Kay Henderson:

Senator Randy Feenstra, a Republican from Hull, summed up the G.O.P.’s objections. "States around us — Minnesota, Nebraska, Wisconsin — are all increasing their tax credits to generate more business and more opportunity," Feenstra said. "It seems the states around us have a direct, opposite rationale about how to create business. Iowa reduces tax credits and it shows business and companies that we are closed for business."

Sadly, that ship sailed long ago. Iowa has the nation's highest corporate income tax rate, at 12%. Even taking account our partial deduction for federal taxes, we have the second-highest rate. We have a high individual rate. We have the fifth-worst business tax climate in the country. We aren't going to fix that by bidding against our neighbors to bribe companies to come here.

The way to fix that problem is to leave the bribery to our neighbors and instead to make Iowa a good place for everybody to start and run a business. Instead of our current high-rates and 30-odd economic development tax breaks, lets try this:

- Eliminate the corporation income tax.
- Knock down the individual rate to 4% or so.
- Get rid of our corporate welfare tax breaks, tax code clutter, and corporate welfare subsidies like Vision Iowa and the Iowa Office of Energy Independence to pay for it.

In other words, don't fight a losing battle for corporate welfare, for tax breaks that only go to people with expensive advisors and lobbyists. Fight for the Quick and Dirty Iowa Tax Reform instead!

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So said the Seventh Circuit Court of Appeals yesterday in a decision that's welcome news for hundreds of S corporation banks. They overturned a Tax Court decision that disallowed interest deductions to S corporation banks holding municipal bonds -- primarily Midwestern community banks.

The tax law has two provisions that disallow deductions for banks holding municipal bonds. One rule, Section 265, disallows all interest deductions attributable to purchases of "non-qualified" municipal bonds purchased after August 7, 1986. Another rule, Sec. 291, disallows 20% of the interest expense attributable even to "bank-qualified" bonds not subject to the Sec. 265 disallowance. In both cases the amount of the interest expense disallowance is determined by the ratio of the bank's investment in muni bonds to their total assets.

Another Section of the Code, Section 1363(b)(4), seems to exempt S corporations from the 20% disallowance on "bank-qualified" bonds -- known among bankers as the "20% TEFRA" disallowance -- after three years of S corporation status.

(b) Computation of corporation’s taxable income The taxable income of an S corporation shall be computed in the same manner as in the case of an individual, except that—

(4) section 291 shall apply if the S corporation (or any predecessor) was a C corporation for any of the 3 immediately preceding taxable years.

Bankers long assumed that this means what it says: that after three years of being an S corproation, the Section 291 20% disallowance goes away. The IRS had other ideas. They said that the rules allowing them to write regulations for S corporation banks enabled them to apply Section 291 to all S corporation banks, and last year they got the Tax Court to go along.

The IRS had less luck convincing the Seventh Circuit, and Judge Posner:

The government argues that because section 291, and the amendment to it that created the 80 percent rule (for remember that originally it was an 85 percent rule), entered the Internal Revenue Code before banks could be subchapter S corporations or QSubs, Congress never intended section 1363(b)(4) to prevent the application of section 291 to banks, and so should be taken to have authorized the Treasury to rescind that application by regulation, as Congress's delegate.

But section 1361(b)(3)(A) doesn't say or hint that.

It's good news for bankers, and for those who think the tax law should mean what it says. Still, the IRS may not be done. They can still litigate the issue in other circuits; the Eighth Circuit, which includes Iowa, is a likely venue because it has so many S corporation banks. They shouldn't, because the Seventh Circuit has it right, but we should know in two or three months.

What should taxpayers do now? Banks that have been S corporations for more than three years should feel free to ignore the Section 291 "20% TEFRA" disallowance; if they are not in the Seventh Circuit, they should disclose that they are doing so to protect themselves from potential IRS penalty assessments. Shareholders of S corporation banks that have been filing returns under the now-overturned Tax Court decision should file refund claims on Form 1040-X. The statute of limitations for non-extended 2006 returns expires April 15, 2010; you can wait until after tax season for later years.

Banks that filed prior-year returns under the now-overturned Tax Court decision should file amended returns and give modified K-1s to their shareholders so they claim refunds on amended 1040s. This is especially urgent for any banks that filed 2006 returns with the Section 291 20% TEFRA disallowance, to help their shareholders file amended 2006 returns before the statute expires next month. All S corporation banks should contact their shareholders as soon as possible to let them know whether they filed their 2006 returns taking the 20% TEFRA disallowance that the Seventh Circuit overturned yesterday. No S corporation returns prepared for 2006 by Roth & Company will need to be amended as a result of this decision.

Taxpayers who don't receive amended K-1s for 2006 showing the correct amount of S corporation bank income might need to file a protective refund claim to preserve their 2006 refund rights.

What should the IRS do? They should comply with the tax law as enacted and tear up their proposed regulations requiring long-time S corporations to apply Sec. 291.

Cite: Vainisi, CA-7, No. 09-3314

Prior Coverage:

BANKING ORGANIZATIONS COME OUT AGAINST IRS 'TEFRA' REGULATION PROPOSAL

Tax Court rules for IRS in S corporation bank TEFRA disallowance

Earlier this week another loser's battle with the IRS came to a quieter end. An appeals court upheld Floridian Randy Nowak's conviction for attempting to hire a contract killer to kill an IRS agent. Mr. Nowak apparently felt the agent was getting too close to his offshore accounts. For good measure he wanted to burn down the local IRS office.

You don't need to be a defender of the tax code to realize that murdering IRS agents is a bad thing. You don't see anybody using Mr. Nowak's plight -- he'll probably never be out of prison alive -- as an argument against the tax law. Still, the only difference between Mr. Nowak and the Austin tax kamikaze is that Mr. Nowak failed. That should give pause to anybody who views the Austin guy as something other than a selfish loser.

Cite: Nowak, CA-11, No. 09-11329

Related: Tax anger nearly causes another tragedy

Tax Policy Blog has the details.

Behave. Or be careful.

Hiding Income Offshore

Phishing

FIling Fals or Misleading Forms (duh!)

Nontaxable Social Security Benefits with Exaggerated Withholding Credit

Abuse of Charitable Organizations and Deductions

Frivolous Arguments

Abusive Retirement Plans

Disguised Corporate Ownership

Zero Wages

Misuse of Trusts

Fuel Tax Credit Scams

Falling for any of these scams could make your financial life miserable for years to come. Keep in mind the first rule for avoiding scam: if it sounds too good to be true, it probably is.

More coverage:

TaxProf Blog
Peter Pappas

Also: These Are the Real Scams: The Dirty Dozen Tax Policy Scams

The main elements of the bills are:

- Halving the R&D credit for big companies
- Limiting the cap on certain business tax credits to $120 million, from the current $185 million
- Suspending the film credit for one year
- Setting up an "oversight committee" for tax expenditures, so when the next scandal comes around, they can say it was just an oversight.

As most of these credits are just government spending run through the tax return, they are a natural target when the state is low on cash. Still, the legislature isn't addressing the real issues: are the tax credits worth keeping at all? There's no evidence they do any good. Far better to scrap the credits, lower the rates, and let us keep our money without running it through the Department of Revenue first. Something like the Quick and Dirty Iowa Tax Reform Plan.

More coverage:

Iowa Independent

O. Kay Henderson

The Boston Globe in an excellent March 14 article reported that Massachusetts has given away hundreds of millions of dollars in state and local tax breaks to companies that created few or no jobs. Indeed, many of the recipients of the tax breaks actually moved jobs overseas or just laid workers off. For example, Nortel Networks received $2 million from the state and promised to add an additional 800 workers to its staff of 2,200. Today Nortel has 145 employees in the state but continues to enjoy the tax breaks.

That's why we shouldn't have been surprised that Iowa's film credit program was grossly mismanaged. The politicians wanted to meet starlets and have happy stories about the film crews they bribed to come here. It's no fun checking invoices to make sure the money isn't plundered.

UPDATE: More here.