I will get back to the AMT because that still is a major issue that is not going away; however, we need to learn about all the provisions that have just been announced. This law contains important information on the AMT.
I mentioned in an earlier article, when a major new bill is passed, first the headlines, then the basic details and then a bit later the procedures and how this all will work.
We have passed the first step and now are in step two while step three should take a bit of time. Most of these provisions are for tax years 2009 and 2010 but a number do apply to tax year 2008.
First a correction: the federal new homebuyers' credit is for homes purchased BEFORE Dec. 1, 2009. I believe I mentioned the end of the year, which in this case would not be accurate.
The vast majority if the federal stimulus bill affects tax year 2009 and 2010. This means there could be outstanding opportunities available depending on your situation. There are, however two major provisions that effect tax year 2008.
The first concerns net operating losses for small businesses.
A net operating loss is a situation when expenses exceed income. If their expenses are investment or business, then the excess or net operating loss – NOL – can be used as a deduction for other years.
Currently, the federal allows either a carry back of two years or a carry forward. A carry back means that one must amend that return and apply the losses. Generally this means that they will get a refund from that year. It also expends the statute of limitations for that year, so it is a trade off.
The statute of limitations defines how long the Internal Revenue Service or the Franchise Tax Board (FTB) have under normal circumstances to examine your return. Under normal circumstances, the IRS has three years and the FTB has four years. If used, the taxpayer must go back to the second previous year and then apply anything left over to the next year and then into the future. An option to this is to forgo the carry back and just use this loss on future tax returns. I’ve mentioned just the basis; the actual rules are quite a bit more complicated.
There is a new NOL for small businesses. A small business is defined by having gross receipts of under $15 million dollars, and this is an average of year years. Under these new provisions, small businesses that generate an NOL in years either beginning or ending in 2008 will have expanded carry back options. This will allow the businesses more freedom to carry back an NOL, amend a previous tax return and receive a refund.
An affirmative election must be made on the return and there are some traditional rules and complex details so be sure to discuss this with an accountant if you are not familiar with the rules. The state has not conformed to this provision, so there will be timing issues if you have an NOL. This provision has two major benefits, the first is that this allows you to get a refund faster and allows more options to select a carry back year with the highest tax brackets.
The other major change affecting tax year 2008 is the first-time homebuyers' credit. This is an extension of the credit form 2008 with some major change. This applies to purchases made after Jan. 1, 2009, and before Dec. 1, 2009. Remembers that if the purchase is close to either date, make sure escrow begins or ends within the applicable dates. The maximum credit is increased to $8,000 and the repayment provision has been eliminated.
To increase the speed of receiving a refund, you can claim the credit on the 2008 return, even if purchased in 2009. There are three major limitations if you make this election;
You qualify only if neither you nor spouse has owned a principal residence for at least three years as of the date of purchase. You have to live in the residence for at least three years or you have to pay back the credit and the credit will be reduced if your income is $75,000 or more and completely eliminated at $95,000 and for married, the numbers are $150,000 and $170,000.
Not to be out done, California has passed their own version of the credit. As too often happens, the California bill is quite different from the federal provision.
The California credit is for the purchase of a brand new, never-occupied home. The credit is $10,000 and there are no income restrictions. The details are:
1. The credit is available if you purchase a personal residence on or after March 1, 2009 and before March 1, 2010. You must occupy the home as your residence for at least two years or the credit must be paid back. Remember to watch the dates very carefully; when it said after March 1, 2009, that means escrow statement must be dated after that date.
2. You take a third of the credit per year, so if you purchase the home in 2009, you get one-third of the credit on tax years 2009, 2010 and 2011.
3. The seller must provide you with a certificate that they obtain from the Franchise Tax Board within one week of purchase.
4. There is a limited funds for this credit, soothe fact that you qualify and make all the steps properly does not mean that you will actually receive the credit. The FTB has announced that they will have a counter on their website to let people know the status of the fund.
5. So, if you are considering this credit, you should act as fast as possible.
As a reminder, a major part of the California bill is that the sales tax will increase by 1 percent starting April 1.
So we see that of the two major bills passed, the federal stimulus and the California budget bill the federal tends to give some tax breaks while the California bill tends to increase tax. I will write more about these bills in my next article and of course will get back to the Alternative Minimum Tax because it’s still very important and is part of the new federal stimulus bill.
Jon Meyer is a local tax accountant and enrolled agent with more than 25 years experience in tax preparation. The office of Jon the “Tax Man Meyer” also offers retirement planning and insurance options. For more information call 928-5200.
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