Recent legislation: parts of 2005 Gulf Opportunity Zone Act apply nationally.

President Bush signed the 2005 Gulf Opportunity Zone Act (P.L. 109-135) into law Dec. 21, 2005. Some of its provisions apply nationally.

S Corporations

The 2004 American Jobs Creation Act (Jobs Act) allowed any family member to elect to treat all family members as one shareholder in determining the permissible number of shareholders (California CPA, January/February 2006, Page 6). The new law eliminates this election requirement and also treats a family member's estate as a family member for this purpose.

Family members include a common ancestor, that ancestor's decendants and any spouse (or former spouse) of these individuals. An individual cannot be considered a common ancestor if, on the "applicable date," the individual is more than six generations removed from the youngest generation of shareholders who would otherwise be family members. The "applicable date" is the latest date the S election is made or a family member first holds stock in the S corp or Oct. 22, 2004.

Suspension of Interest and Certain Penalties

If an individual files an income tax return by its due date, including extensions, the IRS must suspend accruing interest and certain penalties if it does not notify the taxpayer--specifically stating the taxpayer's liability and its basis--before the close of the 18-month period beginning on the later of the return's filing date or its due date, excluding extensions.

The suspension period starts the day after the end of this 18-month period and terminates 21 days after the IRS sends the required notice.

Under the new law, if a taxpayer files an amended return or other signed written documents showing additional tax due, this 18-month period is measured from the latest date these documents were provided, instead of from the original return's filing date. This change applies to documents provided after Dec. 20, 2005.

Under existing law, the suspension of interest does not apply to interest accruing after Oct. 3, 2004, on tax underpayments resulting from listed transactions or undisclosed reportable transactions. Under the new law, this interest suspension exception for listed and undisclosed reportable transactions also applies generally to interest accruing before Oct. 4, 2004.

Nonqualified Deferred Compensation (NQDC) Plans

Under the Jobs Act, generally for amounts deferred after 2004, all amounts deferred under these plans are taxable unless certain requirements are satisfied (California CPA, December 2004, Page 19). Interest and an additional 20 percent tax also are imposed.

The new law clarifies that this interest and additional tax are not treated as regular tax payments for AMT purposes.

The Jobs Act also provided funding rules for offshore rabbi trusts and financial health triggers [IRC Sec. 409A(b)].

Though the NQDC provisions generally are effective for post-2004 deferrals, the new law clarifies that the effective date of the Sec. 409A(b) funding rules is Jan. 1, 2005. Therefore, transfers of assets offshore to rabbi trusts and inclusions of financial health triggers in plans before 2005 became subject to these funding rules Jan. 1, 2005.

Deduction Regarding Domestic Production Activities

For tax years beginning after 2004, the Jobs Act provides a 9 percent regular tax deduction, equivalent to a 3 percent tax rate reduction, relating to income attributable to domestic manufacturing and certain other production activities. A five-year phase-in applies (California CPA, December 2004, Page 18). Similar treatment applies for AMT purposes.

The new law makes a number of retroactive technical corrections to the rules governing this deduction, among which are:

* The deduction can't exceed 50 percent of an employer's W-2 wages for any tax year. However, the Jobs Act did not require W-2 to be filed and did not specify whether the employees must be the taxpayer's common-law employees.

The new law clarifies that a taxpayer may take into account only wages that are paid to the taxpayer's common-law employees and reported on a W-2 filed with the Social Security Administration no later than 60 days after the W-2's extended due date.

* The new law clarifies that, in computing qualified production activities income, the domestic production activities deduction itself is not an allocable deduction.

* The definition of "domestic production gross receipts," as it relates to construction performed in the United States and engineering or architectural services performed in the United States for construction projects in the United States, also is clarified as follows:

This term refers only to gross receipts derived from the construction of real property by a taxpayer engaged in the active conduct of a construction business, or from engineering or architectural services performed with respect to real property construction by a taxpayer engaged in the active conduct of an engineering or architectural services business.

The new law also clarifies that this term excludes gross receipts from the lease, rental, license, sale, exchange or other disposition of land, but includes gross receipts from certain contracts or subcontracts to manufacture or produce property for the federal government.

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By Stuart R. Josephs, CPA

Stuart R. Josephs, CPA has a San Diego-based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation, can be reached at [phone] or [e-mail].