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A brief look at new rules for 1989.

A brief look at new rules for 1989

On November 10, 1988, the Technical and Miscellaneous Revenue Act of 1988 was signed into law. Conforming and technical amendments and corrections to the Tax Reform Act of 1986 and other tax acts were provided. The Act touches nearly every area of taxation and almost every group of taxpayers. A brief discussion of the more important provisions of the Act follows.

Modified long-term

contract methods

Under current law, businesses that produce property under a long-term contract must use either the percentage of completion method or percentage of completion-capitalized cost method.

If, however, the business is a "small contractor" (generally, an entity that meets a three-year moving average less than $10 million gross receipts test), it can use the completed contract method of accounting for certain construction contracts to be completed within two years. The changes are effective for contracts entered into after June 20, 1988.

Under the percentage of completion-capitalized cost method, the percentage of items was increased from 70 percent to 90 percent. At the contract's completion, 90 percent of the items are subject to the "look-back" procedure, which uses actual prices and costs rather than estimates to recompute income for each year of the contract.

The percentage of completion or percentage of completion-capitalized cost method of accounting will not be available for home construction contracts. Contractors, except for small contractors, must use the uniform capitalization of cost rules.

Briefly, a home construction contract is one in which 80 percent or more of the estimated total costs of the contract are reasonably expected to be attributable to building, reconstructing, or rehabilitating dwelling units in a building with four or fewer dwelling units, or improving the site of the dwelling units. A townhouse or row house is a separate dwelling unit regardless of the number of attached units.

Home construction contracts of small contractors, in which contracts will be completed within two years, are not treated as long-term contracts for alternative minimum tax purposes.

Residential construction contracts that are not home construction contracts and are accounted for under the percentage of completion-capitalized cost method will continue to use the 70 percent inclusion amount of current law. A residential construction contract is similar to a home construction contract without the limit on the number of dwelling units in a building, provided no more than 50 percent of the units are used for transients.

Non-discrimination rules

Effective for years beginning after December 31, 1988, a new series of the code section 89 non-discrimination rules will apply to all employee welfare benefit plans, such as medical, dental, accident, and group life.

Each plan must pass certain plan requirements to continue to provide benefits to employees, which are not taxable to all employees. Further tests are required to ascertain if the plan discriminates in favor of the highly compensated employees. A plan deemed discriminatory will cause excess benefits received by the highly compensated employees to be included in their gross income.

Employee retirement

or benefit plans

Defined benefit pension plans that terminate during 1988 and 1989, with some exceptions, are subject to a non-deductible excise tax equal to 10 percent of the reversion, in addition to including the reversion in gross income of the employer. The employer is also responsible for payment of the excise tax.

For reversions occurring on or after October 21, 1988, the rate will increase to 15 percent, except for some employers who complied with certain rules prior to October 21, 1988.

Corporate charitable


Under current law, an individual, closely held corporation, or a personal service corporation, is required to obtain an independent written appraisal to claim a charitable deduction for contributions of property in excess of $5,000. The Act provides that the IRS is authorized to prescribe regulations relaxing this appraisal requirement.

Thus, an independent written appraisal will not be required for contributions made after November 10, 1988, when a corporation (that is not an S corporation) meets the other requirements for claiming a charitable deduction in excess of $5,000. This applies to contributions for a tax-exempt organization of inventory or property used in its business.

Estate and gift taxes

Problems relating to tax benefits of an "estate freeze" have been corrected retroactively to estates of persons dying after December 17, 1987.

A taxpayer can sell an entire interest in a business to children (or other lineal family members) in exchange for debt of the business. If certain requirements are met, the business will not be included in the estate at death. Clarification has been added to prevent transferred property from being included in both spouses' estates at death.

Finally, the Act restricts the availability of the grantor-retained income trust (GRIT) as an estate planning technique by requiring that favorable tax treatment is obtained only if the term of the GRIT does not exceed 10 years. A GRIT generally is an irrevocable trust to which a taxpayer has transferred property. With this GRIT, the taxpayer has retained a life estate for a fixed number of years or the period until death.

Tax benefit provisions extended

The targeted jobs credit is extended one year to cover individuals who begin work after 1988 and before 1990. The summer youth credit is reduced from 85 percent to 40 percent, however. Contributions to a qualified group legal services plan continue to be excluded from the employee's gross income.

The Act extends the 10 percent business solar tax credit, the 10 percent geothermal tax credit, and the 15 percent ocean thermal tax credits through June 30, 1989. The 20 percent research and development (R&D) tax credit is extended for qualified expenditures incurred through December 31, 1989. The deduction, however, will be reduced by 50 percent of the R&D tax credit for the year.


The Act also includes the Taxpayer Bill of Rights, which contains many provisions. Some of these include:

* A taxpayer will not be required to attend an examination at an IRS office other than one closest to the taxpayer's home.

* A taxpayer must be notified that he or she may suspend the interview to consult a qualified representative.

* A taxpayer does not have to accompany a representative who holds an executed power of attorney.

* A taxpayer ombudsman may issue a "taxpayer assistance order" if the taxpayer is under significant hardship.

* The IRS must now give 30 days advance notice before collecting a tax by levy.

* The amount of property exempt from levy is increased. In most cases, this includes a principal residence.

* The number of situations in which a taxpayer can collect economic damages has been expanded.

This is by no means a complete summary of the Technical and Miscellaneous Revenue Act. Individuals and businesses should begin as soon as possible to determine the provisions that will impact 1989 tax and business planning.

James C. Haskins, CPA, is a tax manager in the Houston office of Spicer & Oppenheim, the international accounting, tax, and business consulting organization. His responsibilities with the firm are in the areas of tax and business planning for closely held companies and their executive owners. Mr. Haskins obtained a B.B.A. degree in accounting from the University of Houston and is a member of the American Institute of CPAs and the Texas Society of CPAs, including its Houston chapter.
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Title Annotation:Tax Corner
Author:Haskins, James C.
Publication:Journal of Property Management
Date:May 1, 1989
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