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The corporate provisions of the Omnibus Budget Reconciliation Act of 1993.

Editor's note: This article was adapted from a chapter of Ernst & Young's Guide to the New Tax Law, published by John Wiley & Sons, Inc., New York, N.Y., 1993.

On Aug. 10, 1993, President Clinton signed into law the Omnibus Budget Reconciliation Act of 1993 (the "1993 Act"). The 1993 Act promises to reduce the deficit by $500 billion over five years. Of that, $16.4 billion will be raised by increasing the top corporate tax rate for corporations earning more than $10 million, and additional revenue will be raised from other provisions affecting corporations. This article will highlight the major aspects of the new legislation as they affect corporations.

Corporate Tax Rates

The new tax rates on corporate taxable income are as follows:
Taxable income Tax rate
Up to $50,000 15%
$50,001 - $75,000 25%
$75,001 - $10 million 34%(*)
Over $10 million 35%(**)

(*)The phaseout of the benefits of the 15% and 25% rates still applies. Thus, taxpayers with taxable income between $75,001 and $100,000 still pay a 34% rate, and an additional 5% tax not to exceed $11,750 is imposed on corporate taxable income over $100,000, up to $335,000. (**)An additional 3% tax not to exceed $100,000 is imposed on corporate taxable income over $15 million. This increase in tax phases out the benefits of the 34% rate. Therefore, corporations with taxable income over $18.333 million pay a flat rate of 35%.

The income tax rate for personal service corporations and the maximum capital gain rate for corporations have been increased from 34% to 35%.

Effective date: The new rates apply to tax years beginning on or after Jan. 1, 1993. A fiscal year corporation is required to use a blend of the old and new rates for a tax year that includes but does not begin on Jan. 1, 1993. Accordingly, the corporation's applicable tax rate will be a weighted average of the rates.

Penalties for the underpayment of estimated taxes are waived for underpayments attributable solely to the changes in tax rates.

A fiscal-year taxpayer, who is required to use a blend of the old and new rates for a tax year that includes but does not begin on Jan. 1, 1993 (e.g., a Jan. 31, 1993 year-end), that may have filed or extended a tax return will be required to pay the additional tax imposed. However, for purposes of determining whether a valid extension exists, taxpayers are required to remit the estimated unpaid tax liability with the extension request. The determination of the required amount will be made under prior law.

* Commentary

In addition to the impact of increased corporate tax rates on cash flow, there may also be an impact on financial statements under Financial Accounting Standard (FAS) 109, "Accounting for Income Taxes." Under FAS 109, deferred tax assets or liabilities are measured using the enacted tax rates expected to apply to taxable income in the period in which the deferred tax asset or liability is expected to be settled or realized. In cases in which there has been a change in the tax rate or laws, the balance sheet is adjusted for the effect of the change. This change is recorded as a component of income tax expense relating to continuing operations in the period in which the law is enacted. For some companies, the increase in the corporate tax rate to 35% may result in a higher tax provision due to the adjustment of the deferred taxes. For example, a company has net deferred tax liabilities of $340,000 at the beginning of the year, applying a 34% rate. During the year, assume the company has no change in its temporary differences, but the tax rate increases to 35%. Under FAS 109, deferred tax liabilities would be adjusted to $350,000. The $10,000 difference reflects the rate change that will flow through the tax provision as a component of income tax expense, thereby reducing net income for financial statement purposes.

Also, as rates increase, the incentive for accelerating deductions increases. Thus, techniques used to accelerate deductions and defer income should provide greater benefits in the future.

The corporate alternative minimum tax (AMT) rate has not changed and remains at 20%. Since the spread between the AMT rate and the top regular tax rate increased by one percentage point, certain taxpayers may be able to benefit further by taking certain deductions that would be included in alternative minimum taxable income (AMTI), such as accelerated depreciation or utilization of certain credits, without paying AMT.

AET and PHC Tax

The accumulated earnings tax (AET) is a penalty tax imposed on C corporations that accumulate earnings beyond reasonable business needs. There is a presumption that such accumulations are made to avoid the imposition of a second level of tax on the earnings of a C corporation when the earnings are distributed to the shareholders (e.g., the income tax paid by an individual shareholder on dividends received from a corporation). Reasonable business needs include working capital and funds for expansion and diversification. The AET is imposed on accumulated taxable income, which consists of taxable income with certain adjustments, reductions and an accumulated earnings credit. The AET rate was 28%. The personal holding company (PHC) tax was also imposed at 28% on undistributed earnings of certain closely held companies with largely passive investments or personal service income. The 1993 Act increases AET and PHC tax rates to 39.6%.

Effective date: The new rates apply for tax years beginning after Dec. 31, 1992.

* Commentary

The 11.6 percentage point rate increase underscores the importance of establishing and documenting reasonable business needs, including working capital needs, in order to avoid the AET. The AET has taken on added significance as the IRS has made it a hot issue in audits of public companies in recent years.

Corporate Estimated Taxes

Under prior law, for tax years beginning before Jan. 1, 1997, to avoid penalties for underpayment of estimated taxes, a corporation was required to make quarterly estimated tax payments that totaled at least 97% of the tax liability shown on the corporation's return for the current tax year. A corporation may estimate its tax liability for the current year by annualizing its income through the period ending with either the month or the quarter ending prior to the estimated payment due date. For tax years beginning after Dec. 31, 1996, the 97% requirement would have become a 91% requirement.

Under a safe harbor rule, any corporation that is not a large corporation may still avoid penalties for underpayment if it makes four timely estimated tax payments each equal to at least 25% of the tax liability shown on its return for the preceding tax year (otherwise known as the prior-year tax exception). A large corporation may also use this rule but only for the first quarter of its current tax year. A large corporation is one that had taxable income of $1 million or more for any of the three preceding tax years.

Now a corporation that does not or may not use the prior-year tax exception is required to base its estimated tax payments on 100% of the tax shown on its return for the current year. The amount required to be paid per installment is as follows:
Installment Percent of tax due
 1 25%
 2 50%
 3 75%
 4 100%

There is no change to the prior-year exception (safe harbor) for either small or large corporations, but the income annualization methods used to determine estimated tax payments have been modified. First, there is a new set of periods over which a corporation may elect to annualize income. Thus, there are now three alternative sets of periods a corporation may use to annualize income. Second, corporations are required to elect annually which of the three alternative periods they will use.

Specifically, annualized income is determined based on the following: Method 1:
Installment Periods for applying annualization
 1 First 3 months of the tax year*
 2 First 3 months of the tax year
 3 First 6 months of the tax year
 4 First 9 months of the tax year

Method 2:
Installment Periods for applying annualization
 1 First 2 months of the tax year*
 2 First 4 months of the tax year
 3 First 7 months of the tax year
 4 First 10 months of the tax year

Method 3:
Installment Periods for applying annualization
 1 First 3 months of the tax year*
 2 First 5 months of the tax year
 3 First 8 months of the tax year
 4 First 11 months of the tax year

(*) Note: A large corporation may use the prior-year tax exception by paying at least 25% of the prior-year tax.

An election to use any of the alternative methods described above must be made on or before the due date of the first estimated tax installment for the tax year for which the election is to apply, in a manner prescribed by the Treasury.

Effective date: These rules apply to tax years beginning after Dec. 31, 1993.

* Commentary

Once an annualized method is adopted for a tax year, a taxpayer cannot change the method for the remainder of the year. Thus, taxpayers should anticipate when income will be earned during the year and elect a method that defers recognition of such income to later quarters in order to defer cash payments until the end of the year. For example, if a calendar-year company earns most of its income at the end of each quarter (i.e., March, June, September and December), Method 2 or Method 3 would require less cash to be paid for estimated tax payments than Method 1. However, a larger amount would be due with the tax return or extension.

AMT Relief

A corporate taxpayer is subject to the AMT to the extent that the taxpayer's tentative minimum tax (TMT) exceeds its regular income tax liability. For a corporation, the TMT generally equals 20% of the excess of the corporation's AMTI over an exemption amount. AMTI is the corporation's taxable income modified by certain adjustments and increased by certain tax preference items (e.g., certain tax-exempt interest].

One of the adjustments made to taxable income in computing AMTI relates to depreciation. For AMT purposes, unless the taxpayer has elected to use the straight-line method for regular tax purposes, depreciation on most personal property to which the modified accelerated cost recovery system (MACRS) applies is computed using the 150% declining-balance method (switching to straight-line in the year necessary to maximize the deduction) over the property's class life.

For tax years beginning after 1989, the AMTI of a corporation is increased by an amount equal to 75% of the amount by which adjusted current earnings (ACE) exceeds AMTI (as determined without this adjustment). Generally, ACE equals AMTI with additional adjustments that generally follow the rules used by corporations in computing earnings and profits. For ACE purposes, depreciation was computed using the straight-line method over the class life of the property. Thus, a corporation that uses MACRS for regular tax purposes generally had to make two additional depreciation computations for purposes of AMT.

The 1993 Act eliminates the depreciation component of the ACE adjustment. As under prior law, unless the straight-line method was used for regular tax purposes, corporations will compute depreciation for MACRS tangible personal property for AMT purposes by using the 150% declining-balance method over the class life of the property.

Effective date: This rule is effective for property placed in service after Dec. 31, 1993.

* Commentary

While this change should simplify the calculation of depreciation for AMT purposes, taxpayers must continue to make the ACE adjustment for depreciation for property placed in service before Jan. 1, 1994.

Moving Expense Deduction

Deductible moving expenses now include only the expense of transporting the taxpayer (and members of the taxpayer's household) to the new residence, as well as the cost of moving household goods and personal effects. Deductible moving expenses no longer include the following: * The cost of meals. * The cost of house-hunting trips before the move. * The cost of temporary living expenses. * The costs incident to the sale or lease of the old residence, including settling of an unexpired lease. * The costs incident to the purchase or lease of a new residence.

In addition, the individual's new principal place of work must be at least 50 miles farther from the former residence than was his former principal place of work. Expenses that qualify as moving expenses that are not paid or reimbursed by the taxpayer's employer are allowable as a deduction in calculating adjusted gross income (AGI). Thus, moving expenses are no longer an itemized deduction. Qualified moving expenses paid or reimbursed by the employer are excludible from the employee's gross income and are not included in the employee's Form W-2.

Effective date: These rules apply to moving expenses paid or incurred after Dec. 31, 1993.

* Commentary

Taxpayers planning to move as a result of employment may want to pay or incur as many of these moving expenses as possible by Dec. 31, 1993. For example:

* If a new residence is sought, travel before Dec. 31, 1993 so that the meals consumed while traveling and the cost of the house-hunting trip are deductible.

* If it is known in advance that an unexpired lease of the old residence must be settled, be sure to settle the costs by Dec. 31, 1993.

* Try to sell the old residence and purchase the new residence by Dec. 31, 1993, so that the costs incident to the sale or purchase are deductible.

Business Meals and Entertainment

Meals and entertainment expenses incurred for business or investment purposes are deductible if certain legal and substantiation requirements are met. The amount of the deduction is now generally limited to 50% of the expenses that meet these requirements. No deduction is allowed, however, for meal or beverage expenses that are lavish or extravagant under the circumstances. Effective date: These rules apply to tax years beginning after Dec. 31, 1993.

Employer Tax Credit for FICA Taxes on Tip Income

All income earned by an employee from gratuities (tip income) is treated as wages paid by the employee's employer for purposes of the Federal Insurance Contributions Act (FICA). Thus, an employer must pay the FICA tax (which is often referred to as the social security tax) on the tip income of its employees. This FICA tax rate is 7.65%. Employers are allowed a business deduction for this expense. For purposes of the minimum wage requirements, an employee's tip income is treated as a wage paid by the employer, to the extent of 50% of the minimum wage.

A new tax credit has been created for employers that provide food or beverage services to customers at the employer's place of business if employees are customarily given tips by customers for food or beverage services. The credit is equal to an employer's FICA tax liability on the tip income of its employees, less the amount of the tip income used to satisfy the minimum wage requirements. The employer may not take a deduction for that portion of the FICA tax that is used as a tax credit.

This credit is part of the employer's general business tax credit. However, any credits that are not used in a tax year may not be carried back to a tax year ending before the 1993 Act's date of enactment.

Effective date: The new credit is available for FICA taxes paid after Dec. 31, 1993.

* Commentary

The following example illustrates the computation of this credit.

Example 1: Taxpayer T owns and operates a restaurant business. Employee E is employed part-time as a waiter in T's restaurant. During T's tax year ending December 31, T paid E $2,000 in hourly wages. If T had paid E the minimum wage, E's hourly wages would have been $2,125. In the same year, E also received $4,000 in tip income while working in the restaurant. Of this amount, $125 ($2,125 - $2,000) was used to satisfy the minimum wage requirement. Thus, T was required to pay FICA tax on $6,000 of E's total Wages. The total FICA tax paid by T was $459 $6,000 x 7.65%). T's tax credit is equal to the FICA tax paid on E's tip income not used to satisfy the minimum wage requirements (i.e., $296 [($4,000 - $125) x 7.65%]). T may not deduct this $296 of FICA tax.

Club Dues

No deduction is allowed for club dues. This rule applies to all types of clubs, including business, social, athletic, luncheon, sporting, hotel and airport clubs. Specific business expenses, such as meals and entertainment that may occur at a club, would be deductible to the extent that they otherwise satisfy the standard for deductibility.

Effective date: This rule applies to club dues paid or incurred after Dec. 31, 1993.

* Commentary

Taxpayers may consider prepaying certain club dues by Dec. 31, 1993. However, there are limitations on the extent to which a prepaid expense can be deducted. For example, under similar circumstances when the Tax Reform Act of 1986 (TRA) was passed, the IRS limited deductions for an individual's prepaid miscellaneous business and investment expenses. If an individual makes a payment in the current year as a prepayment for several years of expense, the IRS may allow a deduction for only the portion of the payment that relates to the year immediately following the tax year in which the payment is made.

Lobbying Expense Deduction

Under prior law, a taxpayer could deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business for activities directly related to appearances before or communications with legislative bodies, or their members, concerning legislation of direct interest to the taxpayer and similar amounts paid to communicate information concerning legislation between the taxpayer and organizations of which the taxpayer was a member. The taxpayer could also deduct that portion of dues paid or incurred to an organization to which the taxpayer belonged that were attributable to the activities described above. No deduction was allowed for amounts paid or incurred for participation or intervention in a political campaign on behalf of a candidate for public office (campaign expenses) or for attempts to influence the general public, or segments thereof, with respect to legislative matters, elections or referendums (grass roots lobbying expenses). In addition, no deduction was allowed for lobbying of foreign governments.

The 1993 Act retains the earlier rules denying deductions for campaign expenses, grass roots lobbying expenses and foreign lobbying; it adds new rules that disallow deductions for certain other lobbying expenses. The new rules disallow deductions for the costs of any attempt to influence state or Federal legislation and any communications with a covered executive branch official in an attempt to influence official actions or positions of that official. Covered executive branch officials include the President, Vice President, certain White House officials, cabinet level officials, the two most senior officials in each Executive agency and certain other officials. The new rules apply to attempts to influence legislation through communications with both members or employees of a legislative body and other government officials who participate in the formulation of legislation. The rules apply to costs for research for, or the preparation, planning or coordination of, such lobbying activities.

The ordinary and necessary business expenses of those in the business of lobbying on behalf of others are exempted from the new disallowance rules. If a taxpayer has de minimis amounts ($2,000 or less) of in-house lobbying expenses (not counting payments to a professional lobbying organization or organization dues allocable to lobbying activities), those in-house expenses are exempt from the general disallowance, and may be deductible business expenses.

The costs of attempting to influence legislation at the level of a political subdivision of a state (e.g., a county or municipality) are deductible under rules identical to those contained in the prior law.

The new rules also disallow business deductions for dues or contributions to an exempt organization other than a charity (e.g., a trade association), to the extent those payments are allocable to the lobbying costs of the exempt organization. To implement this rule, a new reporting requirement is placed on such exempt organizations, to inform their members or contributors (and the IRS) of the portion of their dues or contributions that is disallowed under this rule. However, an exempt organization can avoid the reporting requirements if the organization --has de minimis ($2,000 or less) in-house lobbying expenses and makes no payments to third parties for lobbying services; --pays a so-called proxy tax on the total amount of its lobbying expenditures (up to the amount of the dues it receives) at the highest corporate marginal rate, to offset the deductions of its members that would have been disallowed if the organization had informed the members (a portion of the member's dues will be nondeductible); or --can show that at least 90% of its dues or contributions come from members who cannot otherwise take a deduction for their payments to the organization.

In general, no similar disallowance applies to deductions for payments to charitable exempt organizations (e.g., tax-exempt hospitals) unless the charity lobbies on issues that have a direct financial impact on the donor's trade or business and the donor made the contribution to receive a deduction for otherwise nondeductible lobbying costs.

Effective date: This rule applies to amounts paid or incurred after Dec. 31, 1993.

* Commentary

There are a number of contacts with the government that should not be considered lobbying contacts, including (but not limited to) those compelled by subpoena, statute, regulation, etc.; those made in response to public notices soliciting communications from the public; and those made to a Federal official with regard to judicial proceedings, criminal or civil law enforcement inquiries, investigations or proceedings. Congress has expressed an intent that such contacts should not be considered lobbying. Thus, expenses incurred in dealing with the IRS and Treasury Department on matters involving private letter rulings, technical advice memoranda and regulation commentary would remain deductible.

Travel Expenses for Spouses, Dependents and Other Individuals

Generally, expenses for travel conducted in carrying on a trade or business, or for the production of income are deductible as a business expense. However, a deduction is now allowed for travel expenses paid or incurred with respect to a spouse, dependent or other individual accompanying a person on business travel only if the spouse, dependent or other individual is a bona fide employee of the person paying or reimbursing the expenses and the following apply.

* The travel of the spouse, dependent or other individual is for a bona fide business purpose.

* The expenses incurred would otherwise be deductible.

This rule does not apply to travel expenses for spouses, dependents and other individuals that otherwise qualify as deductible moving expenses.

Effective date: This rule applies to expenses paid or incurred after Dec. 31, 1993.

* Commentary

The change in law is illustrated by the following example.

Example 2: W, an employee of T, is accompanied on a business trip by her husband, H, who is not an employee of T. Because H assisted W on the trip by entertaining clients, helping her conduct a seminar and performing other substantial business services, H's presence on the trip had a bona fide business purpose. T paid all of W and H's travel expenses. Under prior law, T may have been able to deduct the costs of W and H's travel as an ordinary and necessary business expense. Under the new law, T may not deduct the costs of H's travel because he is not T's employee.

In order to qualify, a person must be a bona fide employee. However, there is no definition of bona fide employee or bona fide business purpose contained in the statute. Thus, whether a bona fide employee or bona fide business purpose exists will be determined on a case-by-case basis.

Extension of the R&D Credit

Under prior law, a 20% tax credit (the research credit) was available if a taxpayer increased its qualified research expenses in the current tax year over a base amount. Generally, the base amount was the product of a taxpayer's fixed-base percentage and the taxpayer's average annual gross receipts for the four years preceding the current tax year. The fixed-base percentage was a ratio of the taxpayer's qualified research expenses to its gross receipts during the period 1984-1988 (the fixed-base period). A taxpayer that did not have both qualified research expenses and gross receipts in at least three years during the fixed base period (a start-up company) would be assigned a fixed-base percentage of 3%. Expenses paid or incurred after June 30, 1992 were not eligible for the research credit. Under the new law, the prior rules governing the research credit are extended (retroactively) for an additional three years.

There is a new rule regarding the determination of the fixed-base percentage for start-up companies. A start-up company is assigned a fixed-base percentage of 3% for each of its first five tax years after 1993 in which it incurs qualified research expenses. For subsequent tax years, the fixed-base percentage will be computed based on its actual levels of research spending.

Effective date: The research credit may be computed using qualified research expenses paid or incurred before July 1, 1995.

* Commentary

Since the enactment of the research credit in 1981, the definition of qualified research has always been based, in part, on the definition of deductible research or experimental expenditures in Sec. 174. As part of the TRA, Congress modified the definition of qualified research by making it more restrictive for purposes of the research credit. In the Conference Report to the 1993 Act, the conferees affirmed the congressional intent that neither the enactment of the research credit in 1981 nor the modifications to the credit provisions in 1986 affect the definition of research or experimental expenditures for purposes of the deduction provided in Sec. 174. Thus, because the definitions of the terms research or experimental (for the deduction) and qualified research (for the credit) are not identical, certain research and development (R&D) costs incurred by taxpayers may be deductible, even though such costs do not qualify for the research credit.

* Commentary

In March 1993, the IRS issued proposed regulations under Sec. 174 clarifying what activities constitute qualified research. Since the research credit has been extended retroactively, taxpayers should evaluate their research activities using this revised definition to insure that they are receiving the maximum benefit from this tax credit.

Small Business Equipment Expensing Election

A taxpayer that annually purchases sufficiently small dollar amounts of certain types of depreciable property, known as Sec. 179 property, may elect to deduct a portion of the cost of the Sec. 179 property. Generally, Sec. 179 property is depreciable tangible personal property used in the active conduct of a trade or business. Under prior law, a taxpayer could deduct up to $10,000 of Sec. 179 property costs. The 1993 Act increased the maximum allowable deduction for Sec. 179 property to $17,500. However, the deduction may not exceed the taxpayer's taxable income derived from the trade or business for the tax year. Any amount of deduction not allowed by this limitation may be carried forward to succeeding tax years, subject to a similar limitation.

Effective date: This rule applies to property placed in service in tax years beginning after Dec. 31, 1992.

* Commentary

The maximum deduction is reduced by the amount by which the cost of Sec. 179 property placed in service during the tax year exceeds $200,000. Thus, taxpayers should consider the timing of purchases of Sec. 179 property to maximize the tax advantages of the purchases.

Withholding Rate on Supplemental Wages

Supplemental wage payments include bonuses, commissions and overtime pay that are not paid to an employee concurrently with other wages for the payroll period, or if paid concurrently, are separately stated. Withholding on supplemental wage payments was computed at a rate of 20%, if the employer had elected to do so. This elective withholding rate on supplemental wage payments has been increased to 28%. If the employer does not make the election, the supplemental wages are combined with the regular wages paid for the last preceding payroll period or the current payroll period. The aggregate amount is subject to withholding in accordance with withholding table determinations.

Effective date: This new rate applies to payments made after Dec. 31, 1993.

Cancellation of Indebtedness

Generally, if a debt owed by a taxpayer is discharged without the taxpayer having to give money or property in satisfaction of the debt, the amount of the debt discharged must be included in the gross income of the taxpayer. The amount included in income is often referred to as cancellation of indebtedness (or COD) income. Taxpayers are allowed to exclude COD income from gross income if it occurs when the taxpayer is insolvent or in a Title 11 case (bankruptcy); however, such taxpayers must reduce certain tax attributes by the amount of the excluded COD income. An insolvent taxpayer may not exclude COD income in excess of the amount by which the taxpayer is insolvent.

The amount of COD income generally is the difference between the adjusted issue price of the debt being canceled and the amount of cash and the value of any property used to satisfy the debt. Thus, if a debtor corporation transfers its stock to a creditor in satisfaction of a debt, the corporation realizes COD income equal to the excess of the adjusted issue price of the debt over the fair market value (FMV) of the stock transferred.

* Stock-for-debt exception

Under the judicially created stock-for-debt exception (as modified by the Code), a corporation that issued stock to its creditors did not recognize COD income, or reduce its tax attributes, if the corporation was in a Title 11 bankruptcy case or to the extent that the corporation was insolvent. The stock-for-debt exception did not apply if the taxpayer issued certain types of preferred stock, token shares of stock, or if the stock was transferred on a relatively disproportionate basis to unsecured creditors.

The 1993 Act repeals the stock-for-debt exception. Consequently, in all cases, a corporate debtor's use of stock to extinguish a debt will be treated in the same manner as the use of any other corporate property, and the corporation will be treated as having satisfied the debt with an amount of money equal to the FMV of the stock transferred. Thus, the corporation will realize COD income to the extent the adjusted issue price of the debt exceeds the value of the stock. If the corporation is in a Title 11 bankruptcy case or is insolvent, the corporation will not have COD income, but will reduce certain tax attributes.

Effective date: Generally, the stock-for-debt exception will not apply to any stock transferred after Dec. 31, 1994 in satisfaction of any debt. A transitional rule provides that the 1993 Act does not apply to any transfer of stock in satisfaction of debt in a Title 11 bankruptcy case that was filed on or before Dec. 31, 1993.

* Commentary

The 1993 Act eliminates the tax advantage to bankrupt or insolvent companies of issuing stock, as opposed to cash or other property, to creditors in partial satisfaction of debt. Furthermore, without the opportunity to avoid reducing their tax attributes, some companies that might have reorganized under prior law may now be forced into liquidation. The Dec. 31, 1993 bankruptcy filing transitional rule could cause a flood of filings by the close of this year.

* Expansion of tax attributes reduced by COD

The 1993 Act adds the AMT credit and passive activity losses and credits to the list of tax attributes that are reduced in the case of discharge of indebtedness that is excludible from income. Therefore, the list of tax attributes, in the order in which they are reduced, is as follows:

1. Any net operating loss for, or carryovers to, the tax year of discharge.

2. Any carryovers to or from the tax year of the discharge used in determining the general business credit.

3. Any minimum tax credit available as of the beginning of the tax year following the tax year of discharge.

4. Any net capital losses for, or carryovers to, the tax year of discharge.

5. The basis of certain property of the taxpayer.

6. Any passive activity loss or credit carryover from the tax year of discharge.

7. Any carryovers to or from the tax year of discharge used in determining the foreign tax credit of the taxpayer.

The amount of reduction is generally one dollar for each dollar of excluded COD income, except that in the case of credits the reduction is 33 1/3 cents for each dollar of excluded income.

Effective date: This rule is effective for COD income that is excluded in tax years beginning after Dec. 31, 1993.

* Commentary

If the amount of COD excluded from income is greater than the total attributes available for reduction, the taxpayer is not required to recognize the excess as income for tax purposes. The addition of the passive activity loss and credit carryovers and minimum tax credits to the list of attributes required to be reduced will diminish the possibility of enjoying this benefit.
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Author:Herndon, Diane P.
Publication:The Tax Adviser
Date:Sep 1, 1993
Previous Article:The individual provisions of the Omnibus Budget Reconciliation Act of 1993.
Next Article:S corporations' practical alternatives to a sec. 355 spin-off.

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