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BRIEFLY:
Chicago Business Survey, November 2006 — Chicago Business Barometerä
tumbled
The Chicago Purchasing Managers report the Chicago Business Barometerä
turned the October stumble into a November fall, dropping to neutral. The continuous expansion, which began in April 2003, ended at 42 months.
- All major indexes declined;
- Prices Paid expansion slowed for the fifth month;
- Order Backlogs, Employment, and Supplier Deliveries retreated;
- Buying Policy: Lead-times for all three categories increased.
Where the toys are made . . .
The value of U.S. imports of stuffed toys (excluding dolls) from China between January and August 2006 equaled $639 million. China was the leading country of origin for stuffed toys coming into this country, as well as for a number of other popular holiday gifts that were imported. These include electric trains ($65 million), puzzles ($49 million), roller skates ($82 million), sports footwear ($215 million), golf equipment ($47 million) and basketballs ($30 million). China barely edged out Canada as the leading supplier of ice skates ($6.7 million versus $6.6 million), with Thailand ranking third ($4.9 million).
Source: U.S. Census Bureau
Profile America: Famous movie opens
One of the major films in U.S. movie history opened on December 15th in 1939 in Atlanta, Georgia — "Gone With The Wind," based on the Pulitzer Prize winning novel of the Civil War by Margaret Mitchell. In spite of scripting, casting and scenery problems, the movie — starring Clark Gable and Vivien Leigh — was a huge success, winning an unprecedented eight Academy Awards. The publicity surrounding the premier was such that 300,000 people braved the cold to watch the stars arrive at Loew's Grand Theater, and the governor of Georgia proclaimed a state holiday in honor of the event. In 1939, there were more than 15,000 movie theaters across the U.S.
Today, that figure is just over 5,200.
Source: U.S. Census Bureau
Congress extends R&D tax credit
Congress renewed the R&D tax credit as part of its last-minute tax package of legislation before adjourning early Sat., Dec. 9.
The new law provides a research tax credit equal to 20 percent of the amount by which a company's qualified research expenses for a taxable year exceed its base amount for that year. The provision extends the research credit for qualified amounts paid or incurred in 2006 and 2007.
The estimated worth of the credits is $16.5 billion over 10 years, according to CBO estimates.
The R&D tax credit expired nearly a year ago despite repeated promises by both Republicans and Democrats to renew the legislation used annually by nearly 16,000 U.S. companies.
With the R&D tax credit set to expire last year, both the House and Senate included a one-year extension of the credit in their respective tax reconciliation bills, but a joint conference committee was unable to reach agreement on the extension until late Friday night.
Per diem expense reimbursements paid by employers
The need for employers to track the amount of expense reimbursement allowances paid to employees on a per diem basis is being emphasized by the Internal Revenue Service in a recent ruling.
Revenue Ruling 2006-56 tells employers that if they routinely pay per diem allowances in excess of the federal per diem rates, but do not track the allowances and do not require the employees either to actually substantiate all the expenses or pay back the excess amounts, and do not include the excess amounts in the employee's income and wages, then the entire amount of the expense allowances is subject to income tax and employment tax.
Generally, amounts employers pay employees to reimburse them for substantiated business expenses are not subject to income tax or employment tax. For reimbursements for expenses for meals and other incidentals associated with business travel, employees get this exclusion for reimbursements for each day of travel up to the federal per diem rates without having to actually substantiate the amounts of the expenses. However, if an employer pays expense allowances that exceed the federal per diem rates, the excess amounts are subject to income tax and employment tax if they are not repaid to the employer, unless the employee actually substantiates all of the expenses covered by the per diem allowance.
The revenue ruling illustrates when a per diem allowance arrangement that fails to track the excess amounts and does not include the unsubstantiated, unrepaid excess amounts in the employee's income and wages constitutes a pattern of abuse of the rules for tax-free expense reimbursements. The finding that the arrangement is abusive causes all allowances paid under the arrangement to be subject to income tax and employment tax, not just the excess amounts. While the revenue ruling uses a scenario in the trucking industry because of the industry's widespread use of per diem allowances, the analysis in the revenue ruling applies to any employer in any industry that uses per diem allowances to reimburse employee expenses.
IRS Revenue Ruling 2006-56 was effective upon issuance. However, the IRS recognizes that employers may need some time to adjust their systems so they can track excess allowances and account for them correctly. The IRS is issuing instructions to its agents not to apply the results under the revenue ruling for taxable periods ending on or before Dec. 31, 2006, in the absence of intentional noncompliance.
FASB's FIN 48 clarifies accounting for uncertainty in income taxes
Varied interpretations of tax laws and filing requirements have resulted in inconsistent accounting for income taxes. In an effort to increase consistency, the Financial Accounting Standards Board (FASB) recently released an interpretation of Statement No. 109, Accounting for Income Taxes. This interpretation, known as FASB Interpretation Number (FIN) 48, prescribes a model for recognizing and measuring potential tax obligations and their associated financial statement disclosure.
New accounting model
FIN 48 substantially changes the current accounting model. This interpretation requires a two-step process for evaluating tax positions; recognition and measurement. Recognition occurs when it is "more likely than not" that a tax position will be sustained. When assessing the "more likely than not" threshold, it is assumed that taxing authorities have full knowledge of all relevant information. For example, if a company has historically assessed its multistate income tax filing requirements and made a decision not to file in some states or made certain decisions regarding the apportionment of income between states, FIN 48 now requires a more rigorous and methodical assessment of those decisions for financial statement reporting purposes. Management has less flexibility in determining tax reserves.
Measurement applies if step one is met. The tax impact is measured as the largest amount that is greater than 50 percent likely to be realized upon ultimate settlement with taxing authorities. Differences between tax positions taken on a tax return and amounts recognized in the financial statements will result in a change to an income tax payable, income tax receivable, deferred tax asset, or deferred tax liability, if material.
Disclosures
FIN 48 changes disclosure requirements for income taxes. Most notably, this interpretation now requires a tabular reconciliation of the total amounts of unrecognized tax benefits at the beginning and end of the period. Fin 48 also requires specific details regarding the nature and estimated range of uncertain tax benefits that may significantly increase or decrease within 12 months of the reporting date and accrual of interest and penalties related to tax positions. These disclosures are required annually and at interim periods where significant changes occur.
Effective date and transition
FIN 48 is effective for fiscal years beginning after December 15, 2006 (e.g. January 1, 2007 for calendar year companies). The cumulative effect of the FIN 48 provisions must be reported as an adjustment to the beginning retained earnings.
Author Sean Kelley is a manager with RSM McGladrey in the State and Local Tax Practice. For more information, contact him at sean.kelley@rsmi.com
Businesses can use formula for telephone tax refund
A formula that will allow businesses and tax-exempt organizations to estimate their federal telephone excise tax refunds has been issued by the IRS.
"The formula will provide a less burdensome option than gathering up to 41 months of old phone records," said IRS Commissioner Mark W. Everson.
In May 2006, the IRS announced that individuals, businesses and tax-exempt organizations who paid the long-distance telephone excise tax can request the refund on their 2006 federal income tax returns.
"Businesses and tax-exempt organizations generally have more varied phone usage patterns than individuals," Everson said. "The IRS has met with a number of businesses and tax-exempt organizations to understand their concerns. We believe we have developed a reasonable method for estimating telephone excise tax refund amounts while reducing burden."
To request a refund, businesses (including sole proprietors, corporations and partnerships) and tax-exempt organizations must complete Form 8913, Credit for Federal Telephone Excise Tax Paid. To complete this form, businesses and tax-exempt organizations may determine the actual amount of refundable long-distance telephone excise taxes they paid for the 41 months from March 2003 through July 2006, or use the formula to figure their refunds. Businesses should attach Form 8913 to their regular 2006 income tax returns. Tax-exempt organizations must attach it to Form 990-T.
Businesses and tax-exempt organizations can figure their refund amounts by comparing two telephone bills from this year to determine the percentage of their telephone expenses attributable to the long-distance excise tax. The bills they should use are the bill with a statement date in April 2006 and the bill with a statement date in September 2006. They must first figure the telephone tax as a percentage of their April 2006 telephone bills (which included the excise tax for both local and long-distance service) and their September 2006 telephone bills (which only included the tax on local service). The difference between these two percentages should then be applied to the quarterly or annual telephone expenses to determine the amount of their refunds.
The refund is capped at two percent of the total telephone expenses for businesses and tax-exempt organizations with 250 or fewer employees — which covers more than 99 percent of all businesses. The refund is capped at one percent for those with more than 250 employees. Most organizations in this category typically are able to figure the actual amount they paid in long-distance excise tax. However, the formula provides a more limited, but simpler, approach for those large employers who wish to use it.
For example, if a business has an April 2006 telephone bill of $1,000, which includes federal telephone excise tax of $28, the tax percentage is 2.8 percent. If the September 2006 bill is $1,100 including federal telephone excise tax of $16.50, the tax percentage is 1.5 percent. The business' long-distance excise tax percentage is 1.3 percent (2.8 percent for April minus 1.5 percent for September). The business multiplies 1.3 percent by its total phone expenses over the 41-month period to arrive at the amount of its refund. If this business had more than 250 employees, its refund would be limited to one percent of its total phone expenses for the period. If the business had 250 or fewer employees, the two-percent cap would apply and would not limit the amount of the refund.
The IRS developed the formula after receiving public input and discussing the issue with business organizations, the Small Business Administration and representatives from the tax-exempt community.
The IRS already has provided individual taxpayers with the option to use standard amounts based on the number of exemptions allowed to that taxpayer. Individual taxpayers can request a $30 refund with one exemption, $40 for two exemptions, $50 for three exemptions and $60 for four or more exemptions.
Options for requesting this refund vary for sole proprietors, who file a Schedule C with the Form 1040, depending on the gross income reported on the Schedule C. Sole proprietors who report gross income of $25,000 or less on their Schedule C may use the standard amounts or request a refund based on their actual expenses. Sole proprietors reporting more than $25,000 of gross income have three options: they can use the standard amounts which cover both personal and business expenses, they can use the formula for their business expenses and actual for their personal ones, or they can choose to use actual amounts for both business and personal.
Similar rules depending on the amount of gross income reported on Schedule F or Schedule E apply to farmers and individual owners of rental property.
Trusts and fiduciaries may not use the standard amount available to individuals. They should use the formula to figure their refunds, or request the actual amount paid.
The Treasury Department announced in May that the government would stop collecting the federal excise tax on long-distance telephone service beginning Aug. 1, 2006, and provide refunds for taxes billed after Feb. 28, 2003.
Details on the telephone tax refund will be included in 2006 tax return materials and at http://www.irs.gov/newsroom/article/0,,id=164310,00.html.
New Illinois laws effective January 1, 2007
Two new laws taking effect in Illinois will have tax consequences for manufacturing tax professionals.
Public Act 94-1067
Establishes income tax credits for employers who hire veterans or ex-offenders. The legislation also authorizes an employer to take a credit of up to $600 per ex-offender employed per year. Visit www.ilga.gov/legislation/publicacts/fulltext.asp?Name=094-0836&GA=094 for the complete text of the legislation
Public Act 94-836
Amends the Income Tax Code to reduce the right of taxpayers to claim a net loss carry-forward. The new law says that any net loss claimed by a business on or after Dec. 31, 2002 must be reported to the Department of Revenue within three years and all net loss claims may be subject to an audit. This law change was part of the SFY 2007 Budget Implementation bill, so it is part of a larger piece of legislation. Visit http://www.ilga.gov/legislation for the complete text of the legislation.
Questions regarding either of these bills can be directed to the IMA's legislative staff at 217-522-1240, ext. 3008.
Important Tax Filing Deadlines:
January 15, 2007 — 2006 Q4 Estimated Taxes Due
March 15, 2007 — 2006 Corporate Income Taxes Due
April 15, 2007 — 2006 Individual Income Taxes Due
2007 Q1 Estimated Taxes Due
By the numbers: The Economy
Productivity Q3 |
+0.2% |
Unit labor cost |
+2.3% |
ISM services |
58.9 |
Factory orders |
-4.7% |
US Unemployment |
4.5% |
IL Unemployment |
4.1% |
Avg. hourly earnings |
+0.2% |
Avg. workweek |
33.9 hrs. |
Consumer Sentiment |
90.2 |
Total Mfg Employment |
678,100 |
Change from 1 year ago |
-10,300 |
Source: U.S. government agencies
IRS announces 2007 standard mileage rates
The Internal Revenue Service has issued the 2007 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning January 1, 2007, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:
- 48.5 cents per mile for business miles driven;
- 20 cents per mile driven for medical or moving purposes; and
- 14 cents per mile driven in service to a charitable organization.
The new rate for business miles compares to a rate of 44.5 cents per mile for 2006. The new rate for medical and moving purposes compares to 18 cents in 2006. The primary reasons for the higher rates were higher prices for vehicles and fuel during the year ending in October.
The standard mileage rates for business, medical and moving purposes are based on an annual study of the fixed and variable costs of operating an automobile. Runzheimer International, an independent contractor, conducted the study for the IRS.
The mileage rate for charitable miles is set by statute.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire or for more than four vehicles used simultaneously. Revenue Procedure 2006-49 contains additional information on these standard mileage rates.
Notice on reporting and withholding under Code Section 409A
On November 30, Treasury and the IRS issued Notice 2006-100 providing guidance to employers and payers on their reporting and wage withholding requirements for calendar years 2005 and 2006 with respect to deferrals of compensation and amounts to include in gross income under IRC §409A and relief from reporting deferrals that are not to include in income during those years. The notice supersedes Notice 2005-94.
Under the relief in the notice, employers and other payers need not report annual deferrals of compensation that are not to include in income under §409A on Form W-2 or Form 1009-MISC for 2005 or 2006. However, amounts to include in income under §409A for 2005 and 2006 must be reported on Form W-2 or Form 1099-MISC, as appropriate. Employers and payers were alerted last year in Notice 2005-94 that they might have to file amended information returns to report amounts to include in income for 2005. In addition, the notice provides guidance on how to meet income tax withholding requirements for amounts to include in income under §409A for 2006. The notice also provides guidance to service providers on their income tax reporting and tax payment requirements for amounts to include in gross income under 409A for 2005 and 2006.
The notice provides interim rules for 2005 and 2006 on calculating amounts to include in gross income under §409A. These rules apply to service providers who must include amounts in income pursuant to §409A and to employers or other payers who must report and withhold on the amount to be included in income under §409A.
Economics community mourns the loss of Milton Friedman
by Gerald Prante
Milton Friedman, history's most famous free market economist and 1976 Nobel laureate, passed away November 16, 2006, at the age of 94. We should all mourn the loss of one of the most brilliant economic minds the field has ever seen. Friedman's ability to teach people around the globe the benefits of a society built on the framework of individual liberty made him one of the most influential individuals of the past 50 years.
His impact on tax policy has also been tremendous. When he was a Keynesian and employed in the Treasury Department in the early 1940s, it was largely his innovation to have income taxes withheld each payroll period. But soon thereafter, when he moved away from Keynesianism, Friedman criticized Keynesian policies and the use of taxing and spending policy to "control" the ups and downs of the short-run macroeconomy. Friedman's permanent income hypothesis argued that because individuals base their spending habits on their expected long-term income, any short-run increase in income resulting from tax cuts would have little impact on current consumption. Friedman argued that tax cuts, if permanent, would increase lifetime consumption by the amount of the tax, yet only increase consumption in each period by a relatively small amount.
Friedman was also instrumental in developing policy proposals using the theory of the negative income tax. The Earned Income Tax Credit, which Friedman actually opposed in its implementation, is thought to resemble the negative income tax model to a certain extent. Friedman was also highly supportive of vouchers, such as food stamps or education vouchers, as a substitute for programs in which the government had an explicit role in production.
Friedman had many interesting takes on economic issues, including tax policy. Below are some of his quotes on taxes. They illustrate his belief in low taxes, as well as his general support of the "starve the beast" phenomenon.
"Inflation is taxation without legislation."
"The most important ways in which I think the Internet will affect the big issue is that it will make it more difficult for government to collect taxes."
"Workers paying taxes today can derive no assurance from trust funds that they will receive benefits when they retire. Any assurance derives solely from the willingness of future taxpayers to impose taxes on themselves to pay for benefits that present taxpayers are promising themselves."
"The widespread enthusiasm for reducing government taxes and other impositions is not matched by a comparable enthusiasm for eliminating government programs — except programs that benefit other people."
On the Bush tax cuts: "I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible. The reason I am is because I believe the big problem is not taxes, the big problem is spending. The question is, ‘How do you hold down government spending?' Government spending now amounts to close to 40 percent of national income not counting indirect spending through regulation and the like. If you include that, you get up to roughly half. The real danger we face is that number will creep up and up and up. The only effective way I think to hold it down, is to hold down the amount of income the government has. The way to do that is to cut taxes. "
Gerald Prante is an economist at the Tax Foundation in Washington, D.C. Source: The Tax Foundation
New guidelines for payroll deduction contributions to charities
New guidelines for taxpayers to follow to substantiate donations to charities that were made by payroll deductions are now available from the Internal Revenue Service.
"This makes it easier for businesses and individuals to support worthwhile charities without fear of losing the deduction," said IRS Commissioner Mark W. Everson.
Notice 2006-110 explains how a taxpayer who makes charitable contributions by payroll deductions can meet the new recordkeeping requirements. The taxpayer should retain a pay stub, Form W-2, or other document furnished by the employer that shows the total amount withheld for payment to charity, along with the pledge card that shows the name of the charity.
The recently enacted Pension Protection Act of 2006 changed the recordkeeping requirements for taxpayers claiming deductions for cash contributions to charities, including contributions made by payroll deductions. For calendar year taxpayers, the new rules apply to contributions made beginning in 2007.
For federal workers, the notice specifically provides that a pledge card with the name of a Combined Federal Campaign will meet the new requirements.
Manufacturers should not overlook unclaimed property liabilities
What is unclaimed property?
Unclaimed property is nearly any kind of property that is separated from the person who owns it. Commonly recognized examples include dormant bank accounts and unused gift cards. Manufacturers may hold the following types of unclaimed property:
- Un-cashed payroll checks
- Un-cashed accounts payable checks
- Un-cashed dividend checks
- Customer overpayments (credits)
- Unidentified remittances and non-refunded overcharges
When does property become reportable?
Escheat rules vary by state and by type of property. Generally, property becomes reportable after a dormancy period of three to five years. Property can, however, become reportable in as little as one year or in as many as 15 years.
Where is unclaimed property reported?
All states, including Illinois, have unclaimed property laws. Unclaimed property is reported to states in the following order:
- The state of the last known address of the owner.
- If No. 1 is unknown, the state of incorporation of the holder corporation.
What are the risks of noncompliance?
In recent years states have increased and reorganized unclaimed property audit activities. Manufacturer's with unreported unclaimed property risk audit liabilities with one or more states, including long look-back periods, penalties and interest. Examining your company's unclaimed property liabilities now can save money and time later.
Author Sean Kelley is a manager with RSM McGladrey in the State and Local Tax Practice. For more information, contact him at sean.kelley@rsmi.com.
Tax Policy Memo is published quarterly for IMA members by the Illinois Manufacturers' Association,1211 W. 22nd St., Ste. 620, Oak Brook, IL 60523, (630) 368-5300.
Editor: Stefany Henson, Director of Publications (shenson@ima-net.org).
Reproduction of all or any part is prohibited except by permission of authorized IMA personnel.
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