Fund Impact F.Y F.Y F.Y F.Y (000 s) Income Tax Exemption for CARS Vouchers (Negligible) $0 $0 $0

Transcription

1 February 12, 2010 Department of Revenue (Lenczewski) INDIVIDUAL INCOME TAX CORPORATE FRANCHISE TAX Federal Update; REIT Dividends Fund Impact F.Y F.Y F.Y F.Y (000 s) Income Tax Exemption for CARS Vouchers (Negligible) $0 $0 $0 5-Year Carryback of 2008 or 2009 NOLs ($5,700) ($1,700) $1,400 $1,100 Gross Income Exclusion of Certain Military Base Realignment/Closure Payments (2/18/09) (Negl.) (Negl.) (Negl.) (Negl.) Accelerated Tax Benefits for Contributions to Haiti Earthquake Relief ($80) $70 $0 $0 Eliminate Dividend Received Deduction for REIT Dividends (1/1/10) Corporate Franchise Tax $0 $1,000 $1,000 $1,000 Individual Income Tax Subtotal ($5,780) ($1,630) $1,400 $1,100 Corporate Franchise Tax Subtotal $0 $1,000 $1,000 $1,000 General Fund Net Impact ($5,780) ($630) $2,400 $2,100 EXPLANATION OF THE BILL DOR Administrative Costs/Savings The bill would update references to the Internal Revenue Code to adopt the following federal bills: Consumer Assistance to Recycle and Save Act of 2009, Public Law , Title XIII, enacted June 24, The Worker, Homeownership, and Business Assistance Act of 2009, Public Law , enacted November 6, Acceleration of Income Tax Benefits for Charitable Cash Contributions for Relief of Victims of the Earthquake in Haiti, Public Law , enacted January 22, The bill would also prohibit a corporation from taking a dividend received deduction for dividends received from a real estate investment trust (REIT). The proposed change would make the state tax treatment of REIT dividends consistent with the federal tax treatment. Yes No X

2 Page 2 EXPLANATION OF THE BILL (Cont.) Income Tax Exemption for CARS Vouchers The federal Consumer Assistance to Recycle and Save (CARS) Program, also known as the Cash-for-Clunkers program, provided a voucher of either $3,500 or $4,500 to the purchaser of a new motor vehicle if a used vehicle was traded in, subject to specified requirements for both the new and used vehicles. An uncodified provision of the federal law specifies that a voucher issued under the program is not considered gross income of the purchaser of a vehicle. Without this provision, the voucher would be income in cases where the value of the voucher exceeded the taxpayer s basis in the used vehicle. If an individual originally purchased the vehicle for more than the $3,500 or $4,500, there would be no gain and no income. If an individual had purchased the vehicle for less than the value of the voucher, the gain would be the excess of the voucher over the purchase price. For example, if the individual purchased the vehicle two years ago for $4,000 and received a $4,500 voucher, the $500 difference would technically be considered income. If the motor vehicle was used in a business, the taxpayer s basis would be the purchase price less depreciation claimed in prior tax years. In such cases, the taxpayer s basis could be less than the value of the voucher, and the difference would be considered income. However, if both the new and used vehicles are used in the business, the transaction could be considered a like-kind exchange under Section 1031 of the Internal Revenue Code. In that case, the recognition of the gain is deferred until the new vehicle is sold or otherwise disposed. 5-Year Carryback of 2008 or 2009 NOLs Generally net operating losses (NOLs) can be carried back two years and forward twenty years. A provision enacted in 2009 and adopted by Minnesota allows a business with gross receipts less than $15 million ( small business ) to elect to carry back a 2008 NOL for up to five years. The provision in Public Law allows any business to elect to carry back for up to five years an NOL for either 2008 or The NOL carried back to a year cannot exceed 50% of the taxable income for that prior year. A small business making a timely election to carry back a 2008 NOL under the previous provision may also make an election for 2009 under the new provision. Because the Minnesota corporate franchise tax does not adopt the federal NOL provisions, the proposal would affect only the Minnesota individual income tax. Gross Income Exclusion of Certain Military Base Realignment/Closure Payments The Department of Defense Homeowners Assistance Program (HAP) provides payments to certain employees and members of the Armed Forces to offset the adverse effects on housing values that result from a military base realignment or closure. The program was expanded in the American Recovery and Reinvestment Act of Generally, amounts received under HAP are excluded from gross income. The new provision extends the exclusion to include payments received under the 2009 expansion of the program.

3 Page 3 EXPLANATION OF THE BILL (Cont.) Accelerated Tax Benefits for Contributions to Haiti Earthquake Relief The provision allows certain charitable contributions for the relief of victims of the January 12, 2010, Haiti earthquake that were made in 2010 to be taken as a deduction as if they were made in Cash contributions that were made after January 11, 2010, and before March 1, 2010, can be treated as if made on December 31, The contributions must be eligible for deduction under Section 170 of the Internal Revenue Code. However, an exception to the record-keeping requirements under Section 170 is made for these contributions which allows a telephone bill with the relevant information to meet the requirements. The bill would also allow similar accelerated treatment for the Minnesota subtraction for charitable contributions for nonitemizers. This subtraction is equal to 50% of charitable contributions that exceed $500. Eliminate Dividend Received Deduction for REIT Dividends As a general rule, a corporation is allowed to take a dividend received deduction for dividends it receives from another corporation. There are exceptions to this general rule. For example, under both federal and state law a corporation that receives dividends from a regulated investment company cannot take the dividend received deduction. Minnesota differs from federal law on whether dividends from a real estate investment trust (REIT) are eligible for the dividend received deduction. Under federal law a corporation that receives REIT dividends cannot take the dividend received deduction. Minnesota law contains no prohibition from using the dividend received deduction for REIT dividends. Under both federal and state law, the taxable income of a REIT is computed in the same manner. Provided that a corporation distributes 90% of its income, its taxable income is computed using a dividend paid deduction. In most cases the dividend paid deduction reduces the taxable income of a REIT to zero. The bill would disallow the dividend received deduction for REIT dividends. REVENUE ANALYSIS DETAIL Income Tax Exemption for CARS Vouchers The CARS program took place in 2009 and involved about 700,000 used vehicles. Congress appropriated $3 billion for the program, and the total amount of the vouchers in Minnesota is reported to be about $73.2 million. For individuals, it is assumed that in most cases the individual originally purchased the vehicle for more than the value of the voucher, so there would be no reportable income. For businesses, it is assumed that in most cases both the new and used vehicles are used in the business and the like-kind exchange rules would apply. It is likely only a small number of transactions would involve reportable income. Therefore the state revenue impact of the exemption is estimated to be negligible (under $5,000).

4 Page 4 REVENUE ANALYSIS DETAIL (Cont.) 5-Year Carryback of 2008 or 2009 NOLs The estimates are based on the estimates of the federal legislation prepared by the Joint Committee on Taxation, dated November 3, The estimates were adjusted to include only the individual income tax and were apportioned to Minnesota. The estimates were adjusted for the differences between federal and state tax rates and federal and state fiscal years. Gross Income Exclusion of Certain Military Base Realignment/Closure Payments For the exclusion of HAP program payments, it was assumed that few Minnesota residents would be selling homes where the value was affected by a military base realignment or closure. Therefore, the annual revenue loss was estimated to be less than $5,000, or negligible. Accelerated Tax Benefits for Contributions to Haiti Earthquake Relief The option to accelerate the deduction of contributions would potentially benefit three groups of taxpayers: businesses with a tax year ending on December 31 st ; individuals who take an itemized deduction for charitable contributions; and individuals who take the nonitemized charitable contribution subtraction. Under current law, taxpayers can adjust their quarterly estimated payments or withholding in 2010 for a deduction they will take on their 2010 return. Taxpayers most likely to make such an adjustment are businesses and higher-income individuals who make a large charitable contribution for Haiti earthquake relief. Therefore, the potential fiscal year shift is minimized for businesses and higher-income individuals making large contributions. Based on the current version of the House Income Tax Simulation Model, an estimated 691,000 returns will have a state tax benefit from the itemized deduction for charitable contributions for tax year If 15% of the taxpayers make an average qualifying contribution of $30 and 30% elect to take the deduction on their 2009 return, the impact at a tax rate of 7% would be about $65,000. The $65,000 would be shifted from fiscal year 2011 to fiscal year In addition to the shift, some taxpayers may receive a larger tax benefit from taking the deduction in 2009 due to their specific tax situation. Fifteen percent, or about $10,000, is added to the loss in fiscal year 2010 to reflect this impact. Based on the House Income Tax Simulation Model, an estimated 131,000 returns will benefit from the nonitemized charitable contribution subtraction for tax year If 15% of the 131,000 returns make an average qualifying contribution of $30, the subtraction would be at most $15 (50% of $30). If 30% elect to take the deduction on their 2009 return, the impact at an average tax rate of 6% would be about $5,000 that would be shifted from fiscal year 2011 to fiscal year 2010.

5 Page 5 REVENUE ANALYSIS DETAIL (Cont.) Eliminate Dividend Received Deduction for REIT Dividends The revenue estimate is based on an analysis of statistics from the IRS on the amount of dividends earned by corporations. REIT dividends are reported as other dividends on Form 1120, Schedule C. The difference between total dividend income and the sum of dividends reported by various categories represents an estimate of the other dividend income. It is assumed that most of the other dividend income is dividends from REITs and Regulated Investment Companies (RICs). IRS statistics indicate that about 25% of the combined income from RICs and REITs is earned by REITs. As such, it is assumed that 25% of the estimated other dividend income is earned by REITs. The nationwide total of REIT dividends received by corporations was apportioned to Minnesota. The dividend received deduction is 80% of the total dividends received by corporations. The revenue gain from the proposal was reduced by 10% to reflect that corporations with an overall loss do not fully benefit from the dividend received deduction. hf2704_1/cc, dkd Source: Minnesota Department of Revenue Tax Research Division