Professional Documents
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Construction Services Journal 2010 1
Construction Services Journal 2010 1
03 American Recovery and Reinvestment Tax Act of 2009: Tax Credit Bonds
05 Protecting Against Potential Environmental Challenges
07 Tax Issues Common to Troubled Businesses
ABANDONING A
REAL ESTATE
PROJECT:
ORDINARY OR
CAPITAL?
In today’s economy and with struggling real estate prices, a significant tax savings opportunity may be
available to real estate investors with projects that are abandoned or significantly restructured. If the taxpayer
can prove an abandonment loss, it provides a significant benefit as the taxpayer will be able to claim an
ordinary loss even if the property is a capital asset. However, a taxpayer’s ability to claim an ordinary loss is
subject to certain limitations outlined.
Continued on next page
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Abandoning a real estate project:
ordinary or capital?
(CONTINUED)
Internal Revenue Code Section 165 allows a taxpayer to claim
02 a deduction for any “loss sustained during the taxable year
and not compensated for by insurance or otherwise.” This In today’s economic times,
deduction is equal to the adjusted basis of the property. For
individuals, the loss must have been from the taxpayer’s trade abandonment of certain real estate
or business; a transaction entered into for profit; or the result
of a casualty or theft including natural disasters. Generally, this
projects is not uncommon. This
loss is ordinary even if the asset is capital.
abandonment, however, may
In order to claim an ordinary loss there must be an actual create significant tax planning
“abandonment” of the property rather than a “sale or
exchange” of a capital asset. Each of the following transactions opportunities if structured properly.
has been held to constitute a “sale or exchange” rather than
qualifying for an ordinary abandonment or retirement loss:
An involuntary foreclosure sale of real property. there was an abandonment of the property. For example, a
A tax forfeiture of real property. subsequent sale or exchange of the property has been used
A conveyance of real property to a mortgagee by by taxing authorities as a factor supporting the position
quitclaim deed in lieu of foreclosure. that there was no abandonment if the property is sold for
A decline in the value of real property below the amount something more than salvage. However, if the taxpayer sells
of nonrecourse debt associated with the property the property subject to a fortuitous, unsolicited sale this
combined with a conveyance of the property by should not result in a denial of the abandonment loss.
quitclaim deed to the mortgagee.
An abandonment of property subject to nonrecourse Many investors own their real estate interest through a
debt. partnership interest. Although the partnership may not
Relief from indebtedness associated with property. abandon the property, there is potential for a taxpayer to
Extinguishment of a taxpayer’s right of redemption abandon his/her partnership interest so that he/she may
following a foreclosure sale of property. receive an ordinary deduction. A critical element of the
Abandonment of a land trust. abandonment is that the taxpayer seeking to recognize an
ordinary loss due to the abandonment and worthless of a
Accordingly, a taxpayer must take various steps to establish partnership interest not be relieved of any liabilities in the
abandonment. The taxpayer must communicate with third partnership. Even one dollar of debt relief would appear to be
parties that they intend to abandon the property. This sufficient to cause the transaction to be treated as a sale or
communication should take the form of a written notice and exchange.
should be served to lenders, partners, and others with an
interest in the property. The taxpayer must act in a manner In today’s economic times, abandonment of certain real
consistent with abandonment. The taxpayer should stop estate projects is not uncommon. This abandonment,
making additional mortgage or real estate tax payments and however, may create significant tax planning opportunities
should not contribute any additional costs to the project. if structured properly. Accordingly, careful consideration
and advanced planning should be given when deciding to
A facts and circumstances test is used in order to determine if “abandon” a project.
American Recovery and Reinvestment
Tax Act of 2009: Tax Credit Bonds
By Benjamin A. Davey, Senior Accountant
In the American Recovery and Reinvestment Tax Act of 2009 the credit allowed cannot exceed the excess of the sum of the
(ARRTA), Congress significantly expanded the tax credit bond taxpayer’s regular tax liability and AMT liability over the sum 03
programs available to state and local governments and entities. of certain other credits allowable. Any unused credit may be
The purpose of these bonds is to stimulate state and municipal carried forward to the next year. Pass through entities such as
capital spending by allowing the issuing governments to cost- S corporations, partnerships real estate investment companies,
effectively finance projects, thereby creating jobs, stimulating the credit is deemed distributed to the owners of those
local and regional businesses and communities. In addition to entities. Taxpayers must utilize Form 8912, Credit to Holders
the tax advantages, the tax credit bonds may be appealing to of Tax Credit Bonds, to calculate and claim the tax credit
some investors. available.
Common characteristics of tax credit bonds are that the bonds The ARRTA discusses the following tax credit bonds:
are non-interest bearing obligations issued as an alternative
to traditional tax-exempt bonds. The holder (taxpayer) of Qualified Zone Academy Bonds
the bonds is entitled to a nonrefundable tax credit in lieu In 1997, Congress enacted the Tax Payer Relief Act permitting
of receiving interest payments from the issuer of the bond. Qualified Zone Academy Bonds (QZABs) to authorize debt
The taxpayer includes the credit in gross income as if it was instruments for school finance. It allows qualifying schools
taxable interest, and then the taxpayer claims the tax credit to and/or communities to borrow at little or no interest cost.
offset both regular tax and AMT. The amount annual credit is The money can only be used for qualifying schools and the
based on the applicable credit rate set by the IRS multiplied funds can be used for renovation school buildings, purchasing
by the outstanding face amount of the bond. The amount of
Continued on next page
The Internal Revenue Service is allowing taxpayers to accrue liabilities on self-insured medical and
dental plan benefits even though the payments occurred more than two and a half months after the
close of the taxable year. This change in accounting method is automatic and can be made by filing Form
3115 with the Internal Revenue Service.
The ability to accelerate the accrued self-insurance medical expense deductions is only available if the employer uses a third-party
administrator. It is assumed that when the medical service is provided to the employee, the employer’s liability has been incurred because
of the certainty of the submission of the claim by the medical service provider to the third-party administrator. Therefore, the IRS is allowing
taxpayers to treat the liability as incurred in the taxable year in which medical services are provided.
This automatic accounting change is a simple way to accelerate tax deductions and improve cash flow.
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American Recovery and Reinvestment
Tax Act of 2009: Tax Credit Bonds
(CONTINUED)
equipment, developing curriculum and or training school
04 personnel. The proceeds of the bonds may not be used for new
construction. QZABs reduce the burden of interest payments These innovative bond programs will
by giving financial institutions holding the bonds (or other debt
mechanism) a tax credit in lieu of interest. The school district
try and help pursue capital projects
must still pay back the amount of money it initially borrowed,
and begin to revitalize communities
but does not have to pay any interest. The credit rate for
QZABs sold on a given day is set by the Treasury Department. while putting Americans back to work.
In 2009, the ARRTA extended the obligations issuance date
through 2010 for QZABs.
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PROTECTING AGAINST POTENTIAL
ENVIRONMENTAL CHALLENGES
(CONTINUED)
be a bit short-sighted when looking at the bigger picture.
06
As a result, CPL coverage is only one-half of the protective
Contractors need to eliminate potential
equation that should also include the added protection
surprises by thoroughly understanding
provided through Pollution Legal Liability (PLL) insurance.
PLL provides coverage for pollution conditions or events on, the provisions outlined by each policy
at, under or emanating from a designated location or project
site. Coverage is afforded for third-party bodily injury, property and the terms of coverage. When in
damage, clean up costs and defense costs resulting from the
existence of environmental conditions. A unique feature of doubt, experienced and dedicated
many PLL policies is their ability to offer various and different
coverage parts under one policy. Such coverage parts include, advice should be sought from qualified
but are not limited to:
professionals who specialize in these
New pollution conditions, if looking for future
coverage areas.
operational coverage
Existing pollution conditions, could be known or
unknown
On-site clean up coverage
insurance can supply the optimal protection against possible
Transportation coverage for material leaving the site
environmental issues and the resulting financial challenges.
Non Owned Disposal Site (NODS) coverage for the
However, knowledge is key to their successful application.
owner’s legal liability at a disposal site
Contractors need to eliminate potential surprises by thoroughly
Mold liability coverage for operational and maintenance
understanding the provisions outlined by each policy and the
exposures
terms of coverage. When in doubt, experienced and dedicated
advice should be sought from qualified professionals who
Another important aspect of coverage offered under PLL
specialize in these coverage areas. Unfortunately, there is
is that if a known environmental condition exists at a site,
no going back once a situation arises, and costs can mount
the policy may be structured to provide some type of
quickly to cover unexpected insurance gaps.
environmental coverage for that existing contamination.
Coverage is based on the type and extent of the site’s existing
contamination. Lastly, coverage can typically be purchased for
a period of 10 years or even longer in some instances.
07
With the economy continuing to struggle,
it is the ideal time for a reminder as to the
types of tax issues common to troubled
businesses. With effective analysis and
planning, companies can maximize available
tax benefits and mitigate tax costs associated
with issues such as net operating losses and
cancellation or modification of indebtedness.
Section 382
For loss companies that experience ongoing or one-time
ownership changes, pre-change net operating losses may well
be limited under IRC Section 382. This may prevent the
company from enjoying full utilization of these pre-change
losses against future taxable income. The rules of IRC Section
382 are complex, and many tax practitioners incorrectly
view them as applying only in the scenario where an outside
buyer purchases 100% of the company’s stock.
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Tax Issues Common To Troubled
Businesses
(CONTINUED)
If you have a client with net operating loss carryovers who may
08 have experienced an ownership change, Section 382 must be
considered before those net operating losses can be used to The new law has special rules for
offset taxable income in the current or future years.
partnerships and other pass-through
Managing debt modifications and COD
It’s a basic tax rule that income arises from the discharge of
entities and also may defer future
indebtedness under Section 61(a)(12). So when a business debt
interest deductions on new debts
is forgiven, wholly or in part, the debtor generally has income.
Under IRC Section 108, cancellation of indebtedness income is issued in the restructuring.
excluded to the extent the debtor is insolvent immediately after
the discharge. A debtor is insolvent to the extent the debtor’s
liabilities exceed the fair market value of the debtor’s assets.
Cancellation of indebtedness income excluded under this rule
depreciable property.
is applied to reduce tax attributes of the debtor or bankruptcy
Passive activity loss and credit carryovers.
estate.
Foreign tax credit.
EXAMPLE:
The regulations prescribe the order of reduction in the basis of
X’s debt of $8,000 is cancelled. Immediately before
the debtor’s property — e.g., basis reduced first for depreciable
cancellation, X’s liabilities were $44,000 and assets at fair
business or investment real property securing the debt, then
market value were $39,000. Since X is not insolvent after the
depreciable personal property securing the debt, and so on.
cancellation (liabilities now $36,000 with assets of $39,000), X
excludes $5,000 (reducing tax attributes for that amount) and
For clients that are forced to recognize some amount of the
has cancellation of indebtedness income of $3,000.
COD income, new rules will allow a favorable deferral. The
recently enacted American Recovery and Reinvestment Act of
The reduction in tax attributes is applied after the tax liability
2009 provides flexibility that will allow companies to increase
for the debt cancellation year is determined. Thus if the debtor
cash flow through deleveraging or otherwise restructuring
would have a net operating loss for that year, which would be
existing debt without the tax implications. At the election of
carried back (to generate a refund), that net operating loss
the taxpayer, any COD income incurred upon the reacquisition
is not reduced by cancellation of indebtedness income that
of an applicable debt instrument is deferred and recognized
year. If the debtor has a net operating loss carryover to that
ratably over the five-year period beginning in the fifth taxable
year, which would reduce that year’s tax, that carryover is not
year following a 2009 reacquisition and in the fourth taxable
reduced by cancellation of indebtedness income that year.
year following a 2010 reacquisition.
Attribute reduction takes place in the following order (after tax
liability for the debt cancellation year is determined, as above):
Unlike the section 108(a) exclusions of COD income, the
deferral offered under section 108(i) is not limited to insolvent
Net operating loss.
or bankrupt taxpayers and does not require attribute reduction.
General business credit carryovers.
As a result, both solvent and insolvent companies are able to
Minimum tax credit.
defer the impact of the COD event while retaining valuable net
Capital losses.
operating losses, credit carryovers and asset basis. The new
Basis. Reduce the basis of both depreciable and non-
law has special rules for partnerships and other pass-through
entities and also may defer future interest deductions on new 09
debts issued in the restructuring. As a result, companies will ATLANTIC BUILDERS CONVENTION
want to carefully consider all potential exclusions and deferrals
and their collateral side effects before electing to apply section Please stop by the WS+B Construction
108(i).
Services Team Booth #305 at the
In summary, a client who is relieved of the obligation to repay
the full face amount of its outstanding debt will require careful Atlantic Builders Convention from
attention. An understanding of the tax issues surrounding such
a forgiveness and the planning opportunities it represents is
April 14-16, 2010 at the Atlantic City
imperative.
Convention Center in Atlantic City, NJ.
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For more information on how the Construction Services Team can help your business, please email [email protected]
or please contact:
Louis Sandor III, CPA, CCIFP® Ron Martino, CPA, CCIFP® Paul Kuhl, CPA
Practice Leader Team Leader Team Leader
732.842.3113 732.842.3113 609.520.1188
[email protected] [email protected] [email protected]
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The Construction Services Journal is published by WithumSmith+Brown, Certified Public Accountants and Consultants. The information contained in this
publication is for informational purposes and should not be acted upon without professional advice. Please contact a member of the Construction Services
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