Congress on both sides of the aisle is playing a game of political chicken with the debt ceiling; but what would impact mean for the markets and the economy in general?

Although the U.S. hit its $14.3 trillion debt ceiling on Monday, May 16, economic Armageddon hasn’t yet rained down on the U.S. economy. Thanks to some slick Treasury Department maneuvering, the date when the U.S. really reaches the limit has been pushed to around August 2.

But instead of breathing a sigh of relief and resolving to engage in a bipartisan effort to resolve the debt ceiling issue in advance of the August drop-dead date, both sides are likely to wait until the last moment to avoid impact—threatening our fragile economic recovery in the process.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of U.S. debt in Advisor’s Journal, see Storm Clouds over U.S. Debt (CC 11-85).

Why is this Topic Important to Wealth Managers? This blogticle is part of our casual Friday series. It presents wealth managers with information on the start-up expense deduction as well as general information on tax law.

Here at Advanced Markets FYI, we’ve been working in tax law as applied to wealth management for a number of years, and must say it is rare to see mistakes by the Department of the Treasury. In fact, the general practice of a tax lawyer is to read a particular Code Section and corresponding Treasury Regulations multiple times until it finally makes sense. There are however, some instances where no matter how many times you read a Code Section and/or Treasury Regulation something does not add up.

At this point you have a few options. First, maybe you re-read it because chances are the Department of the Treasury and IRS did not made a mistake. As a general matter, it is unusual to find authoritative text that contains an error. So maybe by this point you’ve now corrected your misunderstanding with another proper reading taken with the underlying premise that the Treasury does usually not foul up. If you are still not sure that what you’re reading makes sense, it may be helpful to find more information about the subject. For example finding articles, journals or papers written on the subject will generally add clarity to a particular issue. However, the specific facts and circumstances upon which you are trying to apply the Code or Regulations are commonly unique. Furthermore, not every tax subject or Code Section is written about extensively elsewhere.

Now assuming you’ve spent significant time and diligence reading the primary source and looking for secondary sources to gain a better understanding, it’s then time to break out the big guns. The way we see it is, you have two options at this point. You can find a tax expert to examine the subject in detail with your particular question in mind. It is usually helpful to ask questions and work your way through a problem with another expert who sees the world slightly different than yourself (slightly is used as a relative term in this context). However, if you still don’t have the answer you’re looking for, you can always Blog about it!

Thus, we believe we have come across an error in the Code and Regulations (frankly we think they should give an award when this happens, but we attribute non-recognition to lack of funding anyway). We therefore put it up to you to prove us wrong…

The Small Business Jobs Act of 2010 Section 2031 amends Section 195 Subsection b of Title 26 of the United States Code. The amendment to the Code allows for a $10,000 deduction for start-up expenses with a reduction in the deduction for expenses over $60,000 after Dec. 31, 2009.[1]

Further, the IRS website states (although not authoritative):

Sect. 2031: Increase in amount allowed as deduction for start-up expenditures in 2010

For taxpayers starting an active trade or business, the new law increases the amount the taxpayer is allowed to elect as a deduction for start-up expenditures under section 195(b) for taxable years beginning after December 31, 2009. Section 2031 allows up to $10,000 as a deduction for start-up expenditures, but requires a dollar-for-dollar reduction of the $10,000 deduction if startup expenditures exceed $60,000. [2]

However, the Regulations nevertheless say something else… They appear to have not been amended along with the Code Section; thus the deduction allowed under the Treasury Regulations is only $5,000 (as was the limit before enactment of Section 2031 of the Small Business Jobs Act). Take a look for yourself. What is really interesting (at least to some tax professionals) is that Treasury Regulation Section 1.195 has been reversed and in its place one may be directed to Section 1.195-T or Temporary. Since the Temporary Regulation Section expires during 2011, perhaps it was not amended on purpose? All the same, the guidance is not in accordance with the Code. However, it is not likely that any court would determine the mismatch of information as anything other than an administrative oversight and most courts would likely follow the amended Code section’s limits as passed by Congress.

Next week’s blogticles will present new wealth management ideas for the Second Quarter 2011.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] See The Small Business Jobs Act of 2010. PL 111–240, Sept. 27, 2010. Section 2031(a); 26 U.S.C. 195(b).

[2] See Internal Revenue Service. “Small Business Jobs Act of 2010 Tax Provisions”. http://www.irs.gov/businesses/small/article/0,,id=230307,00.html. Page Last Reviewed or Updated: February 16, 2011. Last Accessed 3/22/2011.

Why is this Topic Important to Wealth Managers? This topic presents a discussion on information reporting regarding nonresident aliens and domestic interest income.  Because some wealth managers work with international clients, or a family in which at least one family member like a spouse or child is foreign, it is helpful to discuss the new proposed reporting requirements as issued by the Department of the Treasury.  Having a better understanding of the reported information that will end up in the hands of the IRS will hopefully help wealth managers focus on compliance, as well as wealth preservation and growth.

The Internal Revenue Service recently released new proposed regulations regarding reporting interest payments made to nonresident aliens.  A nonresident alien is an individual who is neither a citizen of the United States nor a resident of the United States.[1] We will discuss in a later blogticle this week about how to determine if someone is either a US taxpayer or instead is a non-resident alien (not a US taxpayer).

The new proposed rules require the payor to make an information return on Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding” on interest payments aggregating $10 or more each year paid to a nonresident alien, that is otherwise reportable on a Form 1099 (interest income). [2]

The payor shall generally prepare and file Form 1042-S at the time and in the manner prescribed by the code and the regulations, for the calendar year in which the interest is paid. [3]

The IRS and Treasury Department first published, in 2001, a notice of proposed rulemaking which provided that U.S. bank deposit interest paid to any nonresident alien individual must be reported annually to the IRS. [4] Then in 2002, the Treasury Department and the IRS withdrew these regulations and proposed narrower regulations that would require reporting only on interest payments to nonresident alien individuals that are residents of certain designated countries or, at the option of the payor, on interest payments to all nonresident alien recipients of bank deposit interest. [5]

Under regulations currently in effect, reporting of U.S. bank deposit interest is required only if the interest is paid to a U.S. person or a nonresident alien individual who is a resident of Canada. [6]

The newest proposed regulations published this month withdraw previous regulations and provide proposed regulations that extend the information reporting requirement to include bank deposit interest paid to nonresident alien individuals who are residents of any foreign country.

The Treasury Department notes this extension is appropriate for several reasons:

First, since the 2002 proposed regulations were released, there is a growing global consensus regarding the importance of cooperative information exchange for tax purposes that has developed.

Second, requiring routine reporting to the IRS of all U.S. bank deposit interest paid to any nonresident alien individual is aimed to further strengthen the United States exchange of information program, consistent with adequate provisions for reciprocity, usability, and confidentiality in respect of this information.

Finally, the proposed regulations are designed to help to improve voluntary compliance by U.S. taxpayers by making it more difficult to avoid the U.S. information reporting system (such as through false claims of foreign status).

Who is concerned with the proposed enactment of these new rules?  The US financial services community including wealth management firms that have interest bearing assets of foreigners. Briefly, US financial firms think that foreigners will move their assets out of the US into other countries such as the City of London, Switzerland, Hong Kong, and Singapore) that do not have such reporting rules.  Historically, when countries have increased tax on interest, in general money does flee to other countries.  We will also cover this capital flight issue in a historical context in later blogs to provide a wealth manager a better understanding of the likely economic impact to their clients and the US economy should the new interest reporting rules inevitably be enacted.

Tomorrow’s blogticle will discuss important planning aspects of 2011.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts

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[1] IRC Section 7701(b)(1)(B).

[2] Internal Revenue Bulletin: 2011-8; REG-146097-09.

[3] For rules regarding the preparation of a Form 1042 see Treasury Regulations §1.1461-1(b); for rules for furnishing a copy of the Form 1042-S to the payee see Treasury Regulations §1.6049-6(e)(4).

[4] REG-126100-00, 2001-1 C.B. 862.

[5] .REG-133254-02.

[6] See Treasury Regulations § 1.6049-4(b)(5).

Why is this Topic Important to Wealth Managers? Discusses the new PTIN for prepares of tax returns.  Presents the new rules relating to wealth managers who also prepare or assist in the preparation of tax returns.

Amidst the discussion of a possible repeal of the national health care legislation by the new 112^th Republican Congress, we side step today to a new issue that is being debated by those related to the tax industry.  The new Preparer Tax Identification Number is the topic of today’s blogticle.

Prior to January 1, 2011, any individual could prepare a tax return or claim for refund for compensation.  An individual who prepared and signed a taxpayer’s return or claim for refund as the preparer generally could also represent that taxpayer during an examination of the taxable period covered by that return or claim for refund.

All that has changed ever since the IRS issued regulations which state that after December 31, 2010, in order to prepare a tax return for a fee, or to otherwise represent a taxpayer before the IRS, an individual must obtain a preparer tax identification number (PTIN). [1]

The IRS first made findings and recommendations in Publication 4832, “Return Preparer Review,” which was published on January 4, 2010, concerning the results of an in-depth review of the tax return preparer industry.  The IRS then recommended increased oversight of tax return preparers through the issuance of regulations governing tax return preparers.  This increased oversight comes in the form of registration of PTINs.

Generally, in order to obtain a PTIN, the individual must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer.  In addition, the preparer must pay an annual fee to obtain a PTIN. [2]

The IRS has decided to allow certain individuals who are not attorneys, certified public accountants, enrolled agents, or registered tax return preparers to obtain a PTIN and prepare, or assist in the preparation of, all or substantially all of a tax return in certain discrete circumstances.

The Treasury Department and the IRS have decided to adopt the proposed regulations that establish a $50 user fee to apply for or renew a PTIN, which are estimated to recover the full cost to the IRS for administering the PTIN application and renewal program. [3]

The Treasury Department and the IRS have proposed rules that will also require an individual to pass a registered tax return preparer minimum competency examination (competency examination).  The IRS anticipates, however, that the tax returns and claims for refund covered by the competency examination(s) initially offered will be limited to individual income tax returns (Form 1040 series tax returns and accompanying schedules).

There are a few exclusions to the new rule.  For example, common tax forms such as W-2s and 1099s are not required to be filed by those only who obtain a PTIN.  [4]

Tomorrow’s blogticle will continue to discuss emerging hot topics.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Treasury Regulations §1.6109-2(d).

[2] Treasury Regulations §1.6109-2(d).

[3] Internal Revenue Bulletin:  2010-47.

[4] Treasury Regulations §1.6109-2.