Log In | About PICPA | Contact | FAQs

Legislative Update

Week Ending June 8, 2007

• EMS Measure Passes House
• Poll Shows Voters Support Sales Tax Hike to Lower Property Taxes
• May Revenue Collections Strong
• U.S. Senators Ask Treasury to Focus on Nonprofits
• Preparer Penalties Broadened and Increased in New Legislation
• AICPA-Encouraged S Corp Provisions Enacted
• Rep. Boucher Introduces Tax Strategy Patent Bill Sought by AICPA
• AICPA Comments on 2007-2008 IRS Guidance Priority List
• Local Government Conference

EMS Measure Passes House

On June 4, the state House approved a measure by a vote of 190-8 that would provide an exemption for low-income taxpayers from the $52 Local Services Tax (LST), previously known as the Emergency and Municipal Services (EMS) Tax. The legislature originally adopted the EMS Tax in 2004 to help local municipalities pay for fire, police, and emergency services.

Under Senate Bill 218, the annual $52 LST would be waived up front for those who earn less than $12,000, rather than the current provision, which requires taxpayers to seek reimbursement at the end of the year.

Those eligible under the provision would be required to submit a uniform exemption certificate created by the Department of Community and Economic Development to their employers and local tax jurisdiction, along with the previous year’s W-2 forms or year-end pay stubs for income earned within the taxing jurisdiction.

If an exempted taxpayer exceeds the $12,000 threshold during the year, he or she would be liable for an immediate lump-sum withholding of the amount equivalent to that which a non-exempt taxpayer would owe up to that point. For the remainder of the year, his or her tax would be withheld on the same basis as other employees.

The other major provision of the legislation requires political subdivisions with an LST of more than $10 to exempt people whose earned income is less than $12,000 annually. If the LST is $10 or less, the $12,000 exemption level is optional.

The bill must now go back to the Senate for its consideration.

Poll Shows Voters Support Sales Tax Hike to Lower Property Taxes

Despite the recent failure of one proposed tax reform plan, Pennsylvania voters support 56 – 39 percent Gov. Ed Rendell’s proposal to increase the state sales taxes one percent if a portion of the money is used for local property tax relief, according to a Quinnipiac University poll. This compares to 54 – 40 percent support in a March 28 poll.

By a 51 – 32 percent margin, Pennsylvania voters do not blame Gov. Rendell for the failure of the referendum swapping local income tax hikes for property tax cuts and give the Governor a 55 – 36 percent overall approval rating, the poll finds.

Voters disapprove 51 – 30 percent of the way Rendell is handling property taxes, compared to a 49 – 34 percent disapproval March 28, when his overall approval was 57 – 33 percent.

May Revenue Collections Strong

The state Department of Revenue reported that the state collected $2.1 billion in General Fund revenue in May, $201.5 million, or 10.8 percent, more than anticipated. Fiscal year-to-date General Fund collections total $24.8 billion, which is $409.3 million, or 1.7 percent, above estimate.

Sales Tax receipts totaled $710.1 million for May, which was $4.6 million below estimate. Sales Tax collections, year-to-date, total $7.8 billion, which was $41.6 million, or 0.5 percent, less than anticipated.

Personal Income Tax (PIT) revenue in May was $836.3 million, which was $153.8 million above estimate. This brings year-to-date PIT collections to $9.3 billion, which is $237.7 million, or 2.6 percent, above estimate.

May Corporation Tax revenue of $142 million was $200,000 above estimate. Year-to-date Corporation Tax collections total $4.9 billion, which is $219.6 million, or 4.7 percent, above estimate.

Other General Fund revenue figures for the month included $69.7 million in Inheritance Tax, which was $800,000 above estimate and brought the year-to-date total to $690 million, which is $22.5 million below estimate.

Realty Transfer Tax was $47.6 million for May, bringing the total to $521.8 million for the year, which is $32.7 million less than anticipated.

Other General Fund revenue, including the Cigarette, Malt Beverage and Liquor Tax, totaled $256.3 million for the month, $55.7 million above estimate, bringing the year-to-date total to $1.6 billion, which is $48.9 million above estimate.

In addition to the General Fund collections, the Motor License Fund received $268 million for the month, $28.9 million above estimate. Fiscal year-to-date collections for the fund total $2.2 billion, which is $6 million, or 0.3 percent, above estimate.

The Gaming Fund received $29.2 million in unrestricted revenues for May. Fiscal year-to-date collections for the fund total $426.9 million. Gaming Fund receipts include taxes, fees and interest. Of the total for the month, $28.4 million was collected in state taxes for property tax relief, bringing the year-to-date total to $121.8 million.

Other gaming-related revenues collected for May included $3.3 million for the Local Share Assessment, for a total of $15.4 million for the year; $4.2 million for the Economic Development and Tourism Fund, for a year-to-date total of $17.9 million; and $10 million for the Race Horse Development Fund, bringing the total for the year to $43 million.

U.S. Senators Ask Treasury to Focus on Nonprofits

Sens. Max Baucus (D-MT) and Chuck Grassley (R-IA) continue to seek transparency in the charitable community, most recently urging Treasury Secretary Henry Paulson in a May 29 letter to focus on seven oversight areas that they view as needing greater attention.

The seven areas singled out by the senators are as follows: executive compensation; endowments; related organizations; joint ventures; governance; dollars raised vs. dollars actually spent on charitable activity; and hospitals. In regards to executive compensation, Baucus and Grassley say they continue to see executives receiving compensation from different sources, including subsidiaries, joint ventures and the like. Also, some charities are getting “creative” in providing compensation, paying for housing, spousal travel, loans, etc., according to the letter.

The IRS has indicated it is nearly ready to make public a totally reworked Form 990 that will consist of a core form, plus additional schedules depending on the type of tax-exempt organization that is filing.

Preparer Penalties Broadened and Increased in New Legislation

The federal “Small Business and Work Opportunity Tax Act of 2007,” signed into law last week, contains return preparer penalty changes that will affect the CPA practice. The act modifies the standards for avoiding preparer penalties for an understatement of tax.

The act also broadens the penalties to cover the preparation of estate and gift tax, employment tax, excise tax, and exempt organization returns. The bill also dramatically raises penalty amounts by increasing the section 6694(a) penalty (understatements due to unrealistic positions) from $250 to the greater of $1,000 or 50 percent of the income from the preparation of a return or claim for refund. The legislation also increases the section 6694(b) penalty (willful and reckless conduct) from $1,000 to the greater of $5,000 or 50 percent of the income derived (or to be derived) from preparing the return or claim.

The Joint Committee’s Technical Explanation of the “Small Business and Work Opportunity Tax Act of 2007” may be found at: www.house.gov/jct/x-29-07.pdf.

AICPA-Encouraged S Corp Provisions Enacted

The aforementioned “Small Business and Work Opportunity Tax Act of 2007” also contains several improvements to S Corp provisions, for which the AICPA has long advocated:

• Capital gains from the sale of securities, including S corporation stock, are no longer passive investment income. The number of S corporations liable for, or terminating due to, the “sting” tax will be reduced.
• Selling a partial interest in a QSub will now trigger tax on only the percentage of assets sold to an unrelated party. This change delivers tax savings for tiered S corporations in this situation.
• All pre-1983 earnings and profits of S corporations are now eliminated. This will simplify record keeping and dividend/distribution calculations for aged S corporations with C corporation history.
• Interest deductions are now permitted for electing small business trusts that borrow money to acquire S corporation stock. This change permits a common sense interest deduction on par with all other allowable business interest deductions.

Separately, unincorporated businesses whose only owners are a husband and wife are often required to file partnership returns on Form 1065. Effective for 2007 tax years, these couples may elect to file as sole proprietors as long as they both materially participate and file a joint return. Each spouse will be required to file separate Schedules C (or E or F, as the case may be) rather than a single, combined schedule in order to preserve proper credits under the Social Security system.

To the extent taxpayers were filing partnership returns for these so-called “qualified joint ventures,” an election to be treated as sole proprietors will clearly ease reporting requirements going forward. However, it is unclear whether those currently filing as partnerships will, upon election, face potential taxation under the liquidation and termination rules of subchapter K, as guidance has not yet been issued on that point.

Rep. Boucher Introduces Tax Strategy Patent Bill Sought by AICPA

HR 2365, legislation sought by the AICPA to limit damages and other remedies with respect to patents for tax planning methods, was introduced by Rep. Rick Boucher (D-VA) on May 17, with co-sponsors Reps. Bob Goodlatte (R-VA) and Steve Chabot (R-OH). Reps. Boucher, Goodlatte and Chabot are senior members of the House Judiciary Committee, which has jurisdiction over patent legislation. The bill has been referred to that committee. Hearings have been requested. For more information on tax strategy patents go to tax.aicpa.org/Resources/Tax+Patents/.

AICPA Comments on 2007-2008 IRS Guidance Priority List

The AICPA submitted comments to the IRS and Treasury regarding the 2007-2008 Guidance Priority List (Notice 2007-41). The 2007-2008 Guidance Priority List will establish the guidance that the Treasury Department and the IRS intend to issue from July 1, 2007, through June 30, 2008.

In its cover letter, the AICPA noted that its suggestions are listed by order of priority within each AICPA working group that developed the suggestions. The suggestions presume a fairly detailed understanding of the tax code and problems related to particular sections, but may be of interest to tax practitioners.

The AICPA also urged the IRS and Treasury to continue the push for tax simplification, noting several recent examples of regulations or guidance issued that reflect elements of simplification.

Local Government Conference

The Local Government Conference is scheduled for Monday, July 16 - Tuesday, July 17 at the Hershey Lodge & Convention Center. In two fact-filled days, receive updates on the latest technical standards and regulatory issues related to local government accounting and auditing. Register today.