A brief look at new rules for 1989
On November 10, 1988, the Technical and Miscellaneous Revenue Act of 1988 was signed into law. Conforming and technical amendments and corrections to the Tax Reform Act of 1986 and other tax acts were provided. The Act touches nearly every area of taxation and almost every group of taxpayers. A brief discussion of the more important provisions of the Act follows.
Under current law, businesses that produce property under a long-term contract must use either the percentage of completion method or percentage of completion-capitalized cost method.
If, however, the business is a "small contractor" (generally, an entity that meets a three-year moving average less than $10 million gross receipts test), it can use the completed contract method of accounting for certain construction contracts to be completed within two years. The changes are effective for contracts entered into after June 20, 1988.
Under the percentage of completion-capitalized cost method, the percentage of items was increased from 70 percent to 90 percent. At the contract's completion, 90 percent of the items are subject to the "look-back" procedure, which uses actual prices and costs rather than estimates to recompute income for each year of the contract.
The percentage of completion or percentage of completion-capitalized cost method of accounting will not be available for home construction contracts. Contractors, except for small contractors, must use the uniform capitalization of cost rules.
Briefly, a home construction contract is one in which 80 percent or more of the estimated total costs of the contract are reasonably expected to be attributable to building, reconstructing, or rehabilitating dwelling units in a building with four or fewer dwelling units, or improving the site of the dwelling units. A townhouse or row house is a separate dwelling unit regardless of the number of attached units.
Home construction contracts of small contractors, in which contracts will be completed within two years, are not treated as long-term contracts for alternative minimum tax purposes.
Residential construction contracts that are not home construction contracts and are accounted for under the percentage of completion-capitalized cost method will continue to use the 70 percent inclusion amount of current law. A residential construction contract is similar to a home construction contract without the limit on the number of dwelling units in a building, provided no more than 50 percent of the units are used for transients.
Effective for years beginning after December 31, 1988, a new series of the code section 89 non-discrimination rules will apply to all employee welfare benefit plans, such as medical, dental, accident, and group life.
Each plan must pass certain plan requirements to continue to provide benefits to employees, which are not taxable to all employees. Further tests are required to ascertain if the plan discriminates in favor of the highly compensated employees. A plan deemed discriminatory will cause excess benefits received by the highly compensated employees to be included in their gross income.
or benefit plans
Defined benefit pension plans that terminate during 1988 and 1989, with some exceptions, are subject to a non-deductible excise tax equal to 10 percent of the reversion, in addition to including the reversion in gross income of the employer. The employer is also responsible for payment of the excise tax.
For reversions occurring on or after October 21, 1988, the rate will increase to 15 percent, except for some employers who complied with certain rules prior to October 21, 1988.
Under current law, an individual, closely held corporation, or a personal service corporation, is required to obtain an independent written appraisal to claim a charitable deduction for contributions of property in excess of $5,000. …