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Newsletters
The Monthly Blend
January 2006
Katrina Emergency Tax Relief Act of 2005 
Submitted by: Stephanie K. Kingsford, CPA
Among the tax relief provisions contained in the recently enacted Katrina Emergency Tax Relief Act of 2005 (KETRA) are several provisions designed to make it easier for Katrina victims to tap their retirement plan or IRA as a source of cash for expenses and recovery. Here is a brief synopsis of these provisions.
Penalty-free retirement plan withdrawals for disaster victims.
KETRA permits victims of Hurricane Katrina to withdraw up to $100,000 of distributions from IRAs and qualified loans without paying the 10% penalty tax for pre-age-59 withdrawals. Eligible individuals are those who lived in the Katrina disaster area and made the distribution on or after Aug. 25, 2005 and before Jan. 1, 2006. The Katrina disaster area includes the entire state of Alabama.
Repayments of qualified Hurricane Katrina distributions.
Although Hurricane Katrina distributions are not subject to the 10% penalty tax for early withdrawals (as discussed above), they are still subject to regular income tax on the distributions. However, KETRA provides that there is no income tax on up to $100,000 of withdrawals that are recontributed to a qualified plan or IRA within three years. Taxpayers who receive qualified Hurricane Katrina distributions, pay tax on them, and who later make repayment contributions, can file amended returns to get a refund of the taxes paid on the distributions.
Income averaging allowed for qualified Hurricane Katrina distributions.
KETRA provides that a qualified Hurricane Katrina distribution is included in a taxpayer's gross income ratably over the three-tax-year period beginning with the tax year the distribution is received, unless the taxpayer elects not to have three-year averaging apply. This income averaging provision will help prevent taxpayers from having artificially high income (and high tax liability) in one year due to a qualified Hurricane Katrina distribution, and much lower income (and tax liability) in subsequent years.
Recontributions of withdrawals for home purchases canceled due to Hurricane Katrina.
KETRA also provides that certain amounts withdrawn from a qualified plan or IRA to help pay for a home that couldn't be purchased because of Katrina won't be subject to tax if recontributed by Feb. 28, 2006.
Plan loan limits to victims of Hurricane Katrina increased and payments postponed.
For victims of Hurricane Katrina, KETRA increases the amount that can be withdrawn as a loan from qualified employer plans. The maximum amount that can be borrowed from a qualified plan without paying a current tax is increased to the lesser of: (1) $100,000 (up from $50,000), or (2) the greater of (a) the present value of the employee's nonforfeitable accrued benefit (up from one-half of this present value), or (b) $10,000. This applies for loans made after Sept. 23, 2005 and before Jan. 1, 2007.
KETRA also offers relief for plan participants with outstanding loans. Under this provision, victims of Katrina who have a qualified plan loan outstanding on or after Aug. 25, 2005, with a repayment due date occurring during the period Aug. 25, 2005 through Dec. 31, 2006, have this due date delayed for one year. Any subsequent loan repayments will be appropriately adjusted to reflect the one-year delay in the due date and any interest accruing during that delay. The period during which required repayment is delayed is disregarded in complying with the requirements that the loan be repaid within five years and that level amortization payments be made.
Retroactive retirement plan and IRA amendments allowed.
KETRA permits certain plan amendments made pursuant to the changes made by the Act provisions involving employee retirement plans and IRAs, or regulations issued thereunder, to be retroactively effective, provided that certain requirements are met. This provision allows a plan to implement any changes in the law or regs governing qualified plans and IRAs without first having to be amended.
Please keep in mind that we have described only the highlights of these provisions in the new law. As of December 16, 2005, the Senate and the House of Representatives have passed the Gulf Opportunity Zone Act of 2005 (the Act). The President is expected to sign the measure. The Act may extend the above provisions to those areas affected by Hurricane Rita and Wilma also. Applying FIN 46 to a Simple Related Party Leasing Arrangement
Submitted by: Amanda Patton
Many companies have some type of related party lease arrangements. The essence of the arrangements is often that an entity is formed to hold certain assets used by the operating business. These assets are usually real estate. The assets may be newly acquired from an unrelated party or may be transferred from the operating business. The ownership of this leasing entity may be identical to the reporting entity, or may have slight variations. The motivations for forming the entity can be related to tax or estate planning, or just a desire to achieve off-balance sheet treatment.
This questionnaire is an aid in assessing whether a real estate rental entity related to a privately held entity (reporting entity) should be consolidated under FASB Interpretation 46, as revised (FIN 46R). FIN 46R was issued in January 2003 and amended in December 2003. A nonpublic entity with an interest in an entity that is subject to FIN 46R and that is created after December 31, 2003, shall apply FIN 46R to that entity immediately. For private companies, the effective date for adopting FIN 46R is generally for periods beginning after December 15, 2004. The means the December 31, 2005 annual statements for a calendar year end company.
Basics of FIN 46R
FIN 46R requires a reporting entity to consolidate a variable interest entity if it has a variable interest in such entity and is the primary beneficiary. These terms were introduced by FIN 46R and have not previously been used in this manner by accountants. The following are descriptions of the new terms.
Variable Interest Entity
FIN 46R introduces the concept of a variable interest entity or VIE. A variable interest entity is one that has either so little equity at risk that its owners lack the normal risks of an equity owner, or the voting control is not with the equity owners. In privately-held related party leasing arrangements, the lessor is often a variable interest entity.
Variable Interest
A variable interest in a variable interest entity is a contractual ownership, or other monetary interest in an entity that changes with changes in the entity's net asset value. Equity interests with or without voting rights are considered variable interests if the entity is a variable interest entity. Examples of the most common variable interests in closely held related party leasing transactions are the lease agreement itself, debt guarantees and subordinated advances from the reporting entity to the leasing entity, as well as the equity interests held by the leasing entity's owners.
Primary Beneficiary
Primary beneficiary refers to a reporting entity that consolidates a variable interest entity under the provisions of FIN 46R. The primary beneficiary is the party that absorbs the majority of the negative variability in the fair value of the variable interest entity's assets. If no party absorbs the majority, then the party that obtains the majority of the residual benefits of the variability in asset values is the primary beneficiary. It is possible that no party has the majority of the negative or positive variability. In many privately held related party leasing situations, the client we report on (the reporting entity) will be the primary beneficiary.
Simple Related Party Real Estate Entity Interpretation 46R Checklist
This questionnaire is designed as an aide for making the accounting determination about the application of FIN 46R. See additional guidance related to FIN 46R at fasb.org.
View Checklist Coffee Talk
Darryl Walker and Scott Butler will be teaching Government Contract Accounting Systems Compliance in Las Vegas on January 18-19, 2006 which is sponsored by Federal Publications.
Denise Miles will be replacing Don Nalley at the Culverhouse School of Accountancy Board of Advisors for the University of Alabama in Tuscaloosa.
Beason & Nalley, Inc. is hosting the GSA Seminar on January 18th & 19th.
Scott Butler and Darryl Walker taught Government Contract Accounting Systems Compliance in Washington DC on December 13 & 14 and then in Atlanta December 15 & 16. Courses are sponsored by Federal Publications.
Don Nalley spoke on December 16th on "Buying and Selling a Company", in a seminar jointly sponsored by The Huntsville Chamber of Commerce and Sirote & Permutt, P.C. Related Information:
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