Overpayments, Underpayments and Interest Netting

S ince 1986, the Internal Revenue Service has provided separate tax rates for overpayments and underpayments—with higher rates for underpayments. To reduce interest expenses, most companies want over- and underpayments "netted" when they overlap during the same period. The IRS will allow annual netting for companies that have both during the same year; also, an overpayment for one year can be offset against an underpayment for another year if both are outstanding at the time of the offset.

On April 18, 1997, the Treasury Department issued Netting of Interest on Tax Overpayments and Underpayments, recommending a legislative solution to implementing "global" interest netting, such as netting an underpayment against an overpayment that already had been paid by the IRS. Meanwhile, President Clintons recently unveiled tax simplification package includes a global interest netting proposal calling for a zero rate of interest during a period of mutual indebtedness for an overlap. Both the Treasury report and President Clintons package recommend that global netting be limited to income taxes, applied only to tax years not barred by statute and performed only at the companys request, with the company bearing the burden of establishing whether it is entitled to the interest netting.

Observation: The Treasury report emphasizes that the most problematic issue with global interest netting is collecting and maintaining the data needed for an accurate calculation. However, because interest computations are extremely difficult and complex, the report points out that companies should not be forced to pay extra interest simply because they had difficulties when computing the correct amount.

The report should serve as a reminder that companies need to perform their own interest computations to make sure that computational errors and/or data deficiencies do not result in overpayments. Moreover, companies will want to make sure they take advantage of whatever netting and offsetting are available.

—Tracy Hollingsworth, Esq., staff director of tax councils at Manufacturers Alliance, Arlington, Virginia.


Ineligible MSAs

B efore 1997, individuals could deduct the cost of health insurance only if they itemized and their total medical expenses exceeded 7 1/4 % of adjusted gross income. In addition, self-employed individuals were allowed to deduct only 30% of the cost of their health insurance premiums for themselves and their immediate family members right off the top as a deduction for adjusted gross income. The remaining premiums were subject to the same 7 1/4 % limitation.

Now, under a pilot program that began on January 1, 1997, certain self-employed individuals and employees of small businesses who are covered by "high-deductible" health plans are eligible to establish medical savings accounts (MSAs). Subject to limitations, amounts contributed to an MSA are deductible directly from gross income. Employer contributions to an MSA on behalf of an employee are excluded from the employees income, and the earnings generated by an MSA and distributions received from an MSA to pay for the taxpayers or the taxpayers familys unreimbursed medical expenses are not subject to tax.

To receive these MSA benefits, Internal Revenue Code section 220(c) (2)(A) requires that a taxpayer invest in a high-deductible health plan with an annual deductible of at least $1,500 and not more than $2,250 for individual coverage and at least $3,000 and not more than $4,500 for family coverage.

Throughout 1997, the insurance industry has been selling MSAs that have "double deductibles." That is, benefits are currently being paid to individual family members on the earlier of the following two dates: (1) when an individual taxpayers personal medical expenses exceed $1,500 (regardless of the familys total medical costs) or (2) when the familys combined medical costs exceed $3,000.

In revenue ruling 97-20 (1997-19 IRB), the IRS ruled that family plans with double deductibles are ineligible MSAs. According to the ruling, to qualify as an MSA high-deductible family health plan, benefits cannot be paid to any family member until the entire familys annual medical expenses exceed $3,000. That is, in a family plan there no longer is an individual deductible.

Observation: The IRS is providing relief to taxpayers who purchase health plans before November 1, 1997, that provide family coverage before that date. These plans will be treated as high-deductible MSAs even though they include double deductibles. This relief will apply until the first renewal date on or after December 31, 1997, or for the term of the health plan; however, it will not extend beyond December 31, 1998.

—Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island.


Pit-Stop Guidance

  • The Internal Revenue Service released an issue paper on convenience stores. The paper details the circumstances under which convenience stores can be depreciated over 15 years using the modified accelerated cost recovery system under Internal Revenue Code section 168, instead of over the 39-year period normally applied to nonresidential real estate.

All Gains, Lots of Pain

  • A husband and his wife sold their principal residence and attempted to buy a replacement home. Because the couple was unable to secure adequate financing, the husbands parents bought the replacement home and allowed the couple to live there. The couple paid the mortgage, the real estate taxes and the insurance on the property. However, according to the Tax Court, the gain on the sale of their old home could not be deferred under code section 1034 because the couple did not purchase the replacement home themselves (DeOcampo, TC memo 1997-161).

A Taxing Vacation

  • A company used its private aircraft to transport an officer-shareholder and his wife to and from domestic vacation sites at a cost of $34,000. Using special valuation rules, the husband was taxed on $2,600 of compensation income. However, the IRS limited the corporations deduction for the cost of the employees vacation use of the company-owned aircraft to $2,600—the amount includable in the employees income (letter ruling 9715001).

—Michael Lynch, CPA, Esq., associate professor of accounting at Bryant College, Smithfield, Rhode Island.


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Black CPA Centennial, 1921–2021

With 2021 marking the 100th anniversary of the first Black licensed CPA in the United States, a yearlong campaign kicked off to recognize the nation’s Black CPAs and encourage greater progress in diversity, inclusion, and equity in the CPA profession.