Congress Passes Two Tax Bills: The Farm Act and The Heroes Act

Congress has just passed two tax bills. The following is an analysis of this new legislation.

THE HEARTLAND, HABITAT, HARVEST, AND HORTICULTURE ACT OF 2008 (THE FARM ACT)

On May 22, 2008, the Heartland, Habitat, Harvest, and Horticulture Act of 2008 became law when the Senate overrode the President's veto of the legislation. The House overrode the veto on May 21, 2008. The tax changes in the 2008 Farm Act consist of specialized tax breaks for the farming industry (along with a crackdown on farm losses), new and modified credits related to the production of certain fuels, extension of GO-Zone-style tax breaks to the Kiowa, Kansas, Presidential disaster area, plus a change in large corporate estimated tax payments for the year 2012.

The following are selected income tax provisions of the Farm Act. Please consult the Act for all the provisions of this new law:

ITEMS EFFECTIVE AFTER 2007

1. Higher Limitations For Conservation Easements Contribution Deductions Extended For Two More Years (§170(b)(1)(E) & §170(b)(2)(B), Effective for tax years beginning after 2007 and before 2010). The Pension Protection Act of 2006 enacted §170(b)(1)(E) which provides that an individual's deduction for a qualified conservation contribution of real property is limited to 50% (rather than 30%) of the individual's modified adjusted gross income less other charitable contributions allowable for the year. An individual that is a qualified farmer or rancher can deduct up to 100% (rather than 30%) of the individual's modified adjusted gross income less other charitable contributions allowable for the year. And, qualified corporate farmers and ranchers can deduct up to 100% (rather than 10%) of modified taxable income less other charitable contributions allowable for the year. In each case, any excess can be carried forward up to fifteen years (rather than 5 years). If total contributions allowable for the year exceed the 50% or 100% limitations, the conservation contributions are taken last. This results in maximum benefit from the 15-year carryover rule. These increased limitations for contributions of conservation easements by individuals, farmers, and ranchers were to expire for tax years beginning after 2007. The Farm Act extends the increased contribution limitations for two additional years. Therefore, the increased limits apply to tax years beginning before 2010.

2. CRP Payments Made To Retired Or Disabled Farmers Not Subject To S/E Tax (§1402(a)(1), Effective for payments made after 2007). Pre-Farm Act law didn't provide a specific statutory rule for treating CRP payments under the S/E tax. The Sixth Circuit (reversing the Tax Court) held that CRP payments received by a farmer were self-employment income. The court held that the payments weren't rentals from real estate, despite being designated as "rental" payments in the CRP statute, regs, and contract, and so didn't qualify for the rental payments exception. See Wuebker (2000, CA6) 85 AFTR 2d 2000-1057. The IRS issued Notice 2006-108 providing that CRP payments were not rental payments and were, therefore, subject to the S/E tax. IRS said this was true even where the farmer was retired or disabled. Effective for payments made after 2007, the Farm Act provides that for individuals who are receiving social security retirement or disability benefits, CRP payments are excluded from self-employment income for purposes of the S/E tax.

3. Modification Of Optional Methods For Calculating S/E Tax (§1402(a) & §1402(l), Effective for tax years beginning after 2007). For tax years beginning after 2007, the farm optional method and nonfarm optional method for computing net earnings from self-employment are modified so that electing taxpayers may pay more in optional self-employment taxes and thus become eligible for Social Security benefits.

ITEMS EFECTIVE ON MAY 22, 2008 OR AFTER MAY 22, 2008

1. Maximum 15% Rate For Qualified Timber Gains Of C Corporations (§1201(b), §55(b)(4), & §857(b)(3)(A)(ii); Effective for timber transactions after 5/22/08 and before 5/23/09). The Farm Act provides a 15% alternative tax rate for the portion of a C corporation's taxable income that consists of qualified timber gains (or, if less, the net capital gain) for a tax year. Generally, "qualified timber gains" are gains under either §631(a) or §631(b) where the timber has been held for more than 15 years. The maximum 15% rate also applies for AMT purposes.

2. Stock In Mutual Ditch, Reservoir, Or Irrigation Companies Can Qualify For §1031 Exchange Treatment (§1031(i), Effective for exchanges completed after 5/22/08). Exchanges of stocks, bonds or notes are generally excluded from nonrecognition of gain or loss treatment under §1031. However, Congress indicated that certain states (e.g., Colorado) use mutual ditch, reservoir, and irrigation companies to manage joint water distribution rights, and the stock of those companies are recognized under state law as real property. Thus, the Farm Act provides that the exchange of mutual ditch, reservoir, or irrigation company stock, where the stock is recognized under state law as real property, is effectively an exchange of real property and therefore may qualify for §1031 exchange treatment after May 22, 2008.

3. New Security Credit For Businesses Selling, Manufacturing, Distributing Or Aerially Applying Agricultural Chemicals (§45O, §38(b)(32), & §280C(f), Generally effective for amounts paid or incurred after 5/22/08 and before 2013). The Farm Act creates a new §38 general business credit category under which a business selling, manufacturing, distributing or aerially applying fertilizers or pesticides can take a 30% credit for "qualified chemical security expenditures" paid or incurred during the tax year. See §45O for "per facility" and "annual" limitations on the credit.

4. Changes To Rules For REITs (§856(c) & §857(b), Effective for tax years beginning after 5/22/08). The Farm Act amends the REIT provisions so that timber income will be treated as qualifying income for purposes of the REIT 95% and 75% income tests. In addition, the Farm Act amends the REIT safe harbor provisions so that a two-year holding period (rather than the normally applicable four-year period) applies for sales of real estate assets to qualified tax-exempt organizations exclusively for conservation purposes.

5. Tax Relief Provisions For Kansas Disaster Area (Act §15345, Effective 5/22/08). Many of the tax benefits for victims of Hurricanes Katrina, Wilma and Rita are modified and made available to victims of the tornadoes and storms that hit Kansas beginning May 4, 2007. The relief provisions include increased ability to deduct personal losses, retirement plan relief, increased business expense deductions, and help for affected businesses that continued to pay their employees after the disaster struck. Even though this provision is generally effective 5/22/08, several of the benefits provided are effective prior to May 22, 2008. Please see Act §15345 for details.

ITEMS EFFECTIVE AFTER 2008

1. Three Year MACRS For All Race Horses (§168(e)(3)(A)(i), Effective for race horses placed-in-service after 2008 and before 2014). For race horses placed-in-service before 2009, the horse is assigned a three-year recovery period if, at the time it is placed-in-service, it is more than two years old (i.e., more than 24 months old). A race horse that is ineligible for a three-year recovery period has a seven-year recovery period. Under the Farm Act, all race horses placed-in-service after 2008 and before 2014 will have a three-year recovery period.

2. Deduction Allowed Farmers For Expenditures Relating To Endangered Species Recovery Act (§175(a), §175(c)(1), and §175(c)(3)(A)(i), Effective for expenditures paid or incurred after 2008). Under the Farm Act, expenditures paid or incurred by a taxpayer engaged in the business of farming for the purpose of achieving site-specific management actions under the Endangered Species Act of 1973 will be treated the same as the soil and water conservation expenditures and anti-erosion expenditures under §175. Accordingly, the expenditures will be deductible up to 25% of the gross income derived from farming.

3. New Credit For Qualified Cellulosic Biofuel (§40, Effective for fuel produced after 2008 and before 2013). The Farm Act adds a $1.01 per gallon cellulosic biofuel producer credit as a new component to §40. This credit is a nonrefundable income tax credit for each gallon of qualified cellulosic fuel production of the producer for the tax year, and is in addition to any pre-Farm Act credit that may be available under the alcohol fuels credit provided by §40.

4. Percentage Of Allowable Denaturants Lowered For Purposes Of Alcohol Fuels Credit (§40(d)(4), Effective for fuel sold or used after 2008). For purposes of determining the number of gallons of alcohol for which the alcohol fuels credit is allowable, the Farm Act will reduce the percentage of denaturants allowed from 5% to 2% of the volume of the alcohol (including denaturants).

5. Reduction In Alcohol Mixture Credit Rates And Alcohol Credit Rates (§40(h), Effective after 2008). Under the Farm Act, for 2009 and 2010, the blender amount of 51-cent-per-gallon alcohol mixture credit and 51-cent-per-gallon alcohol credit will each decrease to 45 cents, and the low-proof blender amount of 37.78-cent-per-gallon alcohol mixture credit and 37.78-cent-per-gallon alcohol credit will each decrease to 33.33 cents. However, if the Treasury Secretary makes a determination, in consultation with the Administrator of the Environmental Protection Agency, that 7,500,000,000 gallons of ethanol (including cellulosic ethanol) were not produced in or imported into the United States in 2008, the reduction in the credit amount will be delayed.

6. Reduction Of Excise Tax Credit For Ethanol Used In Alcohol-Fuel Mixture (§6426(b)(2), Effective after 2008). The Farm Act provides that the 51-cent-per-gallon incentive for ethanol is adjusted to 45-cents-per-gallon for the calendar year 2009 and thereafter. However, if the Treasury Secretary makes a determination, in consultation with the Administrator of the Environmental Protection Agency, that 7,500,000,000 gallons of ethanol (including cellulosic ethanol) were not produced in or imported into the United States in 2008, the reduction in the credit amount will be delayed.

7. Percentage Of Allowable Denaturants Lowered For Purposes Of Alcohol Fuel Mixture Excise Tax Credit (§6426(b)(5), Effective for fuel sold or used after 2008). The Farm Act reduces the percentage of allowable denaturants in the volume of alcohol for which an alcohol fuel mixture excise tax credit is allowed, from 5% to 2%.

ITEMS EFFECTIVE AFTER 2009

1. Limit For Offsetting Farm Losses Against Non-Farm Income (§451(j), Effective for tax years beginning after 2009). The Farm Act limits the amount of farm losses of taxpayers other than C corporations that may offset non-farm income where the taxpayer receives certain farm subsidies. The net farm losses for the year that may offset non-farm income are limited to the greater of a) $300,000 ($150,000 for married individuals filing separately) or b) the total net farm income for the past five years. The farm subsidies that cause the new limitation to "kick in" include any direct or counter-cyclical payment under title I of the Food, Conservation and Energy Act of 2008, or any payment elected to be received in lieu of any direct or counter-cyclical payment under the Food, Conservation and Energy Act of 2008, or any Commodity Credit Corporation (CCC) loan. Any loss disallowed because of this new provision is treated as a loss in the subsequent tax year.

2. Certain C Corporation's Estimated Tax Payments Increased (§6655). The Farm Act increases the corporate estimated tax payment due in July, August, or September 2012 from 116.50% to 124.25% of the payment otherwise due. This is the sixth change in the amount of estimates due by C corporations in July, August, or September of 2012.

THE HEROES EARNINGS ASSISTANCE AND RELIEF TAX ACT OF 2008 (Heroes Act)

The Senate voted unanimously to approve the Heroes Earnings Assistance and Relief Tax Act of 2008 (Heroes Act) on May 22, 2008. The House approved the legislation on May 19, 2008. The Bush administration supports the bill and the President is expected to sign the legislation. In the following outline, references to the date of enactment are to the date the President signs the bill. The Heroes Act provides more than $1.2 billion in tax relief to benefit America's veterans and soldiers.

ITEMS EFFECTIVE BEFORE 2008

1. Military Death Benefits May Be Contributed To Roth IRAs Or Coverdell Education Savings Accounts Without Regard To Contribution Limits (§408A(e)(2) and §530(d)(9), Effective for payments made on account of deaths from injuries occurring after October 6, 2001). Eligible survivors of a service member receive a military death gratuity. The full amount of the military death gratuity is excludable from gross income. In addition, certain members of the uniformed services are automatically insured against death under the Servicemembers' Group Life Insurance ("SGLI") program. In general, these life insurance proceeds are excludable from gross income. The Heroes Tax Act generally provides that a recipient of a military death gratuity and/or SGLI proceeds can contribute the amounts received to a Coverdell Education Savings Account or to a Roth IRA and treat these amounts as "qualified rollover contributions." The rollover has to be made a) within one year of receipt of a payment on account of deaths from injuries occurring on or after the date of enactment, or b) within one year after date of enactment for payments made on account of deaths from injuries occurring after October 6, 2001 and before the date of enactment. These contributions are not subject to the regular Coverdell or Roth IRA contribution limitations nor the AGI phase-out rules.

2. State Bonus Payments To Service Members Are "Qualified Military Benefits" (§134(b)(6), Effective for payments made before, on or after date of enactment). Gross income does not include any "qualified military benefit." A "qualified military benefit" is any allowance or in-kind benefit, other than personal use of a vehicle, received by a member or former member of the "uniformed services" of the U.S., or his or her dependent. Qualified military benefits include benefits received under any dependent care assistance program for any eligible recipient. The Heroes Act provides that the term "qualified military benefit" includes any bonus payment made by a state or political subdivision to any member or former member of the U.S. uniformed services, or to his dependent, only by reason of the member's service in a combat zone.

3. Plans Required To Provide Survivor Payments For Veterans And May Provide Additional Benefit Accruals For Veterans Who Die Or Become Disabled (§401(a)(37), 403(b)(14), 404(a)(2), 414(u)(9), and 457(g)(4), Effective for deaths and disabilities occurring on or after January 1, 2007). The Heroes Act provides that a retirement plan trust will not be a qualified plan trust unless it provides that, for a participant who dies while performing qualified military service, the survivors of the participant are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the plan as if the participant had resumed and then terminated employment on account of his death. Therefore, if a plan provides for accelerated vesting, ancillary life insurance benefits, or other survivor benefits that are contingent upon a participant's termination of employment on account of death, the plan must provide those same benefits to the beneficiary of a participant who dies during qualified military service. Both §403(b) and §457(b) plans must also adopt this new requirement in order to maintain their tax-favored status. In addition, the Act provides that a plan is permitted to treat an individual who leaves service with the plan's sponsoring employer for qualified military service, and who cannot be reemployed on account of death or disability, as if he had been rehired as of the day before his death or disability (a "deemed rehired employee"), and then terminated employment on the date of his death or disability. Employers have until the last day of the first plan year beginning on or after January 1, 2010 (January 1, 2012 for governmental plans) to amend their plans to comply with these new rules.

ITEMS EFFECTIVE AFTER 2007

1. Election To Include Combat Pay As Earned Income For EITC Purposes Will No Longer Expire After 2007 (§32(c)(2)(B)(vi), Effective for tax years beginning after 2007). Prior to 2008, a taxpayer could elect to treat combat pay excluded from gross income under §112 as earned income in determining both eligibility for the earned income credit (EIC) and the amount of that credit. This special election expired after 2007. The Farm Act removes the expiration date for the election so that the election no longer expires.

2. Certain Military Personnel Granted Relief From 10% Early Withdrawal Penalty For "Qualified Reservist Distributions" (§72(t)(2)(G)(2)(iv), Effective for individuals called to active duty on or after 12/31/07).

The Pension Protection Act of 2006 provides that a "qualified reservist" called to active duty after September 11, 2001 and before December 31, 2007 may take a taxable distribution from an IRA, §401(k) plan, or §403(b) annuity without paying the 10% early distribution penalty. Early distributions from both Roth and traditional IRAs received by a reservist while on active duty qualify for this relief. Likewise, a reservist's elective contributions and earnings distributed to him or her by employer sponsored §401(k) plans and §403(b) tax-sheltered annuities also qualify for this relief. To qualify, an individual must be a reservist or a National Guardsman called to active duty for a period in excess of 179 days or for an indefinite period, and the distribution must occur during the period beginning on the date of the active duty order and ending on the close of that active duty period. These qualifying distributions are called "qualified reservist distributions."

The Heroes Act provides that this exception to the 10% early distribution penalty applies to individuals ordered or called to active duty after September 11, 2001 and the Act eliminates the before December 31, 2007 expiration date.

3. Military Families Can Get Rebate Without Spouse's Social Security Number (§6428(h)(3), Effective for tax years beginning after 2007). Generally, the Economic Stimulus Act rebate is not available on a joint return unless both spouses' identification numbers are included on the return. The Heroes Act provides that the identification number requirement doesn't apply to a joint return where at least one spouse was a member of the U.S. Armed Forces at any time during the tax year. Therefore, on a joint return where at least one spouse was a U.S. Armed Forces member during the tax year, the recovery rebate credit is allowed even though the return doesn't include both spouses' social security numbers. In addition, a qualifying child is taken into account in determining the amount of the credit even though the return doesn't include the child's social security number. This provision thus gives relief to U.S. Armed Forces members who are married to foreign spouses who lack social security numbers.

4. Election To Suspend Five-Year Test Period, For Up To 10 Years, In Determining Whether Principal Residence Gain Exclusion Applies To Sales Or Exchanges By Certain Peace Corps Employees Or Volunteers (§121(d)(12), Effective for tax years beginning after 2007). For purposes of determining whether a sale or exchange of an individual's principal residence qualifies for the $250,000/$500,000 exclusion, the Heroes Act creates a new rule for Peace Corps volunteers similar to the suspension rules applicable to members of the uniformed services, Foreign Service, and intelligence community. Under the new rule, an individual may elect to suspend the running of the five-year ownership and use period in §121(a) with respect to the property during any period of up to 10 years that the individual or the individual's spouse is serving outside the U.S. on qualified official extended duty as an employee of the Peace Corps, or as an enrolled volunteer or volunteer leader under §5 or §6 (as the case may be) of the Peace Corps Act.

5. Tax Relief And Expense Payments Provided By State Or Local Governments To Volunteer Emergency Responders Aren't Subject To Withholding Or Employment Taxes (§3401(a)(23), §3121(a)(23), and §3306(b)(20), Effective for tax years beginning after 2007 and before 2011). Section 139B, added by the 2007 Mortgage Relief Act, provides that members of qualified volunteer emergency response organizations (e.g., firefighters, emergency medical technicians [EMTs], paramedics, and ambulance drivers) may exclude from gross income a) qualified state or local tax benefits (i.e., reductions or rebates of certain state or local taxes provided for performing volunteer emergency response services); and b) qualified reimbursement payments (i.e., payments of up to $30 per month provided by state or local governments on account of performing volunteer emergency response services). The Heroes Act clarifies that any qualified state or local tax benefit and any qualified reimbursement payment that is excluded from gross income are not subject to social security tax or federal unemployment tax.

ITEMS EFFECTIVE WITH RESPECT TO DATE OF ENACTMENT

1. Unused FSA Balances May Be Distributed To Reservists Called To Active Duty (§125(h), Effective for distributions made after enactment). The Heroes Act provides a special rule for unused benefits in health FSAs of individuals called to active duty in the armed forces. Under this rule, a plan or other arrangement does not fail to be treated as a cafeteria plan, or health FSA, merely because the plan provides for "qualified reservist distributions." A "qualified reservist distribution" is any distribution to an individual of all or a portion of the employee's health FSA balance if: a) because of the individual's membership in a reserve component, he or she was ordered or called to active duty for a period i) exceeding 179 days, or ii) for an indefinite period; and b) the distribution is made during the period beginning on the date of the call to active duty, and ending on the last date that reimbursements could otherwise be made under the health FSA for the plan year that includes the date of the call to active duty. Thus, amounts distributed in a qualified reservist distribution avoid the usual use-it-or-lose-it treatment of unspent amounts in an FSA. Note! Neither the Heroes Act nor the committee reports describes how the qualified reservist distributions are to be treated for income and FICA tax purposes upon return to the reservist. If the distributed amounts are not spent for the reservist's health care, they may be taxable as wages.

2. Employer's Differential Wage Credit For Amounts Paid To Military Personnel On Active Duty (§38(b)(33), §45P, and §280C(a), Effective for amounts paid after enactment and before 2010. The Heroes Act provides to an "eligible small business employer" a "differential wage payment" credit for any tax year. The credit is equal to 20% of the sum of the "eligible differential wage payments" for each of the "qualified employees" of the taxpayer during the tax year. To qualify for the credit, an employer must employ an average of less than 50 employees on business days during the year and must make differential wage payments to every qualified employee under a written plan. The maximum amount of differential wage payments to any one employee qualifying for the credit may not exceed $20,000 for a tax year.

3. Rule Allowing Employees Of Intelligence Community To Elect To Exclude Up To Ten Years While On Qualified Official Extended Duty In Determining Two Out Of Five Year Ownership And Use Test For Home Gain Exclusion Will Not Sunset After 2010 (§121(d)(9)(E) & §121(d)(9)(C)(vi), Effective after date of enactment). Generally, to be eligible for the $250,000 or $500,000 home sale exclusion, the taxpayer must have owned the residence and used it as a principal residence for at least two years during the five-year period ending on the date of the sale or exchange. However, taxpayers who are members of the uniformed services or the U.S. Foreign Service may elect for the five-year period ending on the date of the sale or exchange of a principal residence to not include any period of up to ten years during which the taxpayer or the taxpayer's spouse is on qualified official extended duty as a member of the uniformed services or the U.S. Foreign Service. In addition, effective for sales or exchanges after 12/20/06, the Tax Relief and Health Care Act of 2006 allows taxpayers that are employees of the intelligence community to elect to exclude from the five-year ownership and use period up to ten years while the taxpayer is serving on qualified official extended duty. However, the 2006 Act provides that this special rule only applies for members of the intelligence community through 2010. The Heroes Act removes the rule that the provision no longer applies to members of the intelligence community after 2010. In addition, effective for sales or exchanges after enactment, the Heroes Act repeals the requirement that members of the intelligence community must move to a duty station outside of the U.S. to qualify for the suspension rule for purposes of the §121 exclusion.

4. Expatriates Recognize Mark-To-Market Gain Upon Expatriation (§877A, §877(e)(1), §877(h), §7701(a)(50)(A), §7701(b)(6), §7701(n), and §6039(G), Effective on or after enactment). Effective for expatriates whose expatriation date occurs on or after the date of enactment, the regime for taxing expatriates is modified. Generally, the Heroes Act adds a new mark-to-market deemed sale rule. Under this rule, all property of a "covered expatriate" is treated as sold on the day before the expatriation date for its fair market value. The resulting gain is recognized and tax is paid on the amount of the gain exceeding a $600,000 exclusion amount. In addition, the Act allows expatriates to elect to defer the payment of the additional tax attributable to any property that is deemed sold under the mark-to-market rules. The additional tax attributable to the property is postponed until the due date of the return for the tax year in which the property is disposed of. If the property is disposed of in a transaction in which gain isn't recognized in whole or in part, the tax is postponed until a date determined by IRS. Please see §301 of the Heroes Act for details including exceptions to the mark-to-market rules.

5. New Transfer Tax Is Imposed On U.S. Citizens And Residents Who Receive Gifts And Bequests From Expatriates (§2801, Generally effective for covered gifts and bequests received on or after date of enactment). Under the Heroes Act, a special transfer tax is imposed on any U.S. citizen or resident who receives any "covered gift or bequest" from a "covered expatriate." The tax applies to any covered gift or bequest valued in excess of the annual exclusion amount in effect for gift tax purposes in the year of the transfer ($12,000 in 2008). The tax is determined by multiplying the value of the gift or bequest by the greater of a) the highest gift tax rate in effect on the date of the transfer or b) the highest estate tax rate on the date of the transfer. Please see §301(b)(1) of the Act for details.

6. FICA Taxes Imposed On Wages For Services Performed Abroad Under U.S. Government Contracts By U.S. Citizens And Residents Employed By U.S.-Controlled Foreign Persons (§3121(z),Generally effective for services performed in calendar months beginning more than 30 days after date of enactment). The Heroes Act treats a foreign person as an American employer for FICA purposes with respect to an employee of the foreign person who is performing services in connection with a contract between the U.S. government (or any of its instrumentalities) and a member of a domestically controlled group of entities that includes the foreign person. Therefore, services performed as an employee for such an employer outside of the U.S. by a U.S. citizen or resident in connection with such a contract is employment subject to FICA taxes. Note! Apparently, this provision was enacted to close a "loophole" whereby U.S. corporations were exempt from FICA taxes on work performed abroad under U.S. government contracts by U.S. citizens and residents employed by subsidiaries of such U.S. corporations.

ITEMS EFFECTIVE AFTER 2008

1. Active Military Service Members Receiving Differential Pay Treated As Employees For Retirement Plan Purposes (§414(u)(12), §219(f)(1), Effective for years beginning after 2008). The Heroes Act adds new rules for "differential wage payments" for purposes of retirement plans subject to §414(u). The Act provides that a) an individual receiving a differential wage payment will have to be treated as an employee of the employer making the payment; b) the differential wage payment will have to be treated as compensation; and c) the plan won't be treated as failing to meet the nondiscrimination requirements of §414(u)(1)(C) by reason of any contribution or benefit that is based on the differential wage payment. However, the special nondiscrimination requirements of §414(u)(12)(C) will have to be met. The Act requires a plan or annuity contract to be amended to comply with the new §414(u)(12) rules above no later than the last day of the first plan year beginning on or after January 1, 2010 (2012 for a §414(d) governmental plan).

2. Differential Military Pay Will Be Treated As Wages For Income Tax Withholding Purposes After 2008 (§3401(h), Effective for remuneration paid after 2008). Under the Heroes Tax Act, for purposes of the income tax withholding rules, any "differential wage payment" will be treated as a payment of wages by an employer to an employee and therefore, will be treated as wages subject to income tax withholding.

3. Minimum Penalty For Failing To File Return Increased From $100 to $135 (§6651(a), Effective for tax returns required to be filed after 2008). A taxpayer who doesn't file a tax return on a timely basis is subject to a penalty of 5% of the net amount of tax due for each month that the return is not filed, up to a maximum of five months or 25%. An exception from the penalty applies if the failure is due to reasonable cause. The net amount of tax due is the excess of the amount of the tax required to be shown on the return over the amount of tax paid on or before the due date for the payment of tax. In addition, if a taxpayer does not file a return within 60 days of the due date for filing the return, he or she is subject to a minimum penalty of the lesser of $100 or 100% of the amount of tax required to be shown on the return (the net tax due). The Heroes Act increases the minimum penalty for a failure to file a tax return within 60 days of the due date (including extensions) to the lesser of $135 or 100% of the amount of tax required to be shown on the return (the net tax due).