Tax reform legislation widely known as the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) was signed into law on December 22, 2017. The TCJA brought forth the most sweeping overhaul of the U.S. tax code in over 30 years. However, widespread efforts to implement the TCJA amidst ongoing tax-related global developments continue to this day. Now, two years following its enactment, Treasury, the IRS, and the tax community remain steadfast in working toward understanding and communicating congressional intent under the new law.

Tax reform legislation widely known as the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) was signed into law on December 22, 2017. The TCJA brought forth the most sweeping overhaul of the U.S. tax code in over 30 years. However, widespread efforts to implement the TCJA amidst ongoing tax-related global developments continue to this day. Now, two years following its enactment, Treasury, the IRS, and the tax community remain steadfast in working toward understanding and communicating congressional intent under the new law.

The Tax Council Policy Institute (TCPI), a nonprofit, non-partisan public policy research and educational organization, will devote its 21st Annual Tax Policy & Practice Symposium to reviewing the current state of U.S. tax law and how it may continue to evolve, when it presents "Hindsight is 2020: What the TCJA and Global Developments Tell us About the Future of Tax" (February 13-14, 2020).

Wolters Kluwer Tax & Accounting sat down recently with two principal organizers of this year’s TCPI Symposium to preview some of the issues that will be discussed. Lynda K. Walker, Esq., is executive director and general counsel of TCPI. John Gimigliano is principal-in-charge of legislative and regulatory services in the Washington National Tax practice of KPMG LLP and former senior tax counsel for the House Ways and Means Committee. KPMG is program manager for the 2020 TCPI Symposium.

Wolters Kluwer: As the name of this year’s symposium reflects, hindsight is 20/20. Are there any particular policy choices made two years ago under the TCJA that standout now as being either well-matched or less than ideal for the functionality of the current U.S. tax system as it relates to domestic as well as multinational business?

Lynda K. Walker: Tax law is constantly evolving, and it seems now more rapidly than ever. Congress and the business community worked for years to advance some of the concepts in the TCJA, particularly the necessity of lower rates for global competitiveness. Enactment of the major overhaul of the business tax system within that legislation was met with much enthusiasm, but it is not the end of the challenge. Promulgation of regulations—an ongoing process—as well as implementation of those rules and the administration of them are major areas of focus for tax executives and will be covered extensively at our upcoming conference. We have designed this symposium’s program to examine how well the tax system is working to meet the goals that Congress was looking to achieve given the passage of time and the practical application of the law. The experts speaking at the symposium are from various fields and bring varying perspectives. We hope to provide our attendees with the gamut of expert thought on the issues of current interest. The program also strives to bring some new understanding to both external and internal pressures on our tax system(s) in the U.S. and globally, not only currently but prospectively.

John Gimigliano: In some ways it is almost too early to know, being only one complete tax filing season in, but that is part of what we are trying to explore by bringing together the experts at the symposium. Although the TCJA was a partisan piece of legislation and there were people that claimed it did or did not do certain things, hopefully we can now put that aside and evaluate what the law does and does not do, and maybe we now have enough experience with it to make those determinations.

Wolters Kluwer: As you mentioned, internal and external pressures on the federal tax system will be examined during the symposium. What are some examples of internal and external forces that affect tax policy generally?

John Gimigliano: You can look at budgetary and political pressures as key internal forces that affect all tax policy. As I said, the TCJA was a Republican bill, and Democrats have made it pretty clear that they have issues with not only how it was enacted but also the substance of the bill. We saw these internal, political pressures manifest especially because we had an election since the enactment of the TCJA, and the House has gone from Republican to Democratic-controlled. That is not to suggest cause and effect, but it does change the potential for changes to the system that was enacted in December of 2017. And, of course there is another big election looming that could change that political calculus again. As for external pressures, the most notable one is the work being done at the Organisation for Economic Co-operation and Development (OECD) to address the digital economy and the opportunity to change international tax rules pretty dramatically in a way that was not envisioned when the TCJA was negotiated, drafted, and enacted. Additionally, there are external trade pressures at work on the tax system. There has always been a fine line between tax and trade policy, and if we have dramatic changes in trade policy, it could certainly trickle over to the tax side.

Lynda K. Walker: Currently, we are seeing a recognition of the correlation between tax and trade policy that is vastly different from a few years ago. Among our peers in the tax policy community, we now talk about tax and trade as related in a way that seems to have more common acceptance than in the past. There is a convergence of these other global issues on tax policy in a very distinguishable way that is a big potential external pressure.

Wolters Kluwer: Can you touch upon the importance of businesses staying informed of the direction the OECD will go with regard to reforms to international tax standards?

Lynda K. Walker: It is really important that businesses pay very close attention to what is going on in the OECD, the European Union (EU), and other economic blocks around the world, perhaps now more than ever. During the time we were debating tax reform in this country, other countries began to move in their efforts to broaden their tax bases. We were occupied with tax reform, and their tax proposals and efforts were moving forward. Moreover, tax executives need certainty—and the whole debate and movement toward multilateral agreements from bilateral and unilateral jurisdictional action could be a forbearer to another regime in global taxation. It is important that taxpayers be part of the dialogue and that business has a seat at the table with government as matters that could have a sweeping impact on where and how business is conducted are discussed and determined.

Wolters Kluwer: As TCPI materials noted, the symposium is expected to highlight the "real world" effects of the TCJA and how it has changed thinking about global investment. What might a preview of this discussion include?

John Gimigliano: Now stepping away from the theoretical of enactment and all the things the TCJA may or may not do, it is important to examine what it means now to be a tax professional. With two years of experience with the TCJA, what does it really do, and how does it change the decisions that tax directors have to make as to whether, when, or where to buy equipment or to develop intellectual property? Those are the kind of questions we are hoping to address with this real world application of our experience with the TCJA.

Wolters Kluwer: Generally, have the regulations promulgated since passage of the TCJA succeeded in clarifying complex provisions of the statute?

Lynda K. Walker: The TCJA is so broad and impacts so much of the tax code, it really does seem like we are relying heavily on regulations, which we always do in the tax world, but we still need a lot more explanation on some of the TCJA provisions. I am sure it has been a challenge for the IRS, and we are very happy that we will have Michael J. Desmond, IRS chief counsel, with us for this symposium to provide some insight into how the IRS has proceeded and plans to continue to move forward with guidance.

John Gimigliano: This is the challenge of being in the executive branch and getting a piece of legislation handed to you and trying to make it work. As a former tax writer, it is often easier to write these provisions in the abstract, but it is so much more challenging in various ways to make sure that it works for taxpayers and that it is administrable by the IRS. You do not want to put the IRS in a position to fail with a provision that ultimately is impossible to administer. These are the challenges that the IRS has, and so far, by all accounts, both Treasury and the IRS have done a pretty good job. But there’s still so much left to do.

Wolters Kluwer: As for any particular provisions, especially those with final regulations, that may still carry uncertainty for taxpayers and practitioners, what might generally be the way to approach the conundrum?

John Gimigliano: I could point to many of the TCJA regulations that are finalized and still say that there are unanswered questions and that people are going to have to make judgment calls. That has always been the case with tax; there are always judgment calls to be made. There is no statute and no regulation that can ever anticipate every fact pattern. So, people will do their best to analyze the rules and examples provided but will ultimately have to make judgment calls.

Wolters Kluwer: How should U.S. businesses prepare for potential changes in tax policy after the elections?

Lynda K. Walker: Businesses should stay engaged in the process with policy makers and groups like TCPI. Tax executives should engage in the discussion, and never think tax law is static. Taxpayers should be prepared for government to revisit the tax code as fiscal and economic needs change, and be prepared to navigate those waters as they shift.

Wolters Kluwer: Can the current corporate tax rate really be considered "permanent" just because it was enacted as such under the TCJA, or is it a relatively impermanent feature of the tax code just like others, largely dependent upon which Party has the White House and majority in Congress?

Lynda K. Walker: It is definitely fair to say that there will be pressure put on the rate as well as the tax code in general, because both Parties have objectives that require money. I do not know that anyone believes anything in the tax code is absolutely written in stone. That is part of the challenge for business in that they need some level of certainty to make long-term business and investment decisions, and to have major changes on an ongoing basis does not provide that certainty.

John Gimigliano: Permanence is an illusion; nothing is permanent. And even temporary policy is somewhat misleading. Take for example the R&D tax credit that was finally made permanent after being considered temporary tax policy for over 30 years. These are all relative terms.

Wolters Kluwer: What are you hoping the symposium accomplishes?

Lynda K. Walker: We hope that this program accomplishes our mission, which is to bring about a stronger and better understanding of federal tax policies and how they impact business and the economy as a whole. We hope this brings some careful study to the forefront through active evaluation and open discussion so that people leave more engaged and perhaps more aware. In our programs, our goal is always to have as inclusive a dialogue as possible by engaging all the critical stakeholders, including government, business, and academia. We work diligently to elevate the discourse on issues where we all might not have exactly the same frame of reference but hopefully the same goal, which is a thriving economy where business can operate under fair and transparent tax laws.

John Gimigliano: I hope we can advance taxpayers’ and practitioners’ understanding of the TCJA. We have all had so many questions since its enactment in late 2017. Now with a little bit of time, hopefully by gathering these experts together and in keeping with TCPI’s mission, it will advance everyone’s understanding of the law—where it is working, where it is not, and what changes are likely to come.

For more information on the 2020 TCPI Symposium, go to https://www.tcpi.org/event/21st-annual-tax-policy-and-practice-symposium/.

On February 11, the White House released President Donald Trump’s fiscal year (FY) 2021 budget proposal, which outlines his administration’s priorities for extending certain tax cuts and increasing IRS funding. Treasury Secretary Steven Mnuchin testified before the Senate Finance Committee (SFC) on February 12 regarding the FY 2021 budget proposal.

On February 11, the White House released President Donald Trump’s fiscal year (FY) 2021 budget proposal, which outlines his administration’s priorities for extending certain tax cuts and increasing IRS funding. Treasury Secretary Steven Mnuchin testified before the Senate Finance Committee (SFC) on February 12 regarding the FY 2021 budget proposal.

Extension of TCJA’s Individual Tax Cuts
Trump’s FY 2021 budget proposal indicates that tax cuts for individuals and passthrough entities under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), which are set to expire at the end of 2025, would be extended. This extension is estimated to cost $1.4 trillion over 10 years, and is reportedly being used as a "placeholder" in the budget for Trump’s forthcoming "Tax Cuts 2.0" plan.

Infrastructure
Trump’s budget proposal also calls for a $1 trillion infrastructure package, although funding details remain scarce at this time. In January, House Democrats unveiled their infrastructure proposal, which also lacked funding details.

IRS Funding
Additionally, Trump’s budget proposes $12 billion in base funding for the IRS "to modernize the taxpayer experience and ensure that the IRS can fulfill its core tax filing season responsibilities." The budget proposal would boost IRS funding from currently enacted levels of $11.5 billion.

Further, the budget would provide $300 million to continue the IRS’s modernization efforts. Specifically, the budget proposal states that IRS funding would help to:

• digitize more IRS communications to taxpayers, so they can respond quickly and accurately to IRS questions;
• create a call-back function for certain IRS telephone lines, so taxpayers do not need to wait on hold to speak with an IRS representative; and
• make it easier for taxpayers to make and schedule payments online.

Hill Reaction
"The Trump Economy stands firm on the proven pro-growth pillars of tax cuts, deregulation, energy independence, and better trade deals," the budget proposal states. However, Democratic lawmakers, while highlighting criticisms of the TCJA, are all but promising Trump’s budget request will not become law.

"Repealing incentives to reduce carbon emissions will hinder our fight against climate change and deter the kind of innovation our planet needs. And extending misguided tax cuts for the richest Americans will only deepen the deficit and further concentrate wealth at the top," House Ways and Means Committee Chairman Richard Neal, D-Mass., said in a statement after the budget proposal was released.

"It [Trump’s budget proposal] doubles down on the failed 2017 GOP tax law, extending expiring provisions and adding $1.5 trillion more to debt over the last six years of the budget window. Most of this extension’s tax breaks go to the richest one-fifth of households," House Budget Committee Democrats said in a committee report during the week of February 10.

However, it is worth noting that Trump’s budget proposal is merely an annual starting point for budget negotiations as Congress has the "power of the purse." Additionally, many of Trump’s requests, particularly those that include extending TCJA tax cuts, would have little chance of successfully clearing the currently Democratic-controlled House.

SFC Hearing; Wyden Bill
Secretary Mnuchin spent much of the SFC hearing praising and defending the TCJA and Treasury’s implementation of the GOP law. "Tax cuts, regulatory reform, and better trade deals are improving the lives of hardworking Americans," Mnuchin told lawmakers. "Unemployment remains historically low at 3.6 percent and is at or near all-time lows for African Americans, Hispanic Americans, and veterans. The unemployment rate for women recently reached its lowest point in nearly 70 years," he added.

Likewise, SFC Chairman Chuck Grassley, R-Iowa praised the TCJA and pointed to the same statistics mentioned by Mnuchin as evidence of its success. "Statistics like these show the tax reform is a success. The Treasury Department’s work to implement the new tax law has been an important part of that success," Grassley said.

However, SFC ranking member Ron Wyden, D-Ore., did not mince words when criticizing Mnuchin’s leadership of Treasury, the TCJA, and related regulations. "It sure looks like corporate special interests are going to make off with new loopholes worth $100 billion in addition to their outlandish share of the original $2 trillion Trump tax law," Wyden said during his opening statement. "When people say the tax code is rigged and the Trump administration has made it worse, what I’ve described is a textbook case of what they are talking about."

In that vein, Wyden introduced a bill on February 12 which would block Treasury’s "exception to the new tax on foreign earnings that allows multinationals to essentially choose the lowest available tax rate," as noted in Wyden’s press release. During the hearing, Wyden accused Treasury of creating a new "corporate tax loophole." Generally, Wyden’s bill would amend the tax code to clarify that high-taxed amounts are excluded from tested income for purposes of determining global intangible low-taxed income (GILTI) only if such amounts would be foreign base company income or insurance income.

Recently, Democrats have been criticizing Treasury for proposing related GILTI regulations based on corporate interests, but Mnuchin vehemently denied that claim. "Our job is to implement the legislation, not to make the legislation," he told lawmakers during the hearing. "Our job has been to implement that part of the tax code consistent with the intent and as prescribed by the law and that is what we have done."

Energy Tax Policy
Meanwhile, on the other side of the Capitol, in a February 11 letter to Senator Grassley, nearly 30 Democratic senators called for prompt committee action on energy tax policy. "Despite numerous opportunities, including in the recent tax extenders package, the Finance Committee has failed to take action on the dozens of energy tax proposals pending before it," the senators wrote in the letter led by Wyden. "Energy tax incentives have played a key part in shaping U.S. energy policy for more than 100 years, and members have shown clear interest in re-examining that ongoing role."

House Committee on Transportation & Infrastructure, "Moving Forward Framework"; House Ways and Means Committee, January 29 hearing witnesses’ testimony

House Committee on Transportation & Infrastructure, "Moving Forward Framework"; House Ways and Means Committee, January 29 hearing witnesses’ testimony

House Democrats on January 29 unveiled their framework for a $760 billion infrastructure plan. Meanwhile, the House Ways and Means Committee held a hearing the same day to examine proposals for funding infrastructure and various "tools" within the Tax Code to encourage investment.

Democratic Infrastructure Framework
Notably, House Democrats’ infrastructure framework, which also contains proposals related to climate change, is considered on Capitol Hill as an opening bid. It is not legislative text, and it does not include any specificities on how to fund infrastructure.

"I think it is really important that we not volunteer a revenue stream until the administration reaches an agreement with us," House Ways and Means Committee Chairman Richard Neal, D-Mass., said in a January 29 news conference. President Donald Trump and Treasury Secretary Steven Mnuchin have both expressed a readiness to move forward on infrastructure.

Ways and Means Infrastructure Hearing
Among some of the funding proposals presented during the January 29 hearing, Neal emphasized his preference for tax-preferred bonds. "Tax-preferred bonds are one of our most powerful tools. When we invest in infrastructure, it results in a significant economic multiplier," Neal said in his opening statement at the hearing. To that end, some witnesses also testified in support of reinstating a program known as Build American Bonds (BABs) on a permanent basis to help finance infrastructure. Neal likewise expressed his support for reinstating BABs.

Additionally, some Democratic lawmakers have discussed raising taxes to help fund infrastructure, namely the federal gas excise tax. Although the move would be met with resistance by lawmakers on both sides of the aisle, Republicans are particularly vocal in their opposition. The last gas tax increase occurred in 1993.

"Workers who are driving used cars shouldn’t be paying higher taxes at the pump so that the wealthy can claim a tax credit for their $75,000 electric vehicles," ranking member Kevin Brady, R-Tex., said during the hearing. "Both will drive on roads and bridges but only the blue-collar worker will pay any taxes to maintain them."

Looking Ahead
Although infrastructure is indeed a priority among congressional tax writers and the Trump administration, the Democratic framework is largely seen as a campaign-related proposal ahead of the 2020 elections, quite similar to Republicans’ talk of "Tax Cuts 2.0." While lawmakers on both sides of the aisle and the U.S. Capitol are certainly eager to address these tax-related issues, it remains to be seen if requisite bipartisan agreement will be reached during an election year and a shortened legislative calendar.

House Democratic and Republican tax writers debated the effects of tax reform’s corporate income tax cut during a February 11 hearing convened by Democrats. Democratic lawmakers have consistently called for an increase in the corporate tax rate since it was lowered from 35 percent to 21 percent in 2017 by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

House Democratic and Republican tax writers debated the effects of tax reform’s corporate income tax cut during a February 11 hearing convened by Democrats. Democratic lawmakers have consistently called for an increase in the corporate tax rate since it was lowered from 35 percent to 21 percent in 2017 by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

During the House Ways and Means Committee hearing, Democrats largely criticized low federal income tax receipts from corporations following the TCJA’s corporate tax rate cut, while Republicans focused on highlighting the resulting economic growth and global competitiveness.

Corporate Tax Revenue
House Ways and Means Committee Chairman Richard Neal, D-Mass., opened the hearing by criticizing corporate tax revenues for being at their lowest level in history. "Some large corporations pay zero year after year. It is therefore not surprising that we collect less corporate tax revenue than all but one of the other OECD nations," Neal said during opening statements.

Similarly, Jason Furman, an economic policy professor in the Harvard Kennedy School and Department of Economics at Harvard University, told lawmakers during the hearing that the low levels of corporate tax revenue are a major reason why overall federal revenue is also low. Additionally, Furman told lawmakers that there is no evidence that the TCJA has made a "substantial contribution to investment or longer-term economic growth."

Inversions
However, Douglas Holtz-Eakin, president of the American Action Forum, testified that corporate tax receipts were falling before the TCJA ever took effect. He credited the TCJA’s corporate tax cut for essentially ceasing corporate inversions. A corporate inversion, in very general terms, is a process in which U.S.-based companies relocate operations outside of the country to reduce their tax burden.

"After years of having five to six prominent companies annually depart the United States, inversions have simply stopped," Holtz-Eakin testified. "Multinationals are bringing operations back to the United States, and many acquisitions of U.S. businesses now are made by U.S. firms, rather than foreign buyers," he added.

Further, Holtz-Eakin issued a reminder that "everyone bears the burden" of corporate income taxes. "Corporations are not walled off from the broader economy, and neither are the taxes imposed on corporate income. Taxes on corporations fall on stockholders, employees, and consumers alike."

JCT
The Joint Committee on Taxation (JCT), Congress’s nonpartisan scorekeeper, detailed in its February 10 report several contributing variables in understanding the corporate income tax equation and its relation to federal revenue. Generally, a corporation’s income tax liability is determined by applying a 21-percent rate to its taxable income.

As the JCT notes in its report, prior to the TCJA, the corporate income tax involved a four-step graduated tax rate schedule, with a top corporate tax rate of 35 percent on taxable income in excess of $10 million. The corporate income tax also included "an alternative minimum tax (AMT) that was payable (in addition to all other tax liabilities) to the extent that it exceeded the corporation’s regular income tax liability." However, the TCJA eliminated the graduated corporate rate structure and repealed the corporate AMT, effective in 2018.

More Hearings Expected
While this particular hearing convened by Democrats was generally seen on Capitol Hill to serve more of a messaging purpose rather than legislative purpose, more TCJA-related hearings are expected this year. "We’re going to be doing a series of hearings on the [GOP] tax bill," Neal told the press after the hearing. "People frequently pay a lot of attention to the spending side, and we are saying that there is also a revenue question here."

The IRS will allow a farmer that is exempt from the uniform capitalization (UNICAP) rules by reason of having average annual gross receipts of $25 million or less to revoke a prior election out of the UNICAP rules made under Code Sec. 263A(d)(3) with respect to pre-productive plant expenditures. The guidance also explains how a farmer may make an election out under Code Sec. 263A(d)(3) in a tax year in which the farmer is no longer exempt from the UNICAP rules as a qualifying small business taxpayer with $25 million or less in average annual gross receipts.

The IRS will allow a farmer that is exempt from the uniform capitalization (UNICAP) rules by reason of having average annual gross receipts of $25 million or less to revoke a prior election out of the UNICAP rules made under Code Sec. 263A(d)(3) with respect to pre-productive plant expenditures. The guidance also explains how a farmer may make an election out under Code Sec. 263A(d)(3) in a tax year in which the farmer is no longer exempt from the UNICAP rules as a qualifying small business taxpayer with $25 million or less in average annual gross receipts.

Revocation of the prior election out is beneficial because a farmer that makes the election must depreciate farm property placed in service during any tax year the election is in effect using the MACRS alternative depreciation system (ADS). ADS requires use of the straight-line method over depreciation periods that are generally longer than those that apply under the MACRS general depreciation system (GDS) if the election out is not made ( Code Sec. 263A(e)(2)). If the election out is revoked, a qualifying small business farmer remains exempt from the UNICAP rules under the $25 million gross receipts test but is no longer required to use ADS on existing or newly acquired property by reason of the prior election out.

In addition, a rule that treats all plants produced by the farmer as section 1245 property, and requires ordinary income recapture to the extent of deductions otherwise required to be capitalized, no longer applies to new plantings after revocation of the election out is made ( Code Sec. 263A(e)(1)).

Eligible Farmers
The election out may be revoked by a farmer that:

• is exempt from the UNICAP rules by reason of the $25 million average gross receipts test for qualifying small business taxpayers (as described in Code Sec. 448(c) and provided by Code Sec. 263A(i), as added by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), effective for tax years beginning after 2017);
• previously made the election out of UNICAP under Code Sec. 263A(d)(3); and
• wants to apply the $25 million gross receipts exemption for small business taxpayers in the same tax year that it revokes the Code Sec. 263A(d)(3) election out.

Revocation Procedure
An eligible small business farmer receives IRS consent to revoke a prior election out by continuing not to capitalize costs under the UNICAP rules on its original tax return (including extensions) for the tax year of the revocation of the election out, continuing to treat plantings in prior tax years as section 1245 property, and changing the depreciation method of farm property from ADS to GDS as explained below.

Special rule for 2018 tax year. A small business farmer that already filed a timely 2018 return may revoke the election out in the 2018 tax year by filing an amended 2018 return (an administrative adjustment request in the case of certain partnerships) before filing a 2019 return. Alternatively, Form 3115, Application for Change in Accounting Method, may be filed with a timely income tax return for the first, second, or third tax year following the 2018 tax year.

Changing From ADS to GDS
A farmer revoking the election out may cease using ADS to depreciate its existing farming property beginning in the year the election out is revoked, and ADS will not apply to farm property placed in service in the revocation year or thereafter. The switch from ADS to GDS is made using the MACRS change in use rules ( Reg. §1.168(i)-4(d)) and, therefore, the GDS method applies prospectively on the remaining basis of the farm property. The change in use rules, however, allow a farmer to elect to continue to depreciate its existing property using ADS. Property switched from ADS to GDS is not eligible for bonus depreciation. A farmer may make an ADS election for classes of newly acquired property under the usual ADS election rules.

A farmer revoking the election out has adopted an impermissible accounting method if it continues to use ADS in the revocation year and the following tax year (unless the election to continue using ADS was made under the change in use rules). In this case, a farmer must file Form 3115 and compute a section 481 adjustment as if the switch from ADS to GDS had been made in the revocation year. Similarly, a farmer that depreciates newly acquired property using ADS in the revocation year and the following year has adopted an impermissible method that must be corrected by filing Form 3115 unless a valid ADS election was made.

Losing Exemption Under Gross Receipts Test
The guidance allows a small business farmer to make a Code Sec. 263A(d)(3) election out of the UNICAP rules in the first tax year the farmer no longer qualifies for exemption under the $25 million average gross receipts test. The election out is made on the original tax return (including extensions) using the currently prescribed election Code Sec. 263A(d)(3) procedures, and by continuing not to capitalize costs under the UNICAP rules.

The electing farmer must use ADS to depreciate property placed in service in the election out year and subsequent years. Bonus depreciation may not be claimed on this property. An election out is not valid if ADS is not used to depreciate this property. ADS does not apply to property placed in service during tax years prior to the election out year.

Effective Date
The guidance is generally effective on February 21, 2020. Transition guidance is provided for taxpayers that filed a Form 3115 on or before February 21, 2020, to obtain consent to revoke a Code Sec. 263A(d)(3) election.

Rev. Proc. 2019-43, I.R.B. 2019-48, 1107, which lists the automatic accounting method changes, is modified to included certain accounting method changes described in the guidance.

Taxpayers claiming the low-income housing credit should apply the "average income" minimum set aside test by reference to the "very low-income" limits calculated by the U.S. Department of Housing and Urban Development (HUD) for purposes of determining eligibility under the HUD Section 8 program. HUD determinations for very low-income housing families are currently used to calculate the low-income housing credit income limits under the alternate "20-50" and "40-60" minimum set-aside tests.

Taxpayers claiming the low-income housing credit should apply the "average income" minimum set aside test by reference to the "very low-income" limits calculated by the U.S. Department of Housing and Urban Development (HUD) for purposes of determining eligibility under the HUD Section 8 program. HUD determinations for very low-income housing families are currently used to calculate the low-income housing credit income limits under the alternate "20-50" and "40-60" minimum set-aside tests.

Rev. Rul. 89-24, 1994-2 C.B. 5, as modified and superseded in part by Rev. Rul. 94-57, 1994-2 C.B. 5, is amplified.

Average Income Test
A taxpayer claiming the low-income housing credit under Code Sec. 42 must elect to satisfy one of three minimum-set aside tests:

• the "20-50" test, under which at least 20 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 50 percent or less of the area median gross income (AMGI);
• the "40-60" test, under which at least 40 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 60 percent or less of AMGI; or
• the "average income" test under Code Sec. 42(g)(1)(C), which was added by the Consolidated Appropriations Act of 2018 ( P.L. 115-141).

The average income test is satisfied if 40 percent or more of the residential units in the project (25 percent or more in the case of a project located in a high cost housing area) are both rent-restricted and occupied by tenants whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit. The imputed income limitation for any unit must be 20, 30, 40, 50, 60, 70 or 80 percent of AMGI. The average of the designated imputed income limitations may not exceed 60 percent of AMGI.

Application of HUD Calculation
HUD uses three different principal income level calculation categories:

• "low-income," which is limited at 80 percent of AMGI;
• "very low-income," which is limited at 50 percent of AMGI; and
• "extremely low-income," which is limited at the higher of 30 percent of AMGI or the “Federal Poverty Level.”

Under the IRS guidance, HUD’s "very low-income" calculation, as adjusted for family size and consistent with the methods provided in Rev. Rul. 89-24, is used as the basis for determining the full range of percentage-based income limits under the new average-income set-aside test.

Specifically, the income attributable to a family in a unit may not exceed an applicable percentage of the HUD income limit for a very low income family of the same size in accordance with the following schedule for the percentage-based imputed income limit chosen for the unit within the 20 through 80 percent range:

• 20 percent limit: 40 percent or less of the income limit for a very low-income family of the same size;
• 30 percent limit: 60 percent or less of the income limit for a very low-income family of the same size;
• 40 percent limit: 80 percent or less of the income limit for a very low-income family of the same size;
• 50 percent limit: 100 percent or less of the income limit for a very low-income family of the same size;
• 60 percent limit: 120 percent or less of the income limit for a very low-income family of the same size;
• 70 percent limit: 140 percent or less of the income limit for a very low-income family of the same size;
• 80 percent limit: 160 percent or less of the income limit for a very low-income family of the same size.

A list of income limits released by HUD may be relied upon until 45 days after HUD releases a new list of income limits, or HUD’s effective date for the list expires.

Prospective Application
Special relief is provided to a taxpayer who receives a low-income housing credit allocation prior to February 18, 2020. The taxpayer must have unambiguously indicated in its application that it will elect the average-income set aside test, and also specified a dollar amount as an expected designated imputed income limitation for a unit that is higher than allowed by the new guidance. If the dollar amount is reasonable it may be relied upon for the entire compliance period of the building, and is also used to determine whether the tenant initially meets the income limitation for the unit.

Final regulations increase a vehicle’s maximum value for eligibility to use the fleet-average valuation rule or the vehicle cents-per-mile valuation rule. The regulations provide transition rules for certain employers. The final regulations are effective on February 5, 2020, the date of publication in the Federal Register.

TCJA Increased Maximum Vehicle Values
Before the Tax Cuts and Job Act (TCJA) ( P.L. 115-97), the maximum base fair market value of a vehicle for use of the fleet-average valuation rule was $16,500, as adjusted annually for inflation (in 2017: $21,100 for a passenger automobile, and $23,300 for a truck or van). The pre-TCJA maximum base fair market value of a vehicle for use of the vehicle cents-per-mile valuation rule was $12,800, as adjusted annually for inflation (in 2017: $15,900 for a passenger automobile, and $17,800 for a truck or van). The TCJA increased these amounts to $50,000, adjusted for inflation.

To implement the changes, the IRS issued Notice 2019-8, I.R.B. 2019-3, 354, to provide interim guidance for 2018 on new procedures for calculating the price inflation adjustments to the maximum vehicle values for use with the fleet-average valuation rule in Reg. §1.61-21(d) and the vehicle cents-per-mile valuation rule in Reg. §1.61-21(e) using amended Code Sec. 280F(d)(7). In Notice 2019-34. I.R.B. 2019-22, 1257, the IRS provided (among other things) that the inflation-adjusted maximum value of an employer-provided vehicle (including cars, vans, and trucks) first made available to employees for personal use in calendar year 2019 for which the vehicle cents-per-mile valuation rule or the fleet-average valuation rule may be used is $50,400. This guidance also provided information about the manner in which the Treasury Department and the IRS intended to publish the maximum vehicle value in the future.

In August 2019, a notice of proposed rulemaking was published that was consistent with Notice 2019-8 and Notice 2019-34 and reflected changes made by TCJA to the depreciation limitations in Code Sec. 280F. The final regulations update the fleet-average and vehicle cents-per-mile valuation rules to conform to the changes made by the TCJA.

Trucks and Vans Not Separately Valued
Before the TCJA, inflation adjustments were determined using the Consumer Price Index (CPI), which contained both a new car and a new truck component. Accordingly, separate inflation adjustments were released for cars using the car component of the CPI, and for trucks and vans using the truck component of the CPI.

Under the TCJA, the price inflation amount for automobiles (including trucks and vans) is calculated using both the CPI automobile component and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) automobile component. There is no separate C-CPI-U component for trucks and vans. As a result, the IRS will publish only one maximum value of a vehicle for use with the fleet-average and vehicle cents-per-mile valuation rules.

Transition Rules
Consistent with Notice 2019-34 and the proposed regulations, the final regulations provide several transition rules.

For the Fleet-Average Valuation Rule: If an employer did not qualify to use the fleet-average valuation rule prior to January 1, 2018, because the automobile’s fair market value exceeded the inflation-adjusted maximum value requirement for the year the automobile was first made available to the employee for personal use, the employer may adopt the fleet-average valuation rule for 2018 or 2019, provided the fair market value of the automobile does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

For the Vehicle Cents-Per-Mile Valuation Rule: An employer that did not qualify to adopt the vehicle cents-per-mile valuation rule for a vehicle first made available to an employee for personal use before calendar year 2018, may first adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year for the vehicle if:

• the employer did not qualify to adopt the vehicle cents-per-mile valuation rule because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the vehicle was first used by the employee for personal use; and
• the vehicle’s fair market value does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

Similarly, if the commuting valuation rule ( Reg. §1.61-21(f)) was utilized when the vehicle was first used by an employee for personal use, the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year if:

• the employer did not qualify to switch to the vehicle cents-per-mile valuation rule on the first day on which the commuting valuation rule was not used because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the commuting valuation rule was first not used; and
• the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

An employer that adopts the vehicle cents-per-mile valuation rule must continue to use the rule for all subsequent years in which the vehicle qualifies for use of the rule. However, the employer may use the commuting valuation rule for the vehicle for any year during which use of the vehicle qualifies for the commuting valuation rule.

The IRS has provided guidance on qualifying for the Earned Income Tax Credit (EITC). The EITC is a refundable tax credit that is intended to be a financial boost for families with low to moderate incomes.

The IRS has provided guidance on qualifying for the Earned Income Tax Credit (EITC). The EITC is a refundable tax credit that is intended to be a financial boost for families with low to moderate incomes.

Due to changes in marital, parental or financial status, millions of workers may qualify for EITC for the first time this year. The IRS urges individuals who (1) work for someone else or have their own businesses or farm, and (2) earned $55,952 or less in 2019, to see if they qualify by using the "EITC Assistant" on the IRS’s website ( https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/use-the-eitc-assistant).

Taxpayers must file a Form 1040, U.S. Individual Income Tax Return, and attach a completed Schedule EIC, Earned Income Credit Qualifying Child Information, to the tax return for a qualifying child, in order to claim EITC. A taxpayer must have a valid Social Security number for themselves, their spouses if they are filing a joint return, and each qualifying child before they file their return.

The IRS expects most EITC-related refunds to be available in taxpayers’ bank accounts or on debit cards by the first week of March, if they choose direct deposit and there are no other issues with their tax return.

Eligibility for EITC
In order to qualify, the worker must have earned income an adjusted gross income with certain limits and meet certain basic rules. The worker also must meet the rules for those without a qualifying child, or must have a child who meets all the qualifying child rules. Only one person can use a particular child to claim the EITC, if that child meets the rules to be a qualifying child for more than one person. Under a special rule, those who receive combat pay may choose to count it as taxable income for the purposes of EITC; this may or may not increase the amount of EITC.

Credit Limits for 2019
For tax year 2019, those who qualify for EITC can get a credit up to:

• $529 with no qualifying children,
• $3,526 with one qualifying child,
• $5,828 with two qualifying children, and
• $6,557 with three or more qualifying children.

Free Tax Help
Since EITC is complex and many special rules apply, the IRS encourages workers to do their taxes using the IRS Free File program, by choosing a trusted tax professional, or at a local free tax preparation site. The IRS also reminds taxpayers that they are always be responsible for the accuracy of their own tax return, even if someone else may have prepared it, because filing a tax return with an error on the EITC claim could have lasting impacts.

The IRS has proposed regulations with guidance for employers on withholding federal income tax from employee’s wages.

The IRS has proposed regulations with guidance for employers on withholding federal income tax from employee’s wages. The proposed regulations:

• implement recent changes made to Code Secs. 3401 and 3402 by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
• reflect the redesigned 2020 Form W-4, Employee’s Withholding Certificate, and the related wage withholding tables and computational procedures published in IRS Pub. 15-T, Federal Income Tax Withholding Methods.

TCJA Changes
The TCJA made many Code amendments affecting income tax withholding on wages. Among other things, the TCJA:

• repealed the rule that, for purposes collecting income tax at source on wages, the "number of withholding exemptions claimed" meant the number of withholding exemptions claimed in a withholding exemption certificate in effect, except that if no such certificate was in effect, the number of withholding exemptions claimed was considered zero;
• permanently modified the wage withholding rules and replaced "withholding exemptions" with a "withholding allowance" prorated to the payroll period, to reflect the reductions in the personal exemption amount to zero due to the temporarily repeal of the personal and dependency exemption deduction for tax years 2018–2025;
• changed the list of factors on which the withholding allowance is based, and entitled an employee to take into account the number of individuals for which the employee expects to take an income tax credit for other dependents, instead of the number of individuals for whom the employee reasonably expects to claim an personal and dependency exemption deduction;
• changed an employee’s entitlement to take into account the standard deduction from an amount generally equal to one withholding exemption to the standard deduction allowable to the employee (one-half of the standard deduction for a married employee whose spouse is an employee receiving wages subject to withholding);
• added a provision that the employee’s withholding allowance also takes into account whether the employee has withholding allowance certificates in effect for more than one employer;
• added the Code Sec. 199A qualified business income deduction to the list of deductions that an employee may take into account in determining the additional withholding allowance that the employee is entitled to claim on Form W-4;
• struck references to payments made under certain divorce or separation instruments; and
• changed the rules for withholding from periodic payments under Code Sec. 3405(a) when no withholding allowance certificate has been furnished.

IRS Guidance
After the TCJA was enacted, the IRS issued guidance for 2018 and 2019 to implement the changes (e.g., Notice 2018-14, I.R.B. 2018-7, 353; Notice 2018-92, I.R.B. 2018-51, 1038; Notice 2020-3, I.R.B. 2020-3, I.R.B. 2020–3, 330). The IRS also released a draft 2019 Form W-4 and instructions, which made significant changes intended to improve the accuracy of income tax withholding and to make the withholding system more transparent for employees. In response to comments received, Treasury and the IRS postponed implementing the redesigned form until 2020. The final redesigned 2020 Form W-4 was released on December 4, 2019, and was then rereleased on December 31, 2019, to reflect the amendment to the medical expense deduction threshold for 2020 made by the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94).

In 2019, the IRS also released drafts of IRS Pub. 15-T, which provided percentage method tables, wage bracket withholding tables, and other computational procedures for employers to use to compute withholding for the 2020 calendar year. IRS Pub. 15-T was finalized and released on December 24, 2019. Withholding tables previously published in IRS Pub. 15, (Circular E), Employer’s Tax Guide, IRS Pub. 15-A, Employer’s Supplemental Tax Guide, and IRS Pub. 51, Agricultural Employer’s Tax Guide, are now published in IRS Pub. 15-T. The IRS also discontinued publishing several other withholding tables in 2020.

Proposed Regulations
The proposed regulations incorporate the TCJA changes to Code Secs. 3401 and 3402, and provide flexible and administrable rules for wage withholding that work with both the 2020 Form W-4 and the related tables and computational procedures described in IRS Pub. 15-T, as well as Forms W-4 and related tables and computational procedures provided in 2019 and earlier years. The proposed regulations are generally compatible with the income tax withholding system in effect for 2019, as well as the system in effect for 2020, and may be relied on by employers for withholding until final regulations are published.

W-4 Issues
An employee is not required to furnish a new Form W-4 solely because of the form’s redesign, regardless of when the employee’s Form W-4 currently in effect was furnished. Similarly, an employer must generally continue to compute the amount of tax to be withheld from an employee’s wages based on a valid Form W-4 furnished by the employee regardless of when the employee furnished the Form W-4.

The 2020 IRS Pub. 15-T provides guidance on how employers will withhold income tax using Forms W-4 furnished and in effect on or before December 31, 2019. An employer can ask all employees who were first paid wages before 2020 to furnish a 2020 Form W-4, but if it does, the employer should explain that:

• employees are not required to furnish a new Form W-4; and
• if the employee does not furnish a 2020 Form W-4, the tax to be withheld from the employee’s wages will continue to be based on the last valid Form W-4 previously furnished.

Similar to the current regulations, the proposed regulations generally provide that Forms W-4 that took effect under prior law generally remain in effect until another Form W-4 is furnished. There are special rules regarding when a Form W-4 furnished by an employee subject to a "lock-in letter" stops being effective.

Periodic Payments
The proposed regulations do not address withholding under Code Sec. 3405(a) on periodic payments from pensions, annuities, or certain other deferred income. Instead, Notice 2020-3 describes the withholding rules for the 2020 calendar year.

Proposed Applicability Date
The proposed regulations are generally proposed to apply on the date that a Treasury Decision adopting them as final regulations is published in the Federal Register. Taxpayers may rely on the rules set forth in the notice of proposed rulemaking until that date. However, Proposed Reg. §31.3402(f)(2)-1(g) is proposed to apply on February 13, 2020 (i.e., the date the notice of proposed rulemaking was published in the Federal Register), Proposed Reg. §31.3402(f)(5)-1(a)(3) is proposed to apply on March 16, 2020 (i.e., 30 days after the date the notice of proposed rulemaking was published in the Federal Register), and a proposed removal of Reg. §31.3402(h)(4)-1(b) relating to the combined income tax withholding and employee FICA tax withholding tables is proposed to apply on and after January 1, 2020. Except for the removal of Reg. §31.3402(h)(4)-1(b), taxpayers may choose to apply the rules on or after January 1, 2020.

Comments and Requests for Hearing
Before the proposed regulations are adopted as final regulations, the IRS will consider any electronic and written comments that are submitted timely to the IRS. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available at http://www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of its date, time, and place will be published in the Federal Register.

Electronic submissions are made via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-132741-17) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking portal, comments cannot be edited or withdrawn. The Treasury Department and the IRS will publish for public availability any comment received to their public docket, whether submitted electronically or in hard copy. Send hard copy submissions to: CC:PA:LPD:PR (REG-132741-17), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.

All comments and requests for a public hearing must be received by April 13, 2020.

A child with earned income above a certain level is generally required to file a separate tax return as a single taxpayer. However, a child with a certain amount of unearned income (from investments, including dividends, interest, and capital gains) may find that this income becomes subject to tax at his or her parent's highest marginal tax rate. This is referred to as the "kiddie tax," and it is designed to prevent parents from transferring income-producing investments to their children, who would generally be taxed at a lower rate.

A child with earned income above a certain level is generally required to file a separate tax return as a single taxpayer. However, a child with a certain amount of unearned income (from investments, including dividends, interest, and capital gains) may find that this income becomes subject to tax at his or her parent's highest marginal tax rate. This is referred to as the "kiddie tax," and it is designed to prevent parents from transferring income-producing investments to their children, who would generally be taxed at a lower rate.

Does the kiddie tax apply to my situation?

The kiddie tax applies if:

1. The child has investment income greater than the annual inflation-adjusted amount ($1,900 for 2013; $2,000 for 2014);
2. At least one of the child's parents was alive at the end of the tax year;
3. The child is required to file a tax return for the tax year;
4. The child does not file a joint return for the tax year; and
5. The child meets one of the following requirements relating to age and income:
• The child was under age 18 at the end of the tax year; or
• The child was age 18 at the end of the tax year and the child's earned income does not exceed one-half of the child's own support for the year; or
• The child was a full-time student who was under age 24 at the end of the tax year and the child's earned income does not exceed one half of the child's own support for the year (This does not include scholarships.)

Computing the kiddie tax

If the kiddie tax applies to a child, the child's tax is calculated as the greater of one of two items:

1. The tax on all of the child's income, calculated at the rates applicable to single individuals; or
2. The sum of two things:
• The tax that would be imposed on a single individual if the child's taxable income were reduced by net unearned income, plus
• The child's share of the allocable parental tax.

The allocable parent tax is the amount of the increase in the parent's tax liability that results from adding to the parent's taxable income the net unearned income of the parent's children who are subject to the kiddie tax. If a parent has more than one child with unearned income subject to the kiddie tax, then each child's share of the allocable parental tax would be assigned pro rata according to the ratio that its net unearned income bears to the aggregate net unearned income subject to the kiddie tax.

Which tax form should I use?

A parent with a child or children whose unearned income is subject to the kiddie tax must generally complete and file Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, along with his or her tax return. However, if the child's interest and dividend income (including capital gain distributions) total less than $9,500 for 2013 ($10,000 for 2014), the parent may be able to elect to include that income on the parent's return rather than file a separate return for the child. In this case, the parents should complete Form 8814, Parents Election To Report Child's Interest and Dividends. However, the IRS cautions that the federal income tax owed on a child's income may be lower if the parent files a separate tax return for the child, which would enable him or her to take certain tax benefits that cannot be taken on the parents' return.

Divorced, separated, or unmarried parents

The kiddie tax is based on a parent's tax return, but what happens when parents do not file joint returns? Several special rules determine what should happen. If the parents are married, but file separate returns, then the child should use the return of the parent with the largest taxable income to figure the kiddie tax.

If the parents are married, but do not live together, and the custodial parent is considered unmarried then generally the custodial parent's return would be used. However, if the custodial parent is not considered unmarried, the child should use the return of the parent with the largest amount of taxable income.

If the child's parents are divorced or legally separated, and the custodial parent has not remarried, the child should use the custodial parent's return. If the custodial parent has remarried, the child's stepparent, rather than the noncustodial parent, is treated as the child's other parent. Similarly, if the child's parent is a widow or widower who has remarried, the new spouse is treated as the child's other parent.

If the child's parents never married each other, but lived together all year, the child should use the return of the parent with the greater taxable income. If the parents were never married and did not live together all year, the rules are the same as the rules for parents who are divorced.

Calculating the kiddie tax can become confusing as a taxpayer attempts to sort through the numerous rules governing who is subject to the tax, which income is subject to the tax, and how to report it properly. Please do not hesitate to contact our offices with any questions.

The Affordable Care Act set January 1, 2014 as the start date for many of its new rules, most notably, the employer shared responsibility provisions (known as the "employer mandate") and the individual shared responsibility provisions (known as the "individual mandate").  One - the employer mandate - has been delayed to 2015; the other - the individual mandate - has not been delayed.

The Affordable Care Act set January 1, 2014 as the start date for many of its new rules, most notably, the employer shared responsibility provisions (known as the "employer mandate") and the individual shared responsibility provisions (known as the "individual mandate").  One - the employer mandate - has been delayed to 2015; the other - the individual mandate - has not been delayed.

Employer shared responsibility payments

Very broadly, the Affordable Care Act imposes a shared responsibility payment (also known as a penalty) on an applicable large employer that either:

• Fails to offer to its full-time employees (and their dependents) the opportunity to enroll in MEC (Minimum Essential Coverage) under an eligible employer-sponsored plan and  has under its employ one or more full-time employees that are certified to the employer as having received a premium assistance tax credit or cost-sharing reduction (Code Sec. 4980H(a) liability), or
• Offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan and has under its employ one or more full-time employees that are certified to the employer as having received a premium assistance tax credit or cost-sharing reduction (Code Sec. 4980H(b) liability).

The amount of the employer shared responsibility penalty varies depending on whether the employer is liable under Code Sec. 4980H(a) or Code Sec. 4980H(b). The calculations of the payment are very complex but two examples help to shed some light on how they are intended to work. Example 1 is based on Code Sec. 4980H(a) liability and Example 2 is based on Code Sec. 4980H(b) liability.

Example 1.  Employer A fails to offer minimum essential coverage and has 100 full-time employees, 10 of whom receive a Code Sec. 36B premium assistance tax credit for the year for enrolling in a Marketplace plan. For each employee over a 30-employee threshold, the employer would owe $2,000, for a total penalty of $140,000. The Code Sec. 4980H(a) penalty is assessed on a monthly basis. 

Example 2.  Employer B offers minimum essential coverage and has 100 full-time employees, 20 of whom receive a Code Sec. 36B premium assistance tax credit for the year for enrolling in a Marketplace plan. For each employee receiving a tax credit, the employer would owe $3,000 for a total penalty of $60,000. The maximum penalty for Employer B would be capped at the amount of the penalty that would have been assessed for a failure to provide coverage ($140,000 above in Example 1). Since the calculated penalty of $60,000 is less than the maximum amount, Employer B would pay the calculated penalty of $60,000. The Code Sec. 4980H(b) penalty is assessed on a monthly basis.

These examples are merely provided to illustrate how the employer shared responsibility payment is intended to work.  Every employer's situation will be different depending on the number of employees, the type of insurance offered and many other factors. Please contact our office for more details.

IRS guidance

Since enactment of the Affordable Care Act, the IRS and other federal agencies have issued guidance on the employer shared responsibility provision.  The IRS has defined what is an applicable large employer (generally defined as businesses with 50 or more employees), who is a full-time employee with certain exceptions for seasonal workers, and much more.

The IRS has not, however, issued guidance on reporting requirements by employers and insurers.  The Affordable Care Act generally requires employers, insurers and other entities that offer minimum essential coverage to file annual information returns reporting information about the coverage. As originally enacted, this information reporting was scheduled to take effect in 2014, the same year that the employer shared responsibility provisions were scheduled to take effect.

Delay

In early July, the Treasury Department announced that information reporting by employers, insurers and other entities offering minimum essential coverage will not start in 2014 but will be delayed until 2015. The IRS followed-up with transitional guidance. Information reporting by employers, insurers and other entities offering minimum essential coverage is waived for 2014. However, the IRS encouraged employers, insurers and others to voluntarily report this information. The IRS reported it is working on guidance and expects to issue regulations before year-end.

Because information reporting has been delayed, the Affordable Care Act's employer shared responsibility provisions are waived for 2014. The IRS explained that the transitional relief is expected to make it impractical to determine which employers would owe shared responsibility payments for 2014. As a result, no employer shared responsibility payments will be assessed for 2014.

Individual mandate

The January 1, 2014 scheduled start date of the Affordable Care Act's individual shared responsibility provisions is not delayed. Unless exempt, individuals must carry minimum essential health coverage after 2013 or pay a shared responsibility payment (also called a penalty). The Affordable Care Act exempts many individuals, such as most individuals covered by employer-provided health insurance, individuals enrolled in Medicare and Medicaid, and many others.  

After 2013, individuals may be eligible for a new tax credit (the Code Sec. 36B credit) to help offset the cost of obtaining health insurance. The credit is payable in advance to the insurer.
The January 1, 2014 scheduled start date of the Code Sec. 36B is also not delayed.

Small employers

Qualified small employers will be able to offer health insurance to their employees through the Small Business Health Options Program (SHOP). Enrollment for coverage through SHOP is scheduled to begin October 1, 2013 for coverage starting January 1, 2014. For 2014, SHOP is open to employers with 50 or fewer employees. Beginning in 2016, SHOP will be open to employers with up to 100 employees.

After 2013, the small employer health insurance tax credit is scheduled to increase from 35 percent to 50 percent for small business employers (and from 25 percent to 35 percent for tax-exempt employers). However, the credit is only available after 2013 to employers that obtain coverage through SHOP. This credit is targeted to very small employers with the credit gradually phasing out as the number of employees reaches 50.

If you have any questions about employer reporting or the employer shared responsibility payment-or any questions about the Affordable Care Act-please contact our office.

The scheduled January 1, 2014 rollout of withholding, reporting and other rules in the Foreign Account Tax Compliance Act (FATCA) has been delayed six months, the Treasury Department and the IRS have announced. The six-month delay is expected to give the U.S. more time to conclude negotiations and sign agreements to implement FATCA with foreign governments. The Treasury Department and the IRS have not, however, delayed the rules for reporting by individuals.

The scheduled January 1, 2014 rollout of withholding, reporting and other rules in the Foreign Account Tax Compliance Act (FATCA) has been delayed six months, the Treasury Department and the IRS have announced. The six-month delay is expected to give the U.S. more time to conclude negotiations and sign agreements to implement FATCA with foreign governments. The Treasury Department and the IRS have not, however, delayed the rules for reporting by individuals.

Far-reaching scope

FATCA 's scope is very far reaching. FATCA requires certain foreign financial institutions (FFIs) to report information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The reporting institutions include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies. Some non-financial foreign entities will also have to report certain of their U.S. owners.  

FATCA also requires that some individuals holding financial assets outside the U.S. must report those assets to the IRS. The IRS has developed Form 8938, Statement of Specified Foreign Financial Assets. This reporting requirement is separate from the long-time reporting requirement under the Bank Secrecy Act to file an "FBAR" (Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts).

Final rules

In early 2013, the Treasury Department and the IRS issued final FATCA regulations. The final rules require withholding agents to withhold 30 percent of certain payments (called "withholdable payments") to FFIs unless the FFI has entered into a reporting agreement with the IRS. To avoid withholding under FATCA, a participating FFI must enter into an agreement with the IRS to:

• Identify U.S. accounts,
• Report certain information to the IRS regarding U.S. accounts, and
• Withhold a 30 percent tax on certain U.S.-connected payments to non-participating FFIs and account holders who are unwilling to provide the required information.

Delay

The final regulations called for the gradual phasing-in of the FATCA rules beginning in 2014 and continuing through 2017. Now, the Treasury Department and the IRS have further delayed the start of some of the FATCA rules, including rules on withholding, reporting and due diligence by FFIs.  Withholding agents generally will be required to begin withholding on withholdable payments made after June 30, 2014 instead of December 31, 2013.

Withholding agents also generally will be required to implement new account opening procedures by July 1, 2014. In addition, Treasury and the IRS intend to modify the final regulations so that the information reports previously required from certain FFIs on U.S. accounts for the 2013 and 2014 calendar years will be required only for 2014 (with respect to   U.S. accounts identified by December 31, 2014).  Reporting by these FFIs would be required by March 31, 2015. Additionally, all qualified intermediary agreements that would otherwise expire on December 31, 2013 will be extended to June 30, 2014. The launch date of the IRS's online FATCA registration site has also been delayed to August 19, 2013.

Agreements

Since FATCA became law, the U.S. has been negotiating with foreign jurisdictions to implement its reporting requirements. The U.S. has developed two model intergovernmental agreements (IGAs). The first model agreement (Model I) generally requires an FFI to report account information to its government, which, in turn, will exchange the information with the IRS.  Under the second model agreement (Model II), an FFI registers with the IRS and reports account information directly to the IRS. As of August 1, 2013, the U.S. has entered into IGAs with nine countries (Denmark, Germany, Ireland, Japan, Norway, Mexico, Spain, Switzerland, and the U.K.). The Treasury Department has reported that it hopes to conclude negotiations before 2014 with Argentina, Belgium, Korea, Malaysia, New Zealand, South Africa, and many other countries.

Individuals

FATCA's rules for reporting by individuals are not delayed. Generally, FATCA requires taxpayers to file Form 8938 if he or she is a U.S. citizen, a resident alien, and in some cases, a nonresident alien. The taxpayer also must own a "specified foreign financial asset," which includes any financial account maintained by an FFI unless specifically excluded. Additionally, the aggregate value of the specified foreign financial asset must exceed certain reporting thresholds.

For single individuals living in the U.S., the total value of the specified foreign financial assets must be more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For married couples filing a joint return and living in the U.S these amounts are $100,000 and $150,000. The threshold amounts are higher for taxpayers living outside the U.S.

Form 8938 is not a substitute for the FBAR. The forms have different filing requirements. Please contact our office for more details about the two forms and their filing requirements.  The IRS is also expected to issue rules on FATCA reporting by domestic entities if the entity is formed or used to hold specified foreign financial assets and the assets exceeds the appropriate reporting threshold. Until the IRS issues regulations, only individuals must file Form 8938.

FATCA is a very complex law, which impacts many taxpayers here and abroad. Please contact our office if you have any questions about FATCA.

More than one month after the U.S. Supreme Court found Section 3 of the Defense of Marriage Act (DOMA) unconstitutional, the IRS has yet to issue guidance in critical areas of tax filing, employee benefits, and more. Many taxpayers and tax professionals are questioning what revisions the IRS will make to its rules and regulations. At the same time, other federal agencies have announced changes in their policies to reflect the demise of Section 3 of DOMA.

More than one month after the U.S. Supreme Court found Section 3 of the Defense of Marriage Act (DOMA) unconstitutional, the IRS has yet to issue guidance in critical areas of tax filing, employee benefits, and more. Many taxpayers and tax professionals are questioning what revisions the IRS will make to its rules and regulations. At the same time, other federal agencies have announced changes in their policies to reflect the demise of Section 3 of DOMA.

DOMA

On June 26, 2013, the Supreme Court struck down Section 3 of DOMA, which provided that the word "marriage" meant only a legal union between one man and one woman as husband and wife, and the word "spouse" referred to only a person of the opposite sex who is a husband or a wife. Because of Section 3 of DOMA, the IRS did not recognize same-sex married couples as married for federal tax purposes.

Now, same-sex married couples who reside in states that recognize same-sex marriage should be entitled to the same tax benefits and responsibilities of opposite-sex married couples. These include the ability to file a joint federal income tax return as a married couple, possible refunds for open tax years, and to take advantage of many benefits in the Tax Code available to married couples. However, it is unclear if this is true for same-sex married couples who reside in states that do not recognize same-sex marriage. As of August 1, 2013, same-sex marriage is recognized in California, Connecticut, Delaware, Iowa, Maine, Massachusetts, Maryland, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington, and the District of Columbia. 

The IRS posted an announcement on its website shortly after the Supreme Court's decision.  The agency promised it would "move swiftly to provide revised guidance in the near future."  To date, that is the only official announcement from the IRS. As a result, there has been much speculation on how the IRS will treat same-sex married couples post-DOMA.  

Common-law marriages

The IRS may take the same approach to same-sex marriage as it did more than 50 years ago with common-law marriage. Some states recognize common-law marriage; others do not. Common-law marriage is a term used to describe a marriage that has not complied with the statutory requirements most states have enacted for a ceremonial marriage.

In Rev. Rul. 58-66, the IRS announced that if a state recognizes common-law marriages, the status of individuals living in this relationship is, for federal income tax purposes, that of husband and wife. This rule also applies in the case of taxpayers who enter into a common-law marriage in a state that recognizes their relationship and who move to a state that does not recognize common-law marriage.  The IRS still treats the common-law couple as married even if they no longer live in a state that recognizes their marriage. The IRS could treat same-sex married couples, who marry in a state that recognizes same-sex marriage and who move to a state that does not recognize their marriage, in the same way.

Other federal agencies

Within days of the Supreme Court's decision, the U.S. Department of Homeland Security (DHS) announced that it would use the location of legal marriage for a same-sex couple for immigration purposes. On July 17, DHS' Bureau of Immigration Appeals (BIA) made its first official decision post-DOMA. The BIA held that DOMA would no longer be an impediment to the recognition of lawful same-sex marriages and will recognize same-sex spouses under the Immigration and Nationality Act if the marriage is valid under the laws of the state where it was celebrated.

The U.S. government's Office of Personnel Management (OPM) also announced some changes in its benefits post-DOMA. OPM told federal employees that all legally married same-sex spouses and children of legal same-sex marriages will be eligible family members under the federal employees' group life insurance program. Additionally, all legally married same-sex spouses will be able to apply for long-term care insurance under the federal long-term care insurance program.

The U.S. Department of Labor is expected to issue guidance on the status of same-sex spouses under the Family and Medical Leave Act (FMLA).  FMLA entitles eligible employees of covered employers to take unpaid, job-protected leave for specified family and medical reasons with continuation of group health insurance coverage under the same terms and conditions as if the employee had not taken leave.  Because of DOMA, spouse was defined only as a person of the opposite sex who is a husband or wife.

Employers

Many employers are revisiting their employee benefits post-DOMA. Employers may need to review their health and retirement plans, as well as their FMLA and other leave policies. A same-sex married couple presumably would have the same rights to tax-exempt spousal coverage under a health plan and the right to a joint and survivor annuity under a retirement plan as an opposite sex-married couple. The IRS and DOL are expected to issue guidance on how quickly employers must act to make changes to health and retirement plans to reflect the Supreme Court's decision.

If you have any questions about the IRS's expected guidance regarding any of the post-DOMA issues, please contact our office.

A business can deduct only ordinary and necessary expenses. Further, the amount allowable as a deduction for business meal and entertainment expenses, whether incurred in-town or out-of-town is generally limited to 50 percent of the expenses. (A special exception that raises the level to 80 percent applies to workers who are away from home while working under Department of Transportation regulations.)

A business can deduct only ordinary and necessary expenses. Further, the amount allowable as a deduction for business meal and entertainment expenses, whether incurred in-town or out-of-town is generally limited to 50 percent of the expenses. (A special exception that raises the level to 80 percent applies to workers who are away from home while working under Department of Transportation regulations.)

Related expenses, such as taxes, tips, and parking fees must be included in the total expenses before applying the 50-percent reduction. The 50-percent reduction is made only after determining the amount of the otherwise allowable deductions. However, allowable deductions for transportation costs to and from a business meal are not reduced.

The 50-percent deduction limitation also applies to meals and entertainment expenses that are reimbursed under an accountable plan to a taxpayer's employees. In that case, it doesn't matter if the taxpayer reimburses the employees for 100 percent of the expenses.

Employee-only meals.  If the value of any property or service provided to an employee is so minimal that accounting for the property or service would be unreasonable or administratively impracticable, it is a de minimis fringe benefit that is excluded for income and employment tax purposes.  Such benefits that are food-related may include occasional parties or picnics, occasional supper money due to overtime work, and employer-furnished coffee and doughnuts.

A subsidized eating facility can be a de minimis fringe if it is located on or near the business premises and the revenue derived from it normally equals or exceeds direct operating costs. Further, if more than one-half of the employees are furnished meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. Therefore, the meals are fully deductible by the employer, instead of possibly being subject to the 50-percent limit on business meal deductions, and excludable by the employees.

Facilitated by the speed, ubiquity, and anonymity of the Internet, criminals are able to easily steal valuable information such as Social Security numbers and use it for a variety of nefarious purposes, including filing false tax returns to generate refunds from the IRS. The victims are often unable to detect the crime until it is too late, generally after the IRS receives the legitimate tax return from the actual taxpayer. By that time the first return has often been long accepted and the refund processed. Because of the ease, speed, and difficulty involved in policing cybercrime, identity theft has grown rapidly. One estimate from the National Taxpayer Advocate Service has calculated that individual identity theft case receipts have increased by more than 666 percent from fiscal year (FY) 2008 to FY 2012.

Facilitated by the speed, ubiquity, and anonymity of the Internet, criminals are able to easily steal valuable information such as Social Security numbers and use it for a variety of nefarious purposes, including filing false tax returns to generate refunds from the IRS. The victims are often unable to detect the crime until it is too late, generally after the IRS receives the legitimate tax return from the actual taxpayer. By that time the first return has often been long accepted and the refund processed. Because of the ease, speed, and difficulty involved in policing cybercrime, identity theft has grown rapidly. One estimate from the National Taxpayer Advocate Service has calculated that individual identity theft case receipts have increased by more than 666 percent from fiscal year (FY) 2008 to FY 2012.

There is, however, another dangerous facet of identity theft that costs the government, taxpayers, and businesses millions of dollars each year. That is business identity theft, which like its consumer counterpart involves the theft or impersonation of a business's identity. To add insult to injury, business identity theft can have crippling federal tax consequences. The following article summarizes the problem of business taxpayer identity theft, the methods employed by thieves, and the means by which you can protect your business.

Business v. individual identity theft

Businesses generally deal with larger transactions, have larger account balances and credit lines than individual taxpayers, and can set up and accept merchant credit card payments with numerous banks. Business information regarding tax identification numbers, profit margins and revenues, officers, and even officer salaries are often public and easily accessed. At the same time remedies and enforcement tend to focus more on individual identity theft. Thus, business identity theft can be more lucrative and arguably less dangerous to engage in than individual taxpayer identity theft.

Methods used

Only some of the many business identity theft schemes relate to tax. Nevertheless, such schemes can be devastating for businesses, resulting in massive employment tax liabilities for fictitious wages or huge deficiencies in reported income. Identity thieves can use a business's employer identification number (EIN) to initiate merchant card payment schemes, file false tax returns, and even generate hundreds of fake Form W-2s in furtherance of more individual taxpayer identity theft.

How they do it

Business identity theft can require less effort than individual identity theft because less information is required to establish a business or open a line of credit than is required of individuals. In general, the thief needs to obtain the business's EIN, which is easy to acquire. Common sources for an EIN include:

• Filings made to the Securities and Exchange Commission (SEC) such as the Form 10-K, which includes the EIN on its first page;
• Public databases that enable users to search for business entities sometimes also display the employer's EIN;
• Websites specifically designed to search for EINs, such as EINFinder.com;
• Business websites sometimes openly display the EIN; and
• Forms W-2, W-9, or 1099.

Once a thief has the EIN, he or she may file reports with various state Secretaries of State to change registered business addresses, registered agents' names, or even appoint new officers. In some cases the thief will apply for a line of credit using this new information. Since the official Secretary of State records display the changed information, potential creditors will not be alerted to the fraud. In one case, however, criminals changed the names of a business's officers by filing with the Secretary of State's office and then sold the whole business to a third party. In the end, however, once an identity thief has established a business name, EIN, and address information, he or she has all the basic tools necessary to perpetrate business identity theft.

Best practices

Businesses should review their banks' policies and recommendations regarding fraud protection. They should know what security measures are being offered and, if commercially reasonable, take them. In a recent U.S. district court case from Missouri, the court found that a bank was not liable for a fraudulent $440,000 wire transfer because it had offered the business a commercially reasonable security procedure, and the business had rejected it. The decision cited Uniform Commercial Code Article 4A-202(b), as adopted by the Missouri Code. Many other states have also adopted the UCC, meaning victimized businesses might find themselves without recourse against their banks in the event of a large fraudulent wire transfer.

Other easy preventative measures that businesses can take include monitoring their financial accounts on a daily basis. They should follow up immediately on any suspicious activity. Businesses should also enroll in email alerts so that they would immediately be apprised of any change in your account name, address, or other information.

A business should also monitor the information on its business registration frequently, whether or not the business is active or inactive. Often businesses that close do not go through the formal dissolution process, which terminates all of the corporate authority. They instead let the charter be forfeited by the Secretary of State. These forfeited charters may be easily reinstated and hijacked by identity thieves.

After fraud occurs

If it is too late, and a fraudulent transaction has occurred in your business's name, take immediate action by contacting your bank, creditors, check verification companies, and credit reporting companies. Report the crime to your local law enforcement authorities and your state's secretary of state business division. Finally, whenever possible, memorialize all correspondence in writing and keep it in your records.

If you'd like more information on how you can take steps to safeguard your personal or business "identity" through safeguarding your tax and other financial accounts, please contact this office.

On June 26, the U.S. Supreme Court held that Section 3 of the federal Defense of Marriage Act (DOMA) is unconstitutional (E.S. Windsor, SCt., June 26, 2013). Immediately after the decision, President Obama directed all federal agencies, including the IRS, to revise their regulations to reflect the Court's order. How the IRS will revise its tax regulations - and when - remains to be seen; but in the meantime, the Court's decision opens a number of planning tax opportunities for same-sex couples.

On June 26, the U.S. Supreme Court held that Section 3 of the federal Defense of Marriage Act (DOMA) is unconstitutional (E.S. Windsor, SCt., June 26, 2013).  Immediately after the decision, President Obama directed all federal agencies, including the IRS, to revise their regulations to reflect the Court's order.  How the IRS will revise its tax regulations - and when - remains to be seen; but in the meantime, the Court's decision opens a number of planning tax opportunities for same-sex couples.

Background

The Supreme Court agreed in 2012 to hear an appeal of a federal estate tax case.  Due to DOMA, the surviving spouse of a same-sex married couple was ineligible for the federal unlimited marital deduction under Code Sec. 2056(a). The survivor sued for a refund of estate taxes. A federal district court and the Second Circuit Court of Appeals found unconstitutional Section 3 of DOMA, which defines marriage for federal purposes as only a legal union between one man and one woman as husband and wife.

Supreme Court's decision

In a 5 to 4 decision, the Supreme Court held that Section 3 of DOMA is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment.  Writing for the five-justice majority, Justice Anthony Kennedy said that "DOMA rejects the long-established precept that the incidents, benefits, and obligations of marriage are uniform for all married couples within each State, though they may vary, subject to constitutional guarantees, from one State to the next."  Kennedy explained that "by creating two contradictory marriage regimes within the same State, DOMA forces same-sex couples to live as married for the purpose of state law but unmarried for the purpose of federal law, thus diminishing the stability and predictability of basic personal relations the State has found it proper to acknowledge and protect."

Chief Justice John Roberts, who would have upheld DOMA, cautioned that "the Supreme Court did not decide if states could continue to utilize the traditional definition of marriage." Roberts noted that the majority held that the decision and its holding "are confined to those lawful marriages-referring to same-sex marriages that a State has already recognized."

Tax planning

The Supreme Court's decision impacts countless provisions in the Tax Code, covering all life events, such as marriage, employment, retirement and death.  The affect on the Tax Code cannot be overstated. It is expected that the IRS will move quickly to clarify how the decision impacts many of the more far-reaching provisions, such as filing status and employee benefits. Other provisions, especially the complex estate and gift tax provisions, will likely require more time from the IRS to issue guidance.

For federal tax purposes, only married individuals can file their returns as married filing jointly or married filing separately. Because of DOMA, the IRS limited these married filing statuses to opposite-sex married couples. The IRS is expected to issue guidance. Same-sex couples who filed separate returns may want to explore the benefits of filing amended returns (as married filing jointly), if applicable. Our office will keep you posted of developments.

Among the other provisions in the Tax Code affected by the Supreme Court's decision are:

• Adoption benefits
• Child tax credit
• Education tax credits and deductions
• Estate tax marital deduction
• Estate tax portability between spouses
• Gifts made by spouses
• Retirement plans

Looking ahead

Will the federal government look to where the same-sex couple was married (state of celebration) or where the same-sex couple reside (state of residence) for purposes of federal benefits? The Supreme Court did not rule on Section 2 of DOMA, which provides that no state is required to recognize a same-sex marriage performed in another state. At the time of the Supreme Court's decision, 12 states and the District of Columbia recognize same-sex marriage. 

In some cases, the rules for marital status are determined by federal regulations, which can be changed without action by Congress. In other cases, the rules are set by statute, which would require Congressional action. Sometimes, a federal agency follows one rule for some purposes but another rule for other purposes. Generally, the IRS has used place of domicile for determining marital status. Our office will keep you posted of developments.

If you have any questions about the Supreme Court's decision and its impact on tax planning, please contact our office.

Gain or loss is not recognized when property held for productive use in a trade or business or for investment is exchanged for like-kind property. Instead, the taxpayer's basis and holding period in the property transferred carries over to the property acquired in the exchange. Deferring taxable gain, always a good strategy, makes more sense than ever after the recent rise in tax rates for many taxpayers under the American Taxpayer Relief Act of 2012. In particular, Code Section 1031 like-kind exchanges deserve a close second look by many businesses and investors.

Gain or loss is not recognized when property held for productive use in a trade or business or for investment is exchanged for like-kind property. Instead, the taxpayer's basis and holding period in the property transferred carries over to the property acquired in the exchange. Deferring taxable gain, always a good strategy, makes more sense than ever after the recent rise in tax rates for many taxpayers under the American Taxpayer Relief Act of 2012.  In particular, Code Section 1031 like-kind exchanges deserve a close second look by many businesses and investors.

Flexibility

More than two properties can be exchanged and more than two parties can participate in a transaction that qualifies for non-recognition treatment. Intermediaries may be used to purchase other property before completing like-kind exchange. Taxpayers can participate in acquisition of other property and qualify for like-kind treatment if there is no actual or constructive receipt of cash proceeds from sale of their property.
It is not required that the properties be given up and received on the same day. However, if the exchange of properties is not simultaneous, the property to be received must be identified within 45 days after the date the relinquished property is transferred. In addition, the identified property must be received within 180 days after the date of transfer or the due date for the return for the tax year in which the transfer occurred, whichever date is earlier.

Certain limitations

Property not qualifying for this treatment includes inventory, securities, foreign real estate and foreign personal property. In an otherwise qualifying exchange, the receipt of boot, in the form of cash, relief from liability, or other non-qualifying property, results in the recognition of realized gain or loss to the extent of the boot received. However, gain so recognized can be postponed if the installment sale rules apply. Depreciation recapture may also result from a like-kind exchange. Losses are not recognized on the acquisition of like-kind property. To recognize a loss, the transaction must be arranged so that the non-recognition provision does not apply.

Literal conformity to the requirements of the non-recognition provisions may not be sufficient to prevent recognition of gain. The substance of the transaction must also satisfy the underlying purpose of the statute. Continuity of investment purpose continues to be emphasized as the primary rationale for non-recognition in a like-kind exchange.

Latest success story

IRS Chief Counsel just this past month approved a taxpayer's exchange of properties as tax-free under Code Sec. 1031 even though the taxpayer used proceeds from the sale of relinquished property to pay down its liabilities. In CCA 201325011, Chief Counsel determined that such use did not trigger constructive receipt. Although taking a look at this winning arrangement may get a bit technical, it is worthwhile if only to provide another example of how like-kind exchange transactions can help your business's tax expenses.

The arrangement. The taxpayer rents equipment to customers. The taxpayer has implemented a like-kind exchange (LKE) program to defer gain from the sales of its rental equipment. The taxpayer has engaged in multiple exchanges under a Master Exchange Agreement (MEA) with a qualified intermediary (QI). Under the MEA, the taxpayer transfers relinquished property to the QI. The QI transfers the relinquished property and acquires replacement property, which it transfers to the taxpayer.

The taxpayer maintains two lines of credit, which are used to purchase replacement property. The taxpayer also uses the lines of credit for general business operations. The lines of credit are secured by the taxpayer's rental properties, accounts receivable, and new equipment sold to customers. The full value of the rental property secures the entire balance on the lines of credit.

The QI must deposit sales proceeds from relinquished property into a joint taxpayer/QI account, and must use the proceeds to pay down the line-of-credit balances. The QI does not use proceeds from the account receivables or the new equipment sales to pay down the lines of credit. The taxpayer then uses borrowed funds to acquire replacement property and complete its exchange. The taxpayer finances the acquisition with new debt in an amount that equals or exceeds the debt that encumbered the relinquished property. Under the MEA, the taxpayer does not have the right to receive, pledge, borrow or otherwise use the money held by the QI.

Chief Counsel's analysis.  The IRS field attorney argued that the debt pay-down arrangement gives the taxpayer actual or constructive receipt of the proceeds from the relinquished property before the deadline for the taxpayer to obtain replacement property. IRS Chief Counsel's Office, however, disagreed. It concluded that the taxpayer was not in constructive receipt of the proceeds received for the relinquished property. This conclusion was not affected by the use of the debt to purchase replacement property and for general business operations, or the QI's use of the proceeds to pay down the lines of credit.
If a taxpayer receives, in part, non-like-kind property, the taxpayer must recognize gain (boot) for the amount of this property. The assumption of a liability, or the transfer of property subject to a liability, is treated as boot. If the relinquished property and the replacement property are both subject to a liability (such as a mortgage), the liabilities are netted and the difference is boot to the party being relieved of the larger mortgage.

Chief Counsel concluded that the taxpayer's transaction was permitted by the regulations where the taxpayer is relieved of debt on the transfer of relinquished property and incurs debt on the acquisition of the replacement property. Under the boot netting rules, there is no gain to the taxpayer.

If you would like further information on how like-kind exchanges might work within your business operations, please do not hesitate to contact our offices.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

Additional tax on higher-income earners

There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.

The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).

Passthrough treatment

For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.

Withholding rules

Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.

Planning techniques

One planning device to minimize the tax  would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.

Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.

If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.

Certain planning techniques involve the use of interest rates to value interests being transferred to charity or to private beneficiaries. While the use of these techniques does not necessarily depend on the interest rate, low interest rates may increase their value.

Certain planning techniques involve the use of interest rates to value interests being transferred to charity or to private beneficiaries. While the use of these techniques does not necessarily depend on the interest rate, low interest rates may increase their value.

Taxpayers can obtain a deduction by giving a partial interest in property to a charity, using a trust. Two types of trusts for this purpose are charitable lead trusts and charitable remainder trusts. In a charitable lead trust, the taxpayer funding the trust gives an income interest to charity and the remainder interest to a family member or other preferred beneficiary. In a charitable remainder trust, an individual receives trust income and a charity is entitled to the remainder interest.

AFRs

The IRS’s applicable federal rate (AFR) is used to value these different interests in trusts. Right now, AFRs are relatively low. For example, for May 2017, the AFR for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest is only 2.4 percent, a low rate when compared to many past years.

CLTs

When AFRs are low, certain transfer mechanisms become even more useful. In a charitable lead trust (CLT), a low AFR increases the present value of the charity’s income interest. This increases the value of the charitable deduction for the income interest, and reduces the value of the remainder interest passing to private individuals. (For a charitable remainder trust, the same mechanism increases the present value of the individual beneficiary’s income interest, and reduces the value of the remainder interest going to charity.)

PRTs

Another device is a personal residence trust (PRT), where the grantor retains the right to live in the house, instead of receiving income payments, and gives the remainder interest in the property to charity. This provides a current charitable deduction. The amount of the charitable contribution is the fair market value of the property, discounted by the AFR. The lower the AFR, the higher is the value of the remainder interest, and the greater the charitable deduction.

A PRT can also be used to give the remainder interest to a family member or other individual. In this case, the transfer of the remainder interest is subject to gift tax. The lower the AFR, the greater is the value of the remainder interest, and the greater the gift tax.

Loans to family members

Another situation in which low interest rates can work to a taxpayer’s advantage is a loan between family members. For the loan to be bona fide, interest generally must be charged on the loan. However, the lower the AFR, the lower will be the market rate for interest that has to be charged to the borrower. If the interest rate is too low, the IRS may impute a higher rate of interest on the loan, which could result in a gift of the foregone interest to the borrower. Again, when the AFR is low, the lender can make a loan at a lower interest rate.

If you are interested in exploring further how any of the above-mentioned planning techniques can benefit your tax situation especially while interest rates remain low, please do not hesitate to contact this office.

Although it is generally not considered prudent to withdraw funds from a retirement savings account until retirement, sometimes it may appear that life leaves no other option. However, borrowing from certain qualified retirement savings account rather than taking an outright distribution might prove the best solution to getting you through a difficult period. If borrowing from a 401(k) plan or other retirement savings plan becomes necessary, for example to pay emergency medical expenses or for a replacement vehicle essential to getting to work, you should be aware that there is a right way and a number of wrong ways to go about it.

Although it is generally not considered prudent to withdraw funds from a retirement savings account until retirement, sometimes it may appear that life leaves no other option. However, borrowing from certain qualified retirement savings account rather than taking an outright distribution might prove the best solution to getting you through a difficult period. If borrowing from a 401(k) plan or other retirement savings plan becomes necessary, for example to pay emergency medical expenses or for a replacement vehicle essential to getting to work, you should be aware that there is a right way and a number of wrong ways to go about it.

When a plan loan is not a taxable distribution

In general, a loan from a qualified employer plan, such as a 401(a) or 401(k) account, must be treated as a taxable distribution unless you can meet certain requirements with respect to amount, repayment period, and repayment method.

First, however, the terms of the employer-plan must allow for plan loans. Due to administrative costs and other considerations, plan loans are made optional for employer plans. If permitted, however, loans must be made available to all employees.

A loan to a participant or beneficiary is generally not treated as a taxable distribution if:

• The loan is evidenced by a legally enforceable written agreement that specifies the amount and term of the loan and the repayment schedule;
• The amount of the loan does not exceed $50,000 or half of the participant's vested accrued benefit under the plan (whichever is less);
• The loan, by its terms, requires repayment within five years, except for certain home loans; and
• The loan is amortized in level installments over the term of the loan.

Plan loans may be made only from employer-based plans. Individual retirement accounts (IRAs) cannot be used as collateral for a loan, nor can a direct loan be made from the IRA to the account holder.

Calculating the amount of the plan loan

In addition to the $50,000 or 50 percent vested benefit rule, several other provisions apply to the amount of the plan loan. First, a plan participant may take out a loan of up to $10,000, even if that $10,000 is more than one-half of the present value of his vested accrued benefit. Second, if a plan participant decides to take out another plan loan, the new maximum amount of the total plan loans will be determined by the following method:

($50,000 − (highest outstanding loan balance during the preceding 12-month period − outstanding balance on the date of the new loan)) = new plan loan maximum.

That new plan maximum must be reduced further by any outstanding loan balance.

Repayment period

Participants must repay a loan within five years. There is one exception, however, for a loan used to make a purchase of a first-time home that is a principal residence. The loan term may then be as long as 30 years.

If a participant defaults on a loan payment, the entire principal may become due under the terms of the plan. In addition, most plan terms require that you repay the loan within 60 days if you leave or lose your job. If you cannot repay at that time, the balance of the loan is usually considered a taxable distribution deducted from your remaining retirement plan account balance. That deemed distribution may also incur a 10 percent early distribution penalty.

Repayment method

Loan repayments must be made at least every quarter, and are generally deducted automatically from a participant’s paycheck. Defaulting on a loan causes the IRS to treat the entire outstanding loan balance as a premature (and therefore a taxable) distribution from the employer plan. A deemed distribution occurs at the time of the failure to pay an installment, but the plan administrator can allow a grace period. The deemed distribution then becomes subject to both income tax and the 10 percent early withdrawal penalty.

There are benefits to borrowing from an employer retirement plan, such as providing a ready-made source of credit and the benefit of returning interest paid back into the plan account rather than into the pockets of a third-party lender. There are also many drawbacks to taking out a plan loan. To learn more, please contact our offices.

Deductible investment expenses fall into three basic categories:

Deductible investment expenses fall into three basic categories:

(1)  Expenses that are directly deductible against particular items of income, without reduction;
(2)  Expenses of producing income that are taken as miscellaneous itemized deductions; and
(3)  Investment interest expense.

The first category applies to rent and royalty income. Expenses attributable to rents and royalties may be deducted in full from gross income in computing adjusted gross income. The expenses are allowed whether or not the taxpayer itemizes deductions. Rental and royalty income and deductions are reported on Schedule E, Supplemental Income and Loss. The totals are then carried over to Form 1040, line 17 (note: references to particular line numbers in this article are to the 2011 Form 1040 since the IRS is not expected to release 2012 Form 1040 until late December, after Congress acts on 2012 legislation).

This first category also applies to direct costs from purchasing and selling stock (e.g. sales commissions) that are included in cost basis or deducted from amounts realized.

The second category applies to a host of expenses that may be related to investments and financial activities but do not necessarily relate to a particular investment. These expenses can be deducted as ordinary and necessary expenses incurred either for the production of income, or for the management, conservation, or maintenance of property held for the production of income. Examples include expenses for investment counsel, investment advice and management, custodial fees, office rent, clerical help, travel to broker’s offices and investment sites, bank fees and safe deposit box rentals, fees for IRAs, and subscriptions to investment-related publications.

This second category is included in miscellaneous itemized deductions on line 23 (other expenses) of Form 1040, Schedule A, Itemized Deductions (2011 form). Miscellaneous itemized deductions, together with unreimbursed job expenses and tax preparation fees, are only deductible to the extent their total exceeds two percent of adjusted gross income (line 38 of 2011 Form 1040). Most taxpayers will only choose to report their itemized deductions if they exceed the standard deduction, which for 2011 is $11,600, married filing jointly and qualified widow or widower; $8,500, head of household; and $5,800, single taxpayers or married filing jointly.

The third category is investment interest expense. Money borrowed to buy property that is held for investment is investment interest. The deduction is limited to net investment income, determined after deducting investment expenses, such as depreciation, that are directly connected with the production of the investment income. The deductible amount is calculated on Form 4952, Investment Interest Expense Deduction, and carried over to Line 14 (Interest You Paid) of Schedule A.

Taxpayers cannot deduct interest incurred to produce tax-exempt income. Investment interest does not include home mortgage interest or interest taken into account in computing income or loss from a passive activity.

As you can see, the deduction of investment expenses can be complex.  Timing these expenses to align themselves with more comprehensive strategies, such as at year end, can create additional issues.  If you have questions about the treatment of these expenses, please contact our office.

In recent years, the IRS has been cracking down on abuses of the tax deduction for donations to charity and contributions of used vehicles have been especially scrutinized. The charitable contribution rules, however, are far from being easy to understand. Many taxpayers genuinely are confused by the rules and unintentionally value their contributions to charity at amounts higher than appropriate.

In recent years, the IRS has been cracking down on abuses of the tax deduction for donations to charity and contributions of used vehicles have been especially scrutinized. The charitable contribution rules, however, are far from being easy to understand. Many taxpayers genuinely are confused by the rules and unintentionally value their contributions to charity at amounts higher than appropriate.

Vehicle donations

According to the U.S. Department of Transportation (DOT), there are approximately 250 million registered passenger motor vehicles in the United States. The U.S. is the largest passenger vehicle market in the world.  Potentially, each one of these vehicles could be a charitable donation and that is why the IRS takes such a sharp look at contributions of used vehicles and claims for tax deductions. The possibility for abuse of the charitable contribution rules is large.

Bona fide charities

Before looking at the tax rules, there is an important starting point.  To claim a tax deduction, your contribution must be to a bona fide charitable organization. Only certain categories of exempt organizations are eligible to receive tax-deductible charitable contributions. 

Many charitable organizations are so-called “501(c)(3)” organizations (named after the section of the Tax Code that governs charities. The IRS maintains a list of qualified Code Sec. 501(c)(3) organizations. Not all charitable organizations are Code Sec. 501(c)(3)s. Churches, synagogues, temples, and mosques, for example, are not required to file for Code Sec. 501(c)(3) status. Special rules also apply to fraternal organizations, volunteer fire departments and veterans organizations. If you have any questions about a charitable organization, please contact our office.

Tax rules

In past years, many taxpayers would value the amount of their used vehicle donation based on information in a buyer’s guide. Today, the value of your used vehicle donation depends on what the charitable organization does with the vehicle.

In many cases, the charitable organization will sell your used vehicle. If the charity sells the vehicle, your tax deduction is limited to the gross proceeds that the charity receives from the sale. The charitable organization must certify that the vehicle was sold in an arm’s length transaction between unrelated parties and identify the date the vehicle was sold by the charity and the amount of the gross proceeds. 

There are exceptions to the rule that your tax deduction is limited to the gross proceeds that the charity receives from the sale of your used vehicle. You may be able to deduct the vehicle’s fair market value if the charity intends to make a significant intervening use of the vehicle, a material improvement to the vehicle, or give or sell the vehicle to a qualified needy individual. If you have any questions about what a charity intends to do with your vehicle, please contact our office.

Written acknowledgment

The charitable organization must give you a written acknowledgment of your used vehicle donation. The rules differ depending on the amount of your donation.  If you claim a deduction of more than $500 but not more than $5,000 for your vehicle donation, the written acknowledgment from the charity must:

• Identify the charity’s name, the date and location of the donation
• Describe the vehicle
• Include a statement as to whether the charity provided any goods or services in return for the car other than intangible religious benefits and, if so, a description and good faith estimate of the value of the goods and services
• Identify your name and taxpayer identification number
• Provide the vehicle identification number

The written acknowledgement generally must be provided to you within 30 days of the sale of the vehicle.  Alternatively, the charitable organization may in certain cases, provide you a completed Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, that contains the same information.

The written acknowledgment requirements for claiming a deduction under $500 or over $5,000 are similar to the ones described above but there are some differences. For example, if your deduction is expected to be more than $5,000 and not limited to the gross proceeds from the sale of your used vehicle, you must obtain a written appraisal of the vehicle. Our office can help guide you through the many steps of donating a vehicle valued at more than $5,000.

If you are planning to donate a used vehicle, please contact our office and we can discuss the tax rules in more detail.

The Tax Code provides that the IRS generally may not select an individual, partnership, or corporate tax return for audit after a period of three years has expired, dating from the tax return's filing date or due date, whichever is later. For example, if a taxpayer filed his 2011 Form 1040 on February 10, 2012, and the due date for the filing of returns that year was April 17, 2012, then the statute of limitations period ends on April 17, 2015, and not February 10, 2015. On the other hand, if the taxpayer filed his tax return late, on November 10, 2012, and had not obtained an extension of time to file, the statute of limitations period would run from November 10, 2012.

The Tax Code provides that the IRS generally may not select an individual, partnership, or corporate tax return for audit after a period of three years has expired, dating from the tax return's filing date or due date, whichever is later. For example, if a taxpayer filed his 2011 Form 1040 on February 10, 2012, and the due date for the filing of returns that year was April 17, 2012, then the statute of limitations period ends on April 17, 2015, and not February 10, 2015. On the other hand, if the taxpayer filed his tax return late, on November 10, 2012, and had not obtained an extension of time to file, the statute of limitations period would run from November 10, 2012.

If a taxpayer receives an extension of time to file the return (for example, an automatic six-month extension until October 15), however, the return is considered filed on the actual date of filing rather than the extension date.  On the other hand, filing an amended tax return, such as a Form 1040X, however, would generally have no effect on the three-year period if it does not increase tax liability. For example, if the taxpayer filed his tax return on April 17, 2012, subsequently discovered a missing item of deduction, and filed an amended return on May 15, 2012 that did not increase his tax liability, the three-year state of limitations period will still run from April 17, 2012 to April 17, 2015.

For more information on the statute of limitations on tax assessments and any exceptions, please contact our office.