President Trump on March 27 signed the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The House approved the historically large emergency relief measure by voice vote just hours before Trump’s signature. The CARES Act cleared the Senate unanimously on March 25, by a 96-to-0 vote.

President Trump on March 27 signed the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The House approved the historically large emergency relief measure by voice vote just hours before Trump’s signature. The CARES Act cleared the Senate unanimously on March 25, by a 96-to-0 vote.

Generally, the following individual and business tax-related provisions are included in what lawmakers have dubbed the "phase three" COVID-19 emergency relief package:

• Direct cash payments of up to $1,200 for certain individual taxpayers and $2,400 for certain married couples filing jointly; those amounts would increase by $500 for every eligible child;
• The 10-percent early withdrawal penalty is waived for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes;
• Payments delayed for employer-side payroll taxes;
• The taxable income limit is eliminated for certain net operating losses (NOL) and businesses and individuals can carry back NOLs arising in 2018, 2019, and 2020 to the last five tax years;
• Excess business loss rules suspended under section 461(l);
• Refunds accelerated of previously generated corporate AMT credits;
• Forgivable loans to small businesses that retain their employees throughout this crisis;
• Temporarily enact provisions of the bipartisan Employer Participation in Repayment Act, which would allow employers to contribute up to $5,250 tax-free to help pay down their employees’ student loans; and
• Various technical corrections to the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), including the so-called retail glitch.

Wolters Kluwer Special Report CARES Act Tax Briefing
Wolters Kluwer provides a detailed discussion of the tax-related provisions under the CARES Act in the "Special Report CARES Act (COVID-19 Economic Stimulus) Tax Briefing" (at https://engagetax.wolterskluwer.com/Cares-Act.pdf).

Let’s Work Together
Treasury Secretary Steven Mnuchin, who spent many late nights in the U.S. Capitol recently participating in bipartisan negotiations on the Senate’s CARES Act, thanked Republican and Democratic leadership in both the Senate and the House for their bipartisanship. "I am pleased that Congress has passed the CARES Act, the largest economic relief package in history for hardworking Americans and businesses that, through no fault of their own, have been adversely impacted by the coronavirus outbreak," Mnuchin said in a March 27 press release. "President Trump is fully committed to ensuring that American workers and businesses have the resources they need. This legislation provides much-needed relief to help our fellow Americans overcome this difficult but temporary challenge."

Phase Four Economic Relief Package
The CARES Act is considered "phase three" of lawmakers’ and the Trump administration’s collaborative response to the COVID-19 pandemic. Meanwhile, lawmakers on both sides of the aisle, including House Ways and Means Committee Chair Richard Neal, D-Mass., have said they want to see a fourth economic relief measure.

"Our work to help Americans during this emergency won’t stop here. Congress must do more to address the significant public health and economic consequences of the coronavirus," Neal said in a March 27 statement. "In a fourth response package, I want to provide any needed additional support to people who have lost their incomes and to affected patients and health care providers. We should take bold action to improve our country’s economic health too," he added. Additionally, Neal said that he would like to see the Earned Income Tax Credit (EITC) and the Child Tax Credit expanded, as well as infrastructure investments to put people back to work and reinvigorate the economy.

Legislative View – Looking Back and Ahead
"From a legislative view, the CARES Act shares the key characteristics that we’ve seen with other emergency legislation, namely bipartisan willingness to forego typical concerns over cost and take action at unusual speed," John Gimigliano, principal-in-charge of federal legislative and regulatory services in the Washington National Tax practice of KPMG LLP, told Wolters Kluwer in a March 27 emailed statement. "Similar dynamics were apparent in other emergency legislation including bills enacted after the attacks of September 11, Hurricane Katrina, and during the financial crisis," Gimigliano added. "But those precedents also show that each of those three characteristics begins to break down with successive legislative attempts. That made quick passage of the CARES Act key and the development of a ‘coronavirus 4’ package something to watch closely."

Lawmakers are continuing talks on a "phase four" economic relief package in response to the COVID-19 global pandemic. To that end, the House’s "CARES 2" package is currently in the works and could see a floor vote as early as this month.

Lawmakers are continuing talks on a "phase four" economic relief package in response to the COVID-19 global pandemic. To that end, the House’s "CARES 2" package is currently in the works and could see a floor vote as early as this month.

"CARES 2"
President Trump signed into law the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-127) on March 27. The CARES Act is known on Capitol Hill as the third phase of legislation aimed to address the national emergency. However, House Speaker Nancy Pelosi, D-Calif., has said that a House floor vote on a "CARES 2" package could happen later in April.

"The acceleration of the coronavirus crisis demands that we continue to legislate," Pelosi said in a "Dear Colleagues" letter sent out to members during the week of April 6. "We must double down on the down-payment we made in the CARES Act by passing a CARES 2 package, which will extend and expand this bipartisan legislation to meet the needs of the American people," she added. According to Pelosi, the CARES 2 package would (1) go further in assisting small businesses (including farmers), (2) extend and strengthen unemployment benefits, and (3) distribute additional direct payments.

"Our communities cannot afford to wait, and we must move quickly," Pelosi wrote. "It is my hope that we will craft this legislation and bring it to the Floor later this month."

Paycheck Protection Program
Meanwhile, the Trump administration is seeking an increase in funding for the CARES Act’s Paycheck Protection Program. Accordingly, several bipartisan lawmakers have called for congressional action to provide the necessary funding needed for small businesses. The administration is reportedly asking for an additional $250 billion for the largely overrun loan program.

"Through this tax break, workers can get back on payrolls and stay there. By working with their bank, small businesses can get eight weeks of cash-flow assistance through 100 percent federally guaranteed loans," House Ways and Means ranking member Kevin Brady, R-Tex., said on April 7. "If the business [including churches] uses the money to maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven."

Likewise, Senate Majority Leader Mitch McConnell, R-Ky., called for swift action on the matter. "Congress needs to act with speed and total focus to provide more money for this uncontroversial bipartisan program," McConnell said on April 7. "I will work with [Treasury] Secretary Steven Mnuchin and [Senate Minority Leader Chuck] Schumer and hope to approve further funding for the Paycheck Protection Program by unanimous consent or voice vote during the next scheduled Senate session on Thursday."

The IRS announced on March 30 that distribution of economic impact payments in response to the coronavirus (COVID-19) pandemic would begin in the next three weeks. On April 1, the Treasury Department clarified that Social Security and Railroad Retirement benefit recipients who are not required to file a federal tax return will not have to file a return in order to receive their economic impact payment.

The IRS announced on March 30 that distribution of economic impact payments in response to the coronavirus (COVID-19) pandemic would begin in the next three weeks. On April 1, the Treasury Department clarified that Social Security and Railroad Retirement benefit recipients who are not required to file a federal tax return will not have to file a return in order to receive their economic impact payment.

Eligibility Based on Returns, Generally
Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals, $2,400 for married couples, and up to $500 for each qualifying child. The payment amount will be reduced based on adjusted gross income (AGI). The phase-out begins at AGI above $75,000 for single individuals, $150,000 for joint filers, with the payment amount reduced by $5 for each $100 above the thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.

The IRS will generally base the payment amount on information from:

• the 2019 tax return for taxpayers who have filed their 2019 return; or
• the 2018 tax return for taxpayers who have not yet filed the their 2019 return.

1099s Used for Certain Recipients
The IRS will use the information on the Form SSA-1099 or Form RRB-1099 to generate economic impact payments to recipients of benefits reflected in the Form SSA-1099 or Form RRB-1099 who are not required to file a tax return and did not file a return for 2018 or 2019. This includes senior citizens, Social Security recipients and railroad retirees who are not otherwise required to file a tax return.

These recipients will receive these payments as a direct deposit or by paper check, just as they would normally receive their benefits.

No payments for dependents, currently. Since the IRS would not have information regarding any dependents for these recipients, each person would receive $1,200 per person, without the additional amount for any dependents at this time.

Other Details
The IRS has addressed other common queries related to economic impact payments:

• Calculating and depositing the payment: The IRS will calculate and automatically send the economic impact payment to those eligible. The economic impact payment will be deposited directly into the same banking account reflected on the 2019 tax returns filed by taxpayers.
• Direct deposit information: A web-based portal for individuals is being developed to provide the taxpayers’ banking information to the IRS online, so that they can receive payments immediately as opposed to checks in the mail.
• Taxpayers who have not filed their tax return for 2018 or 2019: The IRS urges taxpayers with an outstanding tax filing obligation for 2018 or 2019 to file sooner to receive an economic impact payment. Taxpayers should include direct deposit banking information on their tax returns.
• Availability of economic impact payments: The IRS states that for those concerned about visiting a tax professional or local community organization in person to get help with a tax return, the economic impact payments will be available throughout the rest of 2020.

More Information
Even though it currently has a reduced staff in many of its offices, the IRS assures taxpayers that it remains committed to helping eligible individuals receive their payments expeditiously. The IRS urges taxpayers to visit its Coronavirus Tax Relief webpage ( https://www.irs.gov/coronavirus for updated information related to economic impact payments, rather than calling IRS assistors who are helping process 2019 returns.

For the latest information on the economic impact payments, see the IRS’s "Economic impact payments: What you need to know" webpage ( https://www.irs.gov/newsroom/economic-impact-payments-what-you-need-to-know).

The Treasury Department and IRS have provided a notice with additional relief for taxpayers, postponing until July 15, 2020, a variety of tax form filings and payment obligations that are due between April 1, 2020 and July 15, 2020. Associated interest, additions to tax, and penalties for late filing or late payment will be suspended until July 15, 2020. Additional time to perform certain time-sensitive actions during this period is also provided. The notice also postpones due dates with respect to certain government acts and postpones the application date to participate in the Annual Filing Season Program. This notice expands upon the relief provided in Notice 2020-18, I.R.B. 2020-15, 590, and Notice 2020-20, I.R.B. 2020-16, 660.

The Treasury Department and IRS have provided a notice with additional relief for taxpayers, postponing until July 15, 2020, a variety of tax form filings and payment obligations that are due between April 1, 2020 and July 15, 2020. Associated interest, additions to tax, and penalties for late filing or late payment will be suspended until July 15, 2020. Additional time to perform certain time-sensitive actions during this period is also provided. The notice also postpones due dates with respect to certain government acts and postpones the application date to participate in the Annual Filing Season Program. This notice expands upon the relief provided in Notice 2020-18, I.R.B. 2020-15, 590, and Notice 2020-20, I.R.B. 2020-16, 660.

NOTE: The relief is limited to the relief explicitly provided in Notice 2020-18, Notice 2020-20, and Notice 2020-23, and does not apply for any other type of federal tax, any other type of federal tax return, or any other time-sensitive act.

Relief Measures

• Taxpayers Affected by COVID-19 Emergency. Any person (as defined in Code Sec. 7701(a)(1)) with a federal tax payment obligation specified in the notice, or a federal tax return or other form filing obligation specified in the notice, which is due to be performed (originally or pursuant to a valid extension) on or after April 1, 2020, and before July 15, 2020, is affected by the COVID-19 emergency for purposes of the relief.
• Postponement of Due Dates. For an affected taxpayer, the due date for filing specified forms and making specified payments is automatically postponed to July 15, 2020. This relief is automatic: affected taxpayers do not have to call the IRS or file any extension forms, or send letters or other documents to receive this relief. However, affected taxpayers who need additional time to file may choose to file the appropriate extension form by July 15, 2020, to obtain an extension to file their return, but the extension date may not go beyond the original statutory or regulatory extension date.
• Specified Time-Sensitive Actions. Affected taxpayers also have until July 15, 2020, to perform all specified time-sensitive actions listed in either Reg. §301.7508A-1(c)(1)(iv) - (vi) or Rev. Proc. 2018-58, I.R.B. 2018-50, 990, that are due to be performed on or after April 1, 2020, and before July 15, 2020. This includes the time for filing all petitions with the Tax Court, or for review of a decision rendered by the Tax Court, filing a claim for credit or refund of any tax, and bringing suit upon a claim for credit or refund of any tax.
• Certain Government Acts. The notice also provides the IRS with additional time to perform the time-sensitive actions described in Reg. §301.7508A-1(c)(2). Due to the COVID-19 emergency, IRS employees, taxpayers, and other persons may be unable to access documents, systems, or other resources necessary to perform certain time-sensitive actions due to office closures or state and local government executive orders restricting activities.
• Annual Filing Season Program. Under Rev. Proc. 2014-42, I.R.B. 2014-29, 192, applications to participate in the Annual Filing Season Program for the 2020 calendar year must be received by April 15, 2020. The relief postpones the 2020 calendar year application deadline to July 15, 2020.

Specified Forms and Payments
The filing and payment obligations covered by the relief are the following:

• Individual income tax payments and return filings on Form 1040, Form 1040-SR, Form 1040-NR, Form 1040-NR-EZ, Form 1040-PR, and Form 1040-SS.
• Calendar year or fiscal year corporate income tax payments and return filings on Form 1120, Form 1120-C, Form 1120-F, Form 1120-FSC, Form 1120-H, Form 1120-L, Form 1120-ND, Form 1120-PC, Form 1120-POL, Form 1120-REIT, Form 1120-RIC, Form 1120-S, and Form 1120-SF.
• Calendar year or fiscal year partnership return filings on Form 1065 and Form 1066.
• Estate and trust income tax payments and return filings on Form 1041, Form 1041-N, and Form 1041-QFT.
• Estate and generation-skipping transfer tax payments and return filings on Form 706, Form 706-NA, Form 706-A, Form 706-QDT, Form 706-GS(T), Form 706-GS(D), Form 706-GS(D-1), and Form 8971.
• Gift and generation-skipping transfer tax payments and return filings on Form 709 that are due on the date an estate is required to file Form 706 or Form 706-NA.
• Estate tax payments of principal or interest due as a result of an election made under Code Secs. 6166, 6161, or 6163 and annual recertification requirements under Code Sec. 6166.
• Exempt organization business income tax and other payments and return filings on Form 990-T.
• Excise tax payments on investment income and return filings on Form 990-PF and return filings on Form 4720.
• Quarterly estimated income tax payments calculated on or submitted with Form 990-W, Form 1040-ES, Form 1040-ES (NR), Form 1040-ES (PR), Form 1041-ES, and Form 1120-W.
  Notice 2020-18, I.R.B. 2020-15, 590, and Notice 2020-20, I.R.B. 2020-16 are amplified. Rev. Proc. 2014-42, I.R.B. 2014-29, 192, is modified, applicable for calendar year 2020.

synopsisThe Treasury Department and the IRS have released the "Get My Payment" tool to assist Americans in receiving their “economic impact payments” issued under the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The free tool went live on April 15, and is located at https://www.irs.gov/coronavirus/get-my-payment.

The Treasury Department and the IRS have released the "Get My Payment" tool to assist Americans in receiving their “economic impact payments” issued under the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The free tool went live on April 15, and is located at https://www.irs.gov/coronavirus/get-my-payment.

Get My Payment
The "Get My Payment" tool generally allows consumers to check the status of their payments, and to enter their direct deposit information if the IRS does not already have it.

"Thanks to hard work and long hours by dedicated IRS employees, these payments are going out on schedule, as planned, without delay, to the nation," the IRS said in an April 15 statement emailed to Wolters Kluwer. "The IRS employees are delivering these payments in record time compared to previous stimulus efforts."

Treasury had earlier announced that millions of Americans were already starting to see their economic impact payments. "These payments are being automatically issued to eligible 2019 or 2018 federal tax return filers who received a refund using direct deposit," Treasury said in an April 13 press release.

Non-Filers Option
Americans who did not file a tax return in 2018 or 2019 can use the "Non-Filers: Enter Payment Info Here" option ( https://www.irs.gov/coronavirus/non-filers-enter-payment-info-here) to submit basic personal information to receive their payments.

For those who filed 2018 or 2019 tax returns with direct deposit information or receive Social Security, however, no additional action on their part is needed. These individuals are expected to automatically receive the payment in their bank accounts.

"We are pleased that more than 80 million Americans have already received their Economic Impact Payments by direct deposit in record time," Treasury Secretary Steven Mnuchin said in an April 15 press release. "The free ‘Get My Payment App’ will allow Americans who do not have their direct deposit information on file with the IRS to input it, track the status, and get their money fast."

Status Not Available
Many individuals began voicing complaints on April 15 that the Get My Payment tool was not functional. In response, the IRS on the same day stated: "The Get My Payment site is operating smoothly and effectively. As of mid-day today, more than 6.2 million taxpayers have successfully received their payment status and almost 1.1 million taxpayers have successfully provided banking information, ensuring a direct deposit will be quickly sent. IRS is actively monitoring site volume; if site volume gets too high, users are sent to an online ‘waiting room’ for a brief wait until space becomes available, much like private sector online sites. Media reports saying the tool ‘crashed’ are inaccurate."

The IRS also provided consumers with the following information regarding certain situations in which payment status is deemed unavailable. The IRS listed the following reasons why users may receive the "Status Not Available" notice while using the online tool:

• If you are not eligible for a payment (see IRS.gov on who is eligible and who is not eligible).
• If you are required to file a tax return and have not filed in tax year 2018 or 2019. If you recently filed your return or provided information through Non-Filers: Enter Your Payment Info on IRS.gov. Your payment status will be updated when processing is completed.
• If you are a SSA or RRB Form 1099 recipient, SSI or VA benefit recipient– the IRS is working with your agency to issue your payment; your information is not available in this app yet.

"You can check the app again to see whether there has been an update to your information," the IRS said. "The IRS reminds taxpayers that Get My Payment data is updated once per day, so there’s no need to check back more frequently."

As a result of the retroactive assignment of a 15-year recovery period to qualified improvement property (QIP) placed in service after 2017, QIP generally qualifies for bonus depreciation, and typically at a 100 percent rate. IRS guidance requires taxpayers who previously filed two or more returns using what is now an "incorrect" depreciation period (usually 39 years) to file an accounting method change on Form 3115, Application for Change in Accounting Method, to claim bonus depreciation and/or depreciation based on the 15-year recovery period. The automatic consent procedures apply. If only one return has been filed, a taxpayer may either file Form 3115 or an amended return. No alternatives to filing Form 3115 or an amended return are provided.

As a result of the retroactive assignment of a 15-year recovery period to qualified improvement property (QIP) placed in service after 2017, QIP generally qualifies for bonus depreciation, and typically at a 100 percent rate. IRS guidance requires taxpayers who previously filed two or more returns using what is now an "incorrect" depreciation period (usually 39 years) to file an accounting method change on Form 3115, Application for Change in Accounting Method, to claim bonus depreciation and/or depreciation based on the 15-year recovery period. The automatic consent procedures apply. If only one return has been filed, a taxpayer may either file Form 3115 or an amended return. No alternatives to filing Form 3115 or an amended return are provided.

The guidance also allows taxpayers to make or revoke various elections whether or not directly related to QIP, such as the election out of bonus depreciation. These elections and revocations may be made on an amended return or Form 3115.

The guidance applies to a tax year ending in 2018, 2019, or 2020.

Comment: QIP placed in service in 2018 by a 2017/2018 fiscal-year taxpayer is covered by the guidance, since it applies to tax years ending in 2018.

Amended Return Due Date
When an amended return (including an amended Form 1065, U.S. Return of Partnership Income) is filed for the placed-in-service year to correct the QIP depreciation period and/or claim bonus depreciation, the amended return is due on or before October 15, 2021, but not later than the applicable assessment limitations period. Certain partnerships subject to the centralized audit regime may file an administrative adjustment request (AAR) by October 15, 2021.

Late Elections and Revocations
For a limited time, taxpayers may make a late election or revoke a prior election that was made for depreciable property placed in service during a tax year ending in 2018, 2019, or 2020. The return must have been timely filed and filed before April 17, 2020. These elections and revocations are not limited to QIP. The covered elections are:

• election to use the MACRS alternative depreciation system (ADS) ( Code Sec. 168(g)(7));
• election to claim bonus depreciation on specified plants in the year of planting or grafting ( Code Sec. 168(k)(5));
• election out of bonus depreciation for a class of property ( Code Sec. 168(k)(7)); and
• election to claim bonus depreciation at the 50 percent rate in lieu of the 100 percent rate for all bonus depreciation property placed in service in a tax year that includes September 28, 2017 ( Code Sec. 168(k)(10)).

Generally, making or revoking an election is not considered an accounting method change. However, because of the administrative burden of filing amended returns and AARs, the IRS allows taxpayers to treat the making or revoking of these election as a change in method of accounting with a Code Sec. 481(a) adjustment.

Taxpayers may make or revoke these elections by filing an amended return (including any subsequent affected return) or AAR for the placed-in-service year of the property by October 15, 2021. However, if earlier, the amended return must be filed no later than the expiration of the limitations period for the tax year of the amended return.

For taxpayer choosing not to file an amended return, a Form 3115 to make or revoke these elections must be filed with a timely filed original income tax return (or Form 1065) for the first or second tax year after the tax year in which the property was placed in service, or with a timely filed original income return (or Form 1065) filed on or after April 17, 2020, and on or before October 15, 2021.

Excluded Taxpayers
These procedures do not apply to QIP that was expensed under any provision, including Code Sec. 179 as qualified real property. They also do not apply to an electing real property trade or business or electing farming business that made a late election or withdrew an election related to the business interest deduction limitations ( Code Sec. 163(j)) for the tax year in which QIP was placed in service. (Changes to depreciation affected by the late election or withdrawn election were previously addressed in Rev. Proc. 2020-22.)

Accounting Method Change Lists
Rev. Proc. 2019-43, 2019-48 I.R.B. 1107, which contains all automatic consent accounting method changes, is modified to add new section 6.19 to reflect the rules described in this guidance. Section 6.19 provides that certain "eligibility" rules do not apply. Thus, the automatic procedure will apply even if the change is made in the taxpayer’s last tax year of business or the taxpayer made a change for the same item during any of the five tax years ending with the year of change.

Rev. Proc. 2015-56, 2015-49, I.R.B. 827, relating to the remodel-refresh safe harbor, is also modified to require a taxpayer to substantiate the portion of the property that is qualified improvement property.

The IRS has issued guidance providing administrative relief under the Coronavirus Aid, Relief and Economic Security (CARES) Act ( P.L. 116-136) for taxpayers with net operating losses (NOLs).

The IRS has issued guidance providing administrative relief under the Coronavirus Aid, Relief and Economic Security (CARES) Act ( P.L. 116-136) for taxpayers with net operating losses (NOLs).

The CARES Act provides a five-year carryback for NOLs arising in tax years beginning in 2018, 2019, and 2020. The Tax Cuts and Jobs Act ( P.L. 115-97) had eliminated carryback periods effective for tax years ending after 2017. Some taxpayers have filed 2018 and 2019 returns without using five-year carryback period.

The relief:

• provides procedures for waiving the carryback period in the case of an NOL arising in a tax year beginning after December 31, 2017, and before January 1, 2020; and
• describes how taxpayers with NOLs arising in tax years 2018, 2019, or 2020 can elect to either waive the carryback period for those losses entirely or to exclude from the carryback period for those losses any years in which the taxpayer has an inclusion in income as a result of the Code Sec. 965(a) transition tax.

Six Month Extension for Filing Refund Claims
Taxpayers are granted an extension of time to file refund applications on Form 1045 (individuals, estates, and trusts) or Form 1139 (corporations) with respect to the carryback of an NOL that arose in any tax year that began during calendar year 2018 and that ended on or before June 30, 2019.

2017/2018 Fiscal-Year Taxpayers
Relief is also provided for 2017/2018 fiscal year taxpayer who failed to claim an NOL carryback due to a drafting error in the Tax Cuts and Jobs Act that provided the termination of two-year NOL carryback period applied to NOLs arising in tax years ending after 2017. The CARES Act corrects the effective date error by providing that the termination applies to tax years beginning after 2017. This makes these taxpayers eligible to claim an NOL carryback. The CARES Act allows these taxpayer to file a late application for a tentative refund. An application for a tentative refund is considered timely if filed by July 25, 2020.

The guidance also explains how 2017/2018 fiscal year taxpayer may waive the carryback period, reduce the carryback period (if it is longer than the standard two-year carryback), or revoke an election to waive a carryback period for a tax year that began before January 1, 2018, and ended after December 31, 2017.

Partnerships with NOLs
See the story "BBA Partnerships Can Amend Returns for CARES Benefits" on Rev. Proc. 2020-23, below.

The IRS is allowing taxpayers to file by fax Form 1139, Corporation Application for Tentative Refund, and Form 1045, Application for Tentative Refund, for certain coronavirus relief, a senior IRS official said on April 13. On the same day, the IRS unveiled related procedures for claiming quick refunds of the credit for prior year minimum tax liability of corporations and net operating loss (NOL) deductions ( https://www.irs.gov/newsroom/temporary-procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19).

The IRS is allowing taxpayers to file by fax Form 1139, Corporation Application for Tentative Refund, and Form 1045, Application for Tentative Refund, for certain coronavirus relief, a senior IRS official said on April 13. On the same day, the IRS unveiled related procedures for claiming quick refunds of the credit for prior year minimum tax liability of corporations and net operating loss (NOL) deductions ( https://www.irs.gov/newsroom/temporary-procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19).

Forms 1139, 1045
"Starting on April 17, 2020, and until further notice, the IRS will accept eligible refund claims Form 1139 submitted via fax to 844-249-6236 and eligible refund claims Form 1045 submitted via fax to 844-249-6237," the IRS noted in the Coronavirus Tax Relief FAQ posted on its website on April 13. "Before then, these fax numbers will not be operational. We encourage taxpayers to wait until this procedure is available rather than mail their Forms 1139 and 1045 since mail processing is being impacted by the emergency."

In a tailored effort to implement sections 2303 and 2305 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136), the IRS has opened digital transmission of Form 1139 and Form 1045 until further notice. Most notably, only refund claims made under the CARES Act sections 2303 and 2305 are eligible for the temporary procedures.

Generally, under the CARES Act:

• Section 2303 makes several modifications to NOLs, such as requiring a taxpayer with an NOL arising in a tax year beginning in 2018, 2019, or 2020 to carry that loss back to each of the five preceding years unless the taxpayer elects to waive or reduce the carryback; and providing a carryback for a two-year period of NOLs arising during a tax year that began in 2017 and ended during 2018.
• Section 2305 modifies the credit for prior-year minimum tax liability of corporations, including acceleration of the recovery of remaining minimum tax credits of a corporation for its 2019 tax year from its 2021 tax year, and permitting a corporation to elect instead to recover 100 percent of any of its remaining minimum tax credits in its 2018 tax year.

IRS Accepting Yet Not Processing Mail
Similarly, Sunita Lough, deputy commissioner for services and enforcement at the IRS urged taxpayers and practitioners during an April 13 Tax Policy Center (TPC) webinar not to submit Forms 1139 and 1045 related to the CARES Act by mail. Ordinarily, these forms may be filed only via hard copy delivered through the U.S. Postal Service (USPS) or by a private delivery service.

However, the IRS is currently receiving so much mail that the USPS can no longer hold it, according to Lough, adding that the IRS is "literally holding [mail] in trailers until employees can get back to work." Thus, in an effort to "send a signal" that the IRS will implement the CARES Act without access to its mail, it is both allowing and encouraging the fax option, Lough said.

"Only fax Forms 1139 and 1045 specific to the CARES Act," Lough said, adding that any other forms submitted via fax, even Forms 1139 and 1045 unrelated to the CARES Act, will not be processed. Further, the IRS specifically states on its website that any Form 1120X, Amended U.S. Corporation Income Tax Return, that is faxed to the fax numbers noted above will not be accepted for processing.

Pro Tip
"If you are trying to decide between filing Form 1139 and 1120X, it is usually best to file Form 1139 to get a refund," Kirsten Wielobob, principal, Tax Policy and Controversy, Ernst & Young LLP, said on April 10. "It is colloquially referred to as a ‘quickie refund,’" Wielobob said. Generally, the Form 1139 is not subject to joint committee review as the Form 1120X is, which can be filed electronically but can add a layer of complexity. Additionally, Wielobob cautioned that the delays at the IRS could mean filing Form 1139 by paper through the mail is no longer the "quick" option, which appears in line with both the IRS’s cautioning against submitting the form by mail and its newly announced fax option.

The IRS has released guidance on making the following elections for the business interest deduction limitation:

The IRS has released guidance on making the following elections for the business interest deduction limitation:

• the election out of the 50 percent adjusted taxable income (ATI) limitation for tax years beginning in 2019 and 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136);
• the election to use the taxpayer’s ATI for the last tax year beginning in 2019 to calculate the Code Sec. 163(j) limit for the 2020 tax year under the CARES Act; and
  the election out of deducting 50 percent of excess business interest expense (EBIE) for the 2020 tax year without limitation under the CARES Act.

The guidance also provides transition relief to taxpayers making or revoking the election to be an electing real property trade or business or an electing farming trade or business under Code Sec. 163(j)(7).

Business Interest Limit
A taxpayer’s deduction of business interest expenses paid or incurred for any tax year is generally limited to the sum of business interest income, floor plan financing interest, and 30 percent of ATI. The Code Sec. 163(j) limitation is generally increased from 30 percent to 50 percent of a taxpayer’s ATI for any tax year beginning in 2019 and 2020 under the CARES Act.

A taxpayer may elect not to have the increased limitation apply in 2019 or 2020. In addition, a taxpayer may elect for any tax year beginning in 2020 to use its ATI from the 2019 tax year to calculate its Code Sec. 163(j) limitation. The 50 percent ATI limitation does not apply to partnerships for the 2019 tax year. Instead, a partner treats 50 percent of its allocable share of a partnership’s EBIE for 2019 as an interest deduction in the partner’s 2020 tax year without limitation. The remaining 50 percent of such EBIE remains subject to the Code Sec. 163(j) limit applicable to EBIE carried forward at the partner level. A partner may elect out of the 50 percent EBIE rule.

Election Out of 50 Percent ATI
There is no formal election or statement required to the make the election not to apply the 50 percent ATI limit for the 2019 or 2020 tax year. The election is made simply filing a federal income tax return (or Form 1065 in the case of a partnership for 2020) by the due date for the return, including extensions, using the 30 percent ATI limitation. The election may also be made on an amended return or administrative adjustment request (AAR).

The election must be made for each tax year. For a partnership, the election is made by the partnership and not the partners. It is also made by the agent for a consolidated group and for an applicable controlled foreign corporation (CFC) by each controlling domestic shareholder. The taxpayer is granted consent from the IRS to revoke the election by merely filing an amended return and using the 50 percent limit.

Election to Use 2019 ATI in 2020
There is also no formal election or statement required to the make the election to use 2019 ATI to use in the 2020 tax year. The election is made simply filing a federal income tax return (or Form 1065) by the due date for the return for the 2020 tax year, including extensions, using the taxpayer’s 2019 ATI. The 2019 ATI used for the calculation is pro rated if the taxpayer’s 2020 tax year is a short tax year. The election may also be made on an amended return or AAR.

For partnership, the election is made by the partnership and not the partners. It is also made by the agent for a consolidated group and for an applicable CFC by each controlling domestic shareholder. For a CFC group, the election is not effective for any group member unless made for every tax year of a CFC group member for which the election is available.

Election Out of 50 Percent EBIE Rule
There is also no formal election or statement required by a partner in a partnership to make the election out of the 50 percent EBIE rule. A partner makes the election by filing its federal income tax return (or Form 1065) by the due date for the return for the 2020 tax year, including extensions, by not applying the 50 percent EBIE rule in determining the Code Sec. 163(j) limitation. The election may also be made on an amended return or AAR. The partner is granted consent from the IRS to revoke the election by merely filing an amended return, Form 1065, or AAR applying the 50 percent EBIE rule.

Real Property and Farming
The Code Sec. 163(j) limit applies to all taxpayers with business interest except small businesses with meet an average annual gross receipts test. It also does not apply to certain excepted businesses including an electing real property business and an electing farming business.

Under proposed regulations, a taxpayer must make an election for a real property trade or business, or farming business, with respect to each eligible trade business. The election is made by attaching a statement to the taxpayer’s timely filed original tax return (including extensions). A real property trade or business or farming business that elects out of the business interest deduction limit must depreciate certain property using alternative depreciation system (ADS).

In light of the legislative changes, a taxpayer may make the election or revoke an election to be an electing real property trade or business or an electing farming trade or business for the 2018, 2019, or 2020 tax year by filing an amended federal income tax return, amended Form 1065, or amended AAR. The return must include an election statement or withdrawal statement, and any collateral adjustments to taxable income. This include its depreciation of property affected by making a late election or withdrawing the election. The amended federal income tax return, Form 1065, or AAR generally must be filed by October 15, 2021.

The IRS has set forth rules for BBA partnerships to file amended returns to immediately get benefits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). "BBA partnerships" are those subject to the centralized partnership audit regime established by the Bipartisan Budget Act of 2015 (BBA) ( P.L. 114-74). The procedure allows BBA partnerships the option to file an amended return instead of an Administrative Adjustment Request (AAR) under Code Sec. 6227.

The IRS has set forth rules for BBA partnerships to file amended returns to immediately get benefits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). "BBA partnerships" are those subject to the centralized partnership audit regime established by the Bipartisan Budget Act of 2015 (BBA) ( P.L. 114-74). The procedure allows BBA partnerships the option to file an amended return instead of an Administrative Adjustment Request (AAR) under Code Sec. 6227.

Amendment Option
BBA partnerships that filed Form 1065, U.S. Return of Partnership Income, and gave all partners Schedules K-1, Partner’s Share of Income, Deductions, Credits, for the tax years beginning in 2018 or 2019 before the IRS issued Rev. Proc. 2020-23 can file amended returns and furnish amended K-1s before September 30, 2020. The amended returns can take into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law.

Filing Requirements
To amend a return, a BBA partnership must file a Form 1065, checking the "Amended Return" box and furnish amended Schedules K-1 to partners. The BBA partnership must write "FILED PURSUANT TO REV PROC 2020-23" at the top of the amended return, and attach a statement with each Schedule K-1 sent to its partners with the same notation. The BBA partnership may file electronically or by mail.

There are additional rules for BBA partnerships that are currently under examination for a tax year beginning in 2018 or 2019, or that have previously filed an AAR.

GILTI Regulations
A partnership may continue to apply the rules of Proposed Reg. §1.951A-5 when filing an amended Form 1065 and furnishing amended Schedules K-1 consistent with those proposed regulations. The partnership must notify partners as required by Notice 2019-46, I.R.B. 2019-37, 695.

The IRS has announced that the employment tax credits for paid qualified sick leave and family leave wages required by the Families First Coronavirus Response Act ( P.L. 116-127) will apply to wages and compensation paid for periods beginning on April 1, 2020, and ending on December 31, 2020. Additionally, days beginning on April 1, 2020, and ending on December 31, 2020, will be taken into account for the credits for paid qualified sick leave and family leave equivalents for certain self-employed individuals as provided by the Act.

The IRS has announced that the employment tax credits for paid qualified sick leave and family leave wages required by the Families First Coronavirus Response Act ( P.L. 116-127) will apply to wages and compensation paid for periods beginning on April 1, 2020, and ending on December 31, 2020. Additionally, days beginning on April 1, 2020, and ending on December 31, 2020, will be taken into account for the credits for paid qualified sick leave and family leave equivalents for certain self-employed individuals as provided by the Act.

Expanded Leaves
The Act’s Division C (Emergency Family and Medical Leave Expansion Act) and Division E (Emergency Paid Sick Leave Act) requires employers with fewer than 500 employees to provide expanded paid family leave and paid sick leave to certain employees. These employees are unable to work or telework due to certain circumstances related to the coronavirus (COVID-19).

Tax Credits for Paid Leave
The Act’s Division G provides payroll tax credits to employers that make the required leave payments to their employees. The Act also provides comparable credits for self-employed individuals carrying on any trade or business under Code Sec. 1402, if the self-employed individual would be entitled to receive paid leave if he or she were an employee of an employer (other than himself or herself).

The refundable tax credits for most employers with fewer than 500 employees apply to qualified sick leave and family leave wages paid for the period from April 1, 2020, to December 31, 2020. Additionally, the self-employment tax credit will be determined based on days occurring during the period beginning on April 1, 2020, and ending on December 31, 2020.

The Treasury Secretary selected the April 1 date in coordination with the U.S. Department of Labor’s determination of the effective date for employers’ compliance with the Emergency Family and Medical Leave Expansion Act and Emergency Paid Sick Leave Act requirements.

The IRS has provided penalty relief for failure to deposit employment taxes under Code Sec. 6656 to employers entitled to the new refundable tax credits provided under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127), and the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The relief is provided the extent that the amounts not deposited are equal to or less than the amount of refundable tax credits to which the employer is entitled under the Families First Act and the CARES Act.

The IRS has provided penalty relief for failure to deposit employment taxes under Code Sec. 6656 to employers entitled to the new refundable tax credits provided under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127), and the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The relief is provided the extent that the amounts not deposited are equal to or less than the amount of refundable tax credits to which the employer is entitled under the Families First Act and the CARES Act.

The relief applies to deposits of employment taxes reduced in anticipation of the credits for:

• qualified leave wages paid with respect to the period beginning April 1, 2020, and ending December 31, 2020; and
• qualified retention wages paid with respect to the period beginning on March 13, 2020, and ending December 31, 2020.

COVID-19 Refundable Credits
The Families First Act generally requires employers of fewer than 500 employees to provide paid sick leave and expanded family and medical leave, up to specified limits, to employees unable to work or telework due to certain circumstances related to coronavirus disease 2019 (COVID-19). Generally, the Families First Act provides a refundable tax credit against an employer’s share of the Social Security portion of Federal Insurance Contributions Act (FICA) tax and an employer’s share of the Social Security and Medicare portions of the Railroad Retirement Tax Act (RRTA) tax ( "creditable employment taxes") for each calendar quarter. The credit is equal to 100 percent of qualified leave wages paid by the employer, plus qualified health plan expenses with respect to that calendar quarter.

The CARES Act allows certain employers experiencing a full or partial business suspension due to orders from a governmental authority, or a statutorily specified decline in business, due to COVID-19 to claim a refundable tax credit against an employer’s creditable employment taxes. The credit amount is up to 50 percent of the qualified wages (including allocable qualified health expenses), and is limited to $10,000 per employee over all calendar quarters combined.

Employers report these refundable credits on their returns for reporting their liability for FICA tax (or RRTA tax), which for most employers subject to FICA tax is the quarterly Form 941. An employer may claim an advance payment of the refundable tax credits by filing new Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Penalty Relief for Qualified Leave Wages
An employer will not be subject to a penalty for failing to deposit employment taxes relating to qualified leave wages in a calendar quarter if:

• the employer paid qualified leave wages to its employees in the calendar quarter prior to the time of the required deposit;
• the amount of employment taxes that the employer does not timely deposit is less than or equal to the amount of the employer’s anticipated credits under the Families First Act for the calendar quarter as of the time of the required deposit; and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

Thus, an employer may reduce, without penalty, the amount of a deposit of employment taxes by the amount of qualified leave wages and qualified health plan expenses paid by the employer in the calendar quarter prior to the required deposit, plus the amount of the employer’s share of Medicare tax on such qualified leave wages, as long as the employer does not also seek an advance credit for the same amount.

The total amount of any reduction in any required deposit may not exceed the total amount of qualified leave wages and qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages in the calendar quarter, minus any amount of qualified leave wages, qualified health plan expenses, and employer’s share of Medicare tax that had been previously used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Penalty Relief for Qualified Retention Wages
An eligible employer will not be subject to a penalty for failing to deposit employment taxes relating to qualified retention wages in a calendar quarter if:

• the employer paid qualified retention wages to its employees in the calendar quarter prior to the time of the required deposit;
• the amount of employment taxes that the employer does not timely deposit, reduced by the amount of employment taxes not deposited in anticipation of the credits claimed for qualified leave wages, qualified health plan expenses, and the employer’s share of Medicare tax on the qualified leave wages, is less than or equal to the amount of the employer’s anticipated credits under the CARES Act for the calendar quarter as of the time of the required deposit; and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

Thus, after a reduction, if any, of a deposit of employment taxes by the amount of credits anticipated for qualified leave wages, an employer may further reduce, without a penalty, the amount of the deposit of employment taxes by the amount of qualified retention wages paid by the employer in the calendar quarter prior to the required deposit, as long as the employer does not also seek an advance credit for the same amount.

The total amount of any reduction in any required deposit may not exceed the total amount of qualified retention wages in the calendar quarter, minus any amount of qualified retention wages that had been previously used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Technical corrections to the partnership audit rules were included in the bipartisan Consolidated Appropriations Act (CAA), 2018 ( P.L. 115-141), which was signed by President Trump on March 23. The omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions, including technical corrections to the partnership audit provisions of the Bipartisan Budget Act (BBA) of 2015 ( P.L. 114-74).

Technical corrections to the partnership audit rules were included in the bipartisan Consolidated Appropriations Act (CAA), 2018 ( P.L. 115-141), which was signed by President Trump on March 23. The omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions, including technical corrections to the partnership audit provisions of the Bipartisan Budget Act (BBA) of 2015 ( P.L. 114-74).

Scope
The CAA clarifies the scope of the partnership audit rules. The new rules are not narrower than the TEFRA partnership audit rules; they are intended to have a scope sufficient to address partnership-related items. The CAA eliminated references to adjustments to partnership income, gain, loss, deduction, or credit, and replaced them with partnership-related items. "Partnership-related items" are any item or amount that is relevant to determining the income tax liability of any partner, according to the Joint Committee on Taxation (JCT). Among other things, partnership-related items include an imputed underpayment, or an item or amount relating to any transaction with, basis in, or liability of the partnership.

According to the JCT, the partnership audit rules do not apply to withholding taxes except as specifically provided. However, any partnership income tax adjustment will be considered when determining and assessing withholding taxes when the partnership adjustment is relevant to that determination. Further, the technical corrections clarify that an imputed partnership underpayment is determined by appropriately netting partnership adjustments for that year, and then applying the highest rate of tax for the reviewed year.

Pull-In; Push-Out
Also included in the CAA is a "pull-in" procedure, which allows for modifying an imputed underpayment without requiring individual partners to file an amended tax return. The "pull-in" procedure, if elected, would replace the "push-out" election. A push-out shifts liability to individual partners. The "pull-in" procedure contemplates that partner payments and information could be collected centrally by the IRS. However, the procedure permits the partnership representative or a third-party accounting or law firm to collect the data and remit it to the IRS.

Penalties
The partnership adjustment tracking report required in a push out is a return for purposes of failure to file, frivolous submission, and return preparer penalties. Also, the failure to furnish statements in a push-out is subject to the failure to file or pay tax penalties. However, neither an administrative adjustment request nor a partnership adjustment tracking report are returns for purposes of the partner amended return modification procedures.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS cites that over three million taxpayers in recent tax years have claimed deductions for business use of a home, which normally requires the taxpayer to fill out the 43-line Form 8829. Under the new procedure, a significantly simplified form is used. The new method is expected to reduce paperwork and recordkeeping for small businesses by an estimated 1.6 million hours annually, according to the IRS. The new optional deduction is limited to $1,500 per year, based on $5 per square foot for up to 300 square feet.

The simplified method is not effective for 2012 tax year returns being filed during the current 2013 filing season, but it will become effective for 2013 tax year returns filed in 2014. Taxpayers may want to investigate now whether they could benefit from the election for the 2013 tax year. Acting IRS Commissioner Steven Miller advised upon announcement of the safe harbor that "The IRS … encourages people to look at this option as they consider tax planning in 2013."  A final decision on the election need not be made until 2014, when 2013 returns are filed.

Basic home office deduction rule

Under Code 280A, which governs the home office deduction rules on the simplified method election, a taxpayer may deduct expenses that are allocable to a portion of the dwelling unit that is exclusively used on a regular basis. This generally means usage as:

• The taxpayer's principal place of business for any trade or business
• A place to meet with the taxpayer's patients, clients, or customers in the normal course of the taxpayer's trade or business, or
• In the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer's trade or business.

The new simplified method does not remove the requirement to keep records that prove exclusive use, on a regular basis, for one of the three designated uses listed above. It does help, however, in other ways.

Simplified safe harbor

Using the new simplified safe harbor method, a taxpayer determines the amount of deductible expenses for qualified business use of the home for the tax year by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the portion of a home used in a qualified business use of the home, but not to exceed 300 square feet. The prescribed rate is $5.00 per square foot.

Taxpayers who itemize their returns and use the safe harbor method may also deduct, to the extent allowed by the Tax Code and regs, any expense related to the home that is deductible without regard to whether there is a qualified business use of the home for that tax year, the IRS explained. As a result, they will be able to claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A of Form 1040. These deductions do not need to be allocated between personal and business use, as is required under the regular method.

Depreciation

Taxpayers using the safe harbor cannot deduct any depreciation for the portion of the home that is used in a qualified business use of the home for that tax year. For many taxpayers, depreciation is the largest component of the home office deduction under the regular method that must be sacrificed if the new safe harbor method is used.  Depending upon the value of your home and the space devoted to an office at home, using the regular method may prove to be the far better choice than electing the simplified method.

Election

Taxpayers may elect from tax year to tax year whether to use the safe harbor method or actual expense method. Once made, an election for the tax year is irrevocable.  The IRS has provided rules for calculating the depreciation deduction if a taxpayer uses the safe harbor for one year and actual expenses for a subsequent year. The deduction of expenses that are not related to the home, such as wages and supplies, is unaffected and those deductions are still available to those using the new method.

Limitations

The IRS set various limits on the safe harbor, including:

• Taxpayers with more than one qualified business use of the same home for a tax year and who elect the safe harbor must use the safe harbor for each qualified business use of the home.
• Taxpayers with qualified business uses of more than one home for a tax year may use the safe harbor for only one home for that tax year.
• A taxpayer who has a qualified business use of a home and a rental use of the same home cannot use the safe harbor for the rental use.

If you are currently claiming a home office deduction, or if you have considered taking the deduction in the past but were discouraged by all of the paperwork and calculations required, you should consider whether the new, simplified safe harbor method is right for you. Please feel free to contact this office for further details.

An above-the-line deduction is an adjustment to income (deduction) that can be taken regardless of whether the individual taxpayer itemizes deductions. The adjustment reduces the taxpayer's adjusted gross income (AGI). These adjustments are also sometimes called deductions from gross income, as opposed to itemized deductions that are deducted from AGI. An above-the-line deduction is taken out of income "above" the line on the tax form on which adjusted gross income is reported.

An above-the-line deduction is an adjustment to income (deduction) that can be taken regardless of whether the individual taxpayer itemizes deductions. The adjustment reduces the taxpayer's adjusted gross income (AGI). These adjustments are also sometimes called deductions from gross income, as opposed to itemized deductions that are deducted from AGI. An above-the-line deduction is taken out of income "above" the line on the tax form on which adjusted gross income is reported.

Above-the-line deductions are more desirable than itemized deductions because:

• they are more available (for example, they are not phased out or subject to a floor like many itemized deductions);
• they can be claimed even if the taxpayer does not itemize deductions; and
• they lower the taxpayer's AGI, which can allow the taxpayer to qualify for more and/or larger deductions.

The above-the-line deductions include:

• Trade or business expenses
• Net operating loss deduction
• Loss from sales and exchanges
• Depreciation and depletion
• Deductions tied to rents and royalties
• Teacher's classroom expenses
• Jury pay turned over to employer
• Overnight travel expenses of Reserve or National Guard
• Supplemental unemployment compensation repayments
• Business expenses of qualifying performing artists
• Contributions to individual retirement accounts
• Student loan interest deduction
• Tuition and fees deduction
• Health savings account deduction
• Moving expenses
• ½ of self-employment tax
• Health insurance costs of the self-employed
• Contributions to SIMPLE or SEP plans
• Penalty for early withdrawal of funds from a savings account
• Alimony payments
• Legal fees and costs paid in certain actions involving civil rights violations or whistleblower awards
• Domestic production activities deduction

The IRS has issued proposed reliance regulations on the 3.8 percent surtax on net investment income (NII), enacted in the 2010 Health Care and Education Reconciliation Act. The regulations are proposed to be effective January 1, 2014. However, since the tax applies beginning January 1, 2013, the IRS stated that taxpayers may rely on the proposed regulations for 2013. The IRS expects to issue final regulations sometime later this year.

The IRS has issued proposed reliance regulations on the 3.8 percent surtax on net investment income (NII), enacted in the 2010 Health Care and Education Reconciliation Act. The regulations are proposed to be effective January 1, 2014. However, since the tax applies beginning January 1, 2013, the IRS stated that taxpayers may rely on the proposed regulations for 2013. The IRS expects to issue final regulations sometime later this year.

The surtax applies to individuals, estates, and trusts. The surtax applies if the taxpayer has NII and his or her "modified" adjusted gross income exceeds certain statutory thresholds: $250,000 for married taxpayers and surviving spouses; $125,000 for married filing separately; and $200,000 for individuals and other taxpayers. The tax is broad and can raise tax bills by hundreds, if not thousands, of dollars.

Complex provisions

The regulations are extensive and complex. They address a number of issues that were not answered in the statute, such as the interaction of Code Sec. 1411 (the surtax provisions) and Code Sec. 469 (passive activity loss rules). Significant areas addressed in the proposed regulations include:

• Identification of those individuals subject to the surtax,
• Surtax's application to estates and trusts,
• Definition of NII,
• Disposition of interests in partnerships and S corporations,
• Allocable deductions from NII,
• Treatment of qualified plan distributions, and
• Treatment of earnings by controlled foreign corporations and passive foreign investment companies.

Some issues, however, are not yet addressed, such as the application of the Code Sec. 469 material participation rules to trusts and estates. Further guidance from the IRS is expected.

Borrowed definitions and principles

Net investment income that is subject to the new 3.8 percent tax generally includes interest and dividend income as well as capital gains from investments.  But Code Sec. 1411 doesn't stop there, seeking to tax "passive activities" and contrasting those activities with a "trade or business" in often complex ways.

Because Code Sec. 1411 does not define many important terms, the regulations use definitions from several other Tax Code provisions. For example, the definition of a trade or business is determined under Code Sec. 162, regarding trade or business expenses. This definition is essential to Code Sec. 1411, since the application of each of the three categories of net investment income depends on determining whether the income is from a trade or business. The regulations also borrow the definition of a disposition, which applies to category (iii) income, from other provisions, such as Code Section 731 (partnership distributions) and Code Sec. 1001 (dispositions of property).

New elections available

The regulations provide certain elections that may be beneficial to many taxpayers. Taxpayers that engage in multiple activities under Code Sec. are allowed to make another election to regroup their activities. Taxpayers married to a nonresident alien can elect to treat their spouse as a U.S. resident, which allow more income to escape the 3.8 percent surtax.  

Net investment income generally includes interest and dividend income as well as capital gains from investments. To prevent avoidance of the tax, the regulations include substitute payments of interest and dividends in the definition. The IRS also warned in the preamble to the proposed regulations that it will scrutinize activities designed to circumvent the surtax and will challenge questionable transactions using applicable statutes and judicial doctrines. The IRS further warned that taxpayers should figure their exposure to the 3.8 percent tax quickly since liability for this additional tax must be included in quarterly estimated tax computations and payments starting with first quarter 2013.

Please feel free to contact this office for a personalized review of how the 3.8 percent tax may impact you, and what compliance and planning steps should be considered as a consequence.

Individual Retirement Accounts (IRAs) are popular retirement savings vehicles that enable taxpayers to build their nest egg slowly over the years and enjoy tax benefits as well. But what happens to that nest egg when the IRA owner passes away?

Individual Retirement Accounts (IRAs) are popular retirement savings vehicles that enable taxpayers to build their nest egg slowly over the years and enjoy tax benefits as well. But what happens to that nest egg when the IRA owner passes away?

The answer to that question depends on who inherits the IRA. Surviving spouses are subject to different rules than other beneficiaries. And if there are multiple beneficiaries (for example if the owner left the IRA assets to several children), the rules can be complicated. But here are the basics:

Spouses

Upon the IRA owner's death, his (or her) surviving spouse may elect to treat the IRA account as his or her own. That means that the surviving spouse could name a beneficiary for the assets, continue to contribute to the IRA, and would also avoid having to take distributions. This might be a good option for surviving spouses who are not yet near retirement age and who wish to avoid the extra 10-percent tax on early distributions from an IRA.

A surviving spouse may also rollover the IRA funds into another plan, such as a qualified employer plan, qualified employee annuity plan (section 403(a) plan), or other deferred compensation plan and take distributions as a beneficiary. Distributions would be determined by the required minimum distribution (RMD) rules based on the surviving spouse's life expectancy.

In the alternative, a spouse could disclaim up to 100 percent of the IRA assets. Some surviving spouses might choose this latter option so that their children could inherit the IRA assets and/or to avoid extra taxable income.

Finally, the surviving spouse could take all of the IRA assets out in one lump-sum. However, lump-sum withdrawals (even from a Roth IRA) can subject a spouse to federal taxes if he or she does not carefully check and meet the requirements.

Non-spousal inherited IRAs

Different rules apply to an individual beneficiary, who is not a surviving spouse. First of all, the beneficiary may not elect to treat the IRA has his or her own. That means the beneficiary cannot continue to make contributions.

The beneficiary may, however, elect to take out the assets in a lump-sum cash distribution. However, this may subject the beneficiary to federal taxes that could take away a significant portion of the assets. Conversely, beneficiaries may also disclaim all or part of the assets in the IRA for up to nine months after the IRA owner's death.

The beneficiary may also take distributions from the account based on the beneficiary's age. If the beneficiary is older than the IRA owner, then the beneficiary may take distributions based on the IRA owner's age.

If there are multiple beneficiaries, the distribution amounts are based on the oldest beneficiary's age. Or, in the alternative, multiple beneficiaries can split the inherited IRA into separate accounts, and the RMD rules will apply separately to each separate account.

The rules applying to inherited IRAs can be straightforward or can get complicated quickly, as you can see. If you have just inherited an IRA and need guidance on what to do next, let us know. Likewise, if you are an IRA owner looking to secure your savings for your loved ones in the future, you can save them time and trouble by designating your beneficiary or beneficiaries now. Please contact our office with any questions.

If you have or are planning to move - whether it's a change of personal residence or a change of business address - you want the IRS to know about your change of address. The IRS has recently updated its procedures for taxpayers to follow when notifying the IRS of a change of address. The IRS uses a taxpayer's "address of record" for mailing certain notices and documents that the agency is required to send to a taxpayer's last known address.

The IRS's process for updating changes of address is important for both individual and business taxpayers because a notice or document sent to your (or your business') "last known address" is legally effective and binding, even if you never receive it because you have moved. This presumption of delivery includes such important correspondence as notices of deficiency, liens and levies.

Have you moved since April 15?

If you have already filed your federal income tax return (or any other respective business tax return, such as Form 1065, U.S. Return of Partnership Income), and have since moved from the address that you provided on your return, you need to inform the IRS. This is because the IRS automatically uses the address on your return as its "address of record." Thus, when a taxpayer files a tax return, such as a Form 1040, U.S. Individual Income Tax Return, the address on your return is automatically updated by the IRS after the return has been properly processed (tax returns are considered properly processed after a 45-day period that begins on the day after the return is received by the IRS.)

Therefore, if you move to a new address after filing your return, you need to ensure the IRS has your new address. This can generally be done in one of several ways. First, when a taxpayer provides the U.S. Postal Service (USPS) with a new address, the IRS automatically updates the taxpayer's address of record with the address maintained in the USPS's National Change of Address database. So, when you change your address with the USPS to have your mail forwarded to your new address, the IRS may also update you address of record based on the new address you provide the USPS. However, take caution. You should nonetheless notify the IRS directly of your change of address to ensure the IRS has your correct address. This can be done by filing Form 8822, Change of Address, with the IRS.

However, you can also provide the IRS with your change of address by giving the agency "clear and concise notification" of the change. This can be done electronically, written, or orally, and is discussed below. We recommend such followup notification just in case the IRS fails to follow one of its updating procedures.

Types of returns automatically updated when filed

The IRS's updated procedure (Revenue Procedure 2010-16) not only lists the types of returns on which address provided thereon are automatically updated into its "address of record" database, it also makes clear that certain forms are not considered returns and therefore not automatically updated if a new address is listed. Specifically, a new address listed on (1) Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, or (2) Power of Attorney and Declaration of Representative, are not used by the IRS to automatically update a taxpayer's address. The IRS does not consider these to be returns. Therefore, if you file these forms providing a new address, you will need to use another method for informing the IRS of the address change, such as filing Form 8822.

The types of returns from which addresses are automatically updated by the IRS include, but are not limited t

-- Individual income tax returns (e.g., Forms 1040, 1040A, Form 1040X, 1040-SS, 1040EZ, 1040NR, 1040NR-EZ); -- Gift, estate, and generation-skipping transfer tax returns (e.g. Forms 706 series, 709 series); and -- Returns filed under an employer identification number (e.g., Forms 720, 730, 940, 941 series, 943, 945, 940, 990 series, 1041, 1042, 1065 series, and 1120 series.

Comment. Because the IRS maintains address records for gift, estate, and generation-skipping transfer (GST) tax returns that are separate from records maintained for individual income tax returns, an individual's notification of a change of address should identify whether any gift, estate, or GST transfer tax returns are affected.

Documents and notices

The IRS uses the last known address for mailing a number of important documents and notices, as well as any refund you may be owed. Therefore, it is imperative for taxpayers to ensure that the IRS has your proper change of address information. Such notices and documents include, among others, deficiency notices, notices of intent to levy, notices and demand for tax, employment status determinations, notices of third party summonses, notices regarding interest abatements, and notices of final determinations regarding spousal support.

Clear and concise notification

Taxpayers that want to change their address of record can do so by providing the IRS with a "clear and concise notification" that is in accord with the agency's procedures. As previously mentioned, clear and concise notification may be made in writing, electronically, or orally. You must in any case, must provide the your full name, new address, old address, and Social Security number (SSN), individual taxpayer identification number (ITIN), or employer identification number (EIN) when providing the "clear and concise notification" procedures.

Written. The filing of Form 8822, Change of Address, is one way to meet the "clear and concise notification" requirement, for example. You can also provide the IRS with a written statement signed by you, informing the IRS you wish to change your address of record. You must include information such as your full name, new and old address, SSN, ITIN, or EIN as well. If you file a return with your spouse, you should both provide this information as well.

Electronic. You can also satisfy the "clear and concise" requirement by electronically notifying the IRS. You must use a secure application located on the IRS's website, www.irs.gov. A "secure application" is one that requires the taxpayer to verify the taxpayer's identity before accessing the application. However, other forms of electronic notice, such as emailing an IRS email address, do not constitute clear and concise notification.

Verbal. You can also provide the IRS with a change of address orally, by providing a statement - whether in person or directly via telephone -- to an IRS employee. Again, it is a good idea to follow up your telephone call with another call to verify that your address has in fact been inputted properly.

If you have any questions about change of address procedures, please call our office.

If you have completed your tax return and you owe more money than you can afford to pay in full, do not worry, you have many options. While it is in your best interest to pay off as much of your tax liability as you can, there are many payment options you can utilize to help pay off your outstanding debt to Uncle Sam. This article discusses a few of your payment options.

Pay Uncle Sam as much as you can

First and foremost, if you cannot pay the full amount of taxes due, you should nevertheless file your return by the April 15 deadline. Moreover, you should send in as much money as you can with your return. The IRS assesses failure-to-file penalties so you should file your return despite being unable to pay the full amount with the return. As such, it's to your benefit to file your return by its due date and pay off any outstanding balance as soon as you can in order to minimize interest and penalties.

Payment options

If you are not able to pay the full amount of tax you owe, you have options. While you can obtain an automatic six-month extension of time to file, the IRS will still assess interest on the outstanding unpaid tax liability. To do so, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Income Tax Return, by the due date for filing your calendar year return (typically April 15) or fiscal year return. However, an extension of time to file is not an extension of the time to pay your taxes. Penalties and interest continue to accrue during the extension.

Second, consider paying some or all of your tax liability by credit card or obtaining a cash advance on your credit card. The interest rate your credit card or bank charges (plus applicable fees) may be lower than the total amount of interest and penalties imposed by the IRS under the Tax Code.

You may also be eligible to take advantage of the IRS's monthly installment agreement option. This option allows eligible taxpayers to pay off their tax bill over a period of time - in monthly installments - to the IRS. However, if you have entered into an installment agreement during the preceding 5 years you cannot use this option. Additionally, even while you are making payments through an installment agreement, penalties and interest continue on the unpaid portion of that debt. To request an installment plan, you can use Form 9465, Request For Installment Agreement. Or, you can use the Online Payment Agreement (OPA) application.

There are many options for paying off your tax debt. Our office can discuss the payment options that will work best in your specific circumstances. Please don't hesitate to call our office with questions.

Many taxpayers are looking for additional sources of cash during these tough economic times. For many individuals, their Individual Retirement Account (IRA) is one source of cash. You can withdraw ("borrow") money from your IRA, tax and penalty free, for up to 60 days. However, the ability to take a short-term "loan" from your IRA should only be taken in dire financial situations in light of the serious tax consequences that can result from an improper withdrawal or untimely rollover of the funds back into an IRA.

The funds must be returned, or rolled back into, an IRA within 60 days from the day after the date of the withdrawal, or income and penalty taxes are imposed on the amount withdrawn and not returned. These tax consequences can be serious. Therefore, it is imperative that you return the withdrawn funds back into an IRA within 60 days.

Tax and interest imposed

If the funds are not returned within 60 days, the withdrawal will not only be treated as a taxable distribution for individuals who are under the age of 59 1/2, but you will also face an additional 10 percent penalty tax, as well as possible state income tax.

Example

You withdraw $10,000 from your IRA on March 2. The 60-day period begins on March 3. To avoid income taxes as a result of early withdrawal treatment and an additional 10 percent penalty tax, the amounts must be returned to an IRA on May 2. Although May 2 falls on a Saturday, there is no extension as a result of weekends (or holidays).

Income tax reporting

If you decide to take the short-term, 60 day "loan" from an IRA you must report the entire amount of the withdrawal. The withdrawal is reported on line 15a of your Form 1040 for the tax year in which you took the withdrawal. If you have returned the withdrawn funds within the 60 day period, you will enter "zero" as the taxable amount of line 15b of Form 1040.

One-year rule

You can only take a "60 day loan" from a specific IRA account and return the funds to that IRA or a different account once during a one-year period. If you make a withdrawal from the same IRA more than once during a one-year period, the second withdrawal is treated by the IRS as a taxable IRA distribution, again generally subject to income taxes and a 10-percent early withdrawal penalty tax.

Moreover, if you redeposit funds back into a particular IRA account and withdraw money from that same account within the one-year period, again the withdrawn funds are again treated as a premature withdrawal subject to income taxes and the 10-percent penalty tax.

For those struggling in these economic times and looking for additional sources of cash, there are other options in addition to a 60-day loan from your IRA. Our office can discuss your options and the potential tax consequences of each. 

Nonbusiness creditors may deduct bad debts when they become totally worthless (i.e. there is no chance of its repayment). The proper year for the deduction can generally be established by showing that an insolvent debtor has not timely serviced a debt and has either refused to pay any part of the debt in the future, gone through bankruptcy, or disappeared. Thus, if you have loaned money to a friend or family member that you are unable to collect, you may have a bad debt that is deductible on your personal income tax return.

The fact that the debtor is a family member or other related interest does not preclude you from taking a bad debt deduction, provided that the debt was bona fide and that worthlessness has been established. A direct or indirect transfer of money between family members may create a bona fide debt eligible for the bad debt deduction. However, these transactions are closely scrutinized to determine whether the transfer is a bona fide debt or a gift.

Bona-fide debt and other requirements for deductibility

You may only take a bad debt deduction for bona-fide debts. A bona-fide debt is a debt arising from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. You must also have the present intention to seek repayment of the debt. Additionally, for a bad debt you must also show that you had the intent to make a loan, and not a gift, at the time the money was transferred. Thus, there must be a true creditor-debtor relationship.

Moreover, nonbusiness bad debts are only deductible in the year they become totally worthless (partially worthless nonbusiness bad debts are not deductible).

To deduct a bad debt, you must also have a basis in it, which means that you must have already included the amount in your income or loaned out your cash (for example, if your spouse has not paid court-ordered child support, you can not claim a bad debt deduction for the amount owed as this amount was not previously included in your gross income).

Reporting bad debts

You can deduct nonbusiness bad debts as short-term capital losses on Schedule D of your Form 1040. On Schedule D, Part I, Line 1, enter the debtor's name and "statement attached" in column (a). Enter the amount of the bad debt in parentheses in column (f). If you are reporting multiple bad debts, use a separate line for each bad debt. For each bad debt, attach a statement to your return containing the following:

•  A description of the debt, including the amount and date it became due;
• The name of the debtor, and any business or family relationship between you and the debtor:
• The efforts you made to collect the debt; and
• An explanation of why you decided the debt was worthless (for example, you can show the debtor has declared bankruptcy or is insolvent, or that collection efforts such as through legal action will not likely result in the debt being paid).

If you did not deduct a bad debt on your original income tax return for the year it became worthless, you can file a refund claim or a claim for a credit due to the bad debt. You must use Form 1040X to amend your return for the year the debt became worthless. It must be filed with 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later.

Note. If you deduct a bad debt and in a later year collect all or part of the money owed, you may have to include this amount in your gross income. However, you can exclude from your gross income the amount recovered up to the amount of the deduction that did not reduce your tax in the year you deducted the debt.

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. The new Pension Protection Act cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Good used or better condition

The new law does not define good or better condition. For guidance, you can look to the standards that many charities already have in place. Many charities will not accept your donations of clothing or household items unless they are in good or better condition.

Clothing cannot be torn, soiled or stained. It must be clean and wearable. Many charities will reject a shirt with a torn collar or a jacket with a large tear in a sleeve. As one charity spokesperson summed it up, "Don't donate anything you wouldn't want to wear yourself." 

Household items include furniture, furnishings, electronics, appliances, and linens, and similar items.  Food, paintings, antiques, art, jewelry and collectibles are not household items. Household items must be in working condition. For example, a DVD player that does not work is not in good used or better condition. You can still donate it (if the charity will accept it) but you cannot claim a tax deduction. Household items, particularly furnishings and linens, must be clean and useable. 

The new law authorizes the IRS to deny a deduction for the contribution of a clothing or household item that has minimal monetary value. At the top of this list you can expect to find socks and undergarments, which have had inflated values for years.

Fair market value

You generally can deduct the fair market value of your donation. Unless your donation is new - for example, a blouse that has never been worn - its fair market value is not what you paid for it. Just like when you drive a new car off the dealer's lot, a new item loses value once you wear or use it.  Therefore, its value is less than what you paid for it.  

If you're not sure about an item's value, a reputable charity can help you determine its fair market value. Our office can also help you value your donations of used clothing and household items.

Get a receipt

Generally, you must obtain a receipt for your gift. If obtaining a receipt is impracticable, for example, you drop off clothing at a self-service donation center, you must maintain reliable written information about the contribution, such as the type and value of the property.

Charitable contributions of property of $250 or more must be substantiated by obtaining a contemporaneous written acknowledgement from the charity including an estimate of the value of the items. If your deduction for noncash contributions is greater than $500, you must attach Form 8283 to your tax return. Special rules apply if you are claiming a deduction of more than $5,000.

Exception

In some cases, the new rules about good used or better condition do not apply. The restrictions do not apply if a deduction of more than $500 is claimed for the single clothing or household item and the taxpayer includes an appraisal with his or her return.

If you have any questions about the new charitable contribution rules for donations of clothing and household items, give our office a call. The new rules apply to contributions made after August 17, 2006.