The American Institute of CPAs (AICPA) has urged the IRS and Treasury in an August 12 letter to issue guidance on President Trump’s payroll tax deferral memorandum. The executive action signed by the president on August 8 instructs Treasury to defer the collection and payment of payroll taxes from September 1 through years-end for eligible employees.

The American Institute of CPAs (AICPA) has urged the IRS and Treasury in an August 12 letter to issue guidance on President Trump’s payroll tax deferral memorandum. The executive action signed by the president on August 8 instructs Treasury to defer the collection and payment of payroll taxes from September 1 through years-end for eligible employees.

The presidential memorandum to defer payroll taxes has "caused confusion and concern among accountants and businesses," according to the AICPA. Thus, in its letter released on August 13, the AICPA asks IRS Commissioner Charles "Chuck" Rettig and Assistant Treasury Secretary David Kautter to issue guidance on a number of related issues, including the following items:

• Guidance stating that the deferral is voluntary and that an "eligible employee" is responsible for making an affirmative election to defer the payroll taxes;
• Guidance stating that an "eligible employee" is an employee whose wages are less than $4,000 per bi-weekly pay period;
• Guidance stating that the $4,000 limit should apply separately to each employer of an employee; and
• Guidance stating a payment due date(s) for the deferred taxes and a mechanism for employees to pay the deferred taxes.

Payroll Tax Forgiveness

Notably, Treasury Secretary Steven Mnuchin indicated earlier this week that participation in the deferral of payroll taxes is not mandatory. "We cannot force people to participate," Mnuchin said in a televised interview. "But I think many small businesses will do this and pass on the benefits." Additionally, Mnuchin alluded that Trump intends to make the deferral a cut if reelected, essentially forgiving the deferred taxes.

To that end, White House economic advisor Larry Kudlow attempted to clarify Trump’s position that the payroll tax deferral should be forgiven rather than delayed. And when Trump talks about "terminating the payroll tax", he is only referring to those taxes specified within the presidential memorandum, not the entire payroll tax as a whole, according to Kudlow.

"I just want to be clear that the president is saying that he will provide forgiveness; he will terminate the deferral on a forgiveness basis," Kudlow told reporters at the White House on August 13. "That is what he is saying just to be clear…there was some confusion about that."

Additionally, Kudlow told reporters that the payroll tax deferral would apply to the self-employed. Although the applicable presidential memorandum is not currently written as such, Kudlow added that the administration "will make a technical change to it."

The IRS has released final regulations that address the interaction of the $10,000/$5,000 cap on the state and local tax (SALT) deduction and charitable contributions. The regulations include:

• a safe harbor for individuals who have any portion of a charitable deduction disallowed due to the receipt of SALT benefits;
• a safe harbor for business entities to deduct certain payments made to a charitable organization in exchange for SALT benefits; and
• application of the quid pro quo principle under Code Sec. 170 to benefits received or expected to be received by the donor from a third party.

The IRS has released final regulations that address the interaction of the $10,000/$5,000 cap on the state and local tax (SALT) deduction and charitable contributions. The regulations include:

• a safe harbor for individuals who have any portion of a charitable deduction disallowed due to the receipt of SALT benefits;
• a safe harbor for business entities to deduct certain payments made to a charitable organization in exchange for SALT benefits; and
• application of the quid pro quo principle under Code Sec. 170 to benefits received or expected to be received by the donor from a third party.

The final rules generally adopt the proposed regulations issued in December 2019 ( NPRM REG-107431-19) with minor clarifications.

SALT Limit

An individual’s itemized deduction of SALT taxes is limited to $10,000 ($5,000 if married filing separately) for tax years beginning after 2017. Some states and local governments adopted laws that allowed individuals to receive a state tax credit for contributions to certain charitable funds. These laws are aimed at getting around the SALT deduction limit by creating a charitable deduction for federal income tax purposes.

Under previously issued regulations, the receipt of a SALT credit for a charitable contribution is the receipt of a return benefit (quid pro quo benefit). Thus, the taxpayer must reduce any contribution deduction by the amount of any SALT credit received or expected to receive in return. A de minimis exception is available if the SALT credit does not exceed 15 percent of the taxpayer’s charitable payment.

A taxpayer is not required to reduce the charitable contribution deduction because of the receipt of SALT deductions. However, the taxpayer must reduce the charitable deduction if it receives or expects to receive SALT deductions in excess of the taxpayer’s payment or the fair market value of property transferred.

Payments by Individuals

The final regulations adopt the safe harbor for individuals whose have a portion of a charitable deduction disallowed due to the receipt of a SALT credit. Any disallowed portion of the charitable contribution deduction may be treated as the payment of SALT taxes for the purposes of deducting taxes under Code Sec. 164. The safe harbor is allowed in the tax year the charitable payment is made, but only to the extent that the SALT credit is applied as provided under state or local law to offset the individual’s SALT liability for the current or preceding tax year. Any unused credit may be carried forward as provided under state and local law.

The final regulations are not intended to permit a taxpayer to avoid the SALT deduction cap. Thus, any payment treated as a state or local tax under Code Sec. 164 is subject to the limit. Also, a taxpayer is not permitted to deduct the same under more than one rule, so a taxpayer who relies on this safe harbor to deduction payments as SALT taxes may also not deduct the same payment under any other Code provision.

Payments by Business Entities

The final regulations adopt the safe harbor that business entities may continue to deduct charitable contributions in exchange a SALT credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose.

If a C corporation or specified passthrough entity makes the charitable payment in exchange for a SALT credit, it may deduct the payment as a business expense to the extent of any SALT credit received or expected to be received. In addition, if the charitable payment bears a direct relationship to the taxpayer’s business, then it may be deducted as a business expense rather than a charitable contribution regardless of whether the taxpayer receives or expects to receive a SALT credit.

The safe harbor for C corporations and specified passthrough entities applies only to payments of cash and cash equivalents. The safe harbor for specified passthrough entities does not apply if the credit received or expected to be received reduces a state or local income tax.

Benefits from Third Party

If a taxpayer receives any goods, services, or other benefits from a charitable organization in consideration for a contribution, then the charitable deduction must be reduced by the value of those benefits. If the contribution exceeds the fair market value of the benefits received, then only the excess is a deductible as a charitable contribution.

The final regulations continue to provide that this quid pro quo principal applies regardless of whether the party providing the goods, services, or other benefits is the charitable organization or not. A taxpayer will be treated as receiving goods and services in consideration for the taxpayer’s charitable contribution if, at the time the taxpayer makes the payment or transfer, the taxpayer receives or expects to receive goods or services in return. The final rules clarify that the quid pro quo principle applies regardless of whether the party providing the quid pro quo is the donee or a third party.

The IRS has issued final regulations regarding the limitation for the business interest expense deduction under Code Sec. 163(j), including recent legislative amendments made for the 2019 and 2020 tax years. Also, a safe harbor has been proposed allowing taxpayers managing or operating residential living facilities to qualify as a real property trade or business for purposes of the limitation. In addition, new proposed regulations are provided for a number of different areas.

The IRS has issued final regulations regarding the limitation for the business interest expense deduction under Code Sec. 163(j), including recent legislative amendments made for the 2019 and 2020 tax years. Also, a safe harbor has been proposed allowing taxpayers managing or operating residential living facilities to qualify as a real property trade or business for purposes of the limitation. In addition, new proposed regulations are provided for a number of different areas.

Section 163(j) Limitation

A taxpayer’s deduction of business interest expenses paid or incurred for the tax year is generally limited to the sum of:

• the taxpayer’s business interest income for the tax year for which the taxpayer is claiming the deduction (not including investment income);
• 30 percent of the taxpayer’s adjusted taxable income (ATI), but not less than zero; and
• the taxpayer’s floor plan financing interest.

The percentage limit is generally increased to 50 percent of ATI for 2019 and 2020. For a partnership, however, the 50 percent limit applies for 2020 only, and a special allocation of excess business interest expense (EBIE) to a partner may apply for the 2019 tax year. A taxpayer may elect not to use the 50 percent ATI limit, and any taxpayer other than a partnership may elect for 2020 to use its ATI from the 2019 tax year to calculate its limitation.

The 163(j) limitation does not apply to certain small businesses whose gross receipts are less than a threshold amount ($26 million for 2020). It also does not apply to electing real property trades or businesses, electing farming businesses, and certain regulated public utilities.

Final Regulations

The final regulations generally adopt proposed rules that were issued in December 2018, with some modifications. Taxpayer may continue to rely on some of the rules in the proposed regulations. One significant change is that the final regulations provide any that any depreciation, amortization, or depletion that is capitalized into inventory under Code Sec. 263A before 2022 will be added back to tentative taxable income in calculating ATI.

This is change from the proposed rules which effectively resulted in taxpayers with inventory to effectively use earnings before interest and tax (EBIT) instead of earnings before interest, tax, depreciation, and amortization (EBITDA) before 2022 in calculating ATI. Also, the final rules eliminate the “lesser of” standard with respect to sales and disposition of stock, and require taxpayers to back out depreciation deductions that were allowed or allowable during the EBITDA period.

The IRS had adopted the broad definition of business interest in the proposed rules, including the definition of substitute interest and the embedded loan rule with some modifications. However, the final regs exclude commitment fees, debt issuance costs, guaranteed payments (except used as capital), and hedging rules. The IRS has also modified the anti-avoidance rule for time value of money.

Qualified Residential Living Facilities

The IRS has proposed a safe harbor for a trade or business that manages or operates a qualified residential living facility to be treated as a real property trade or business solely for purposes of qualifying as an electing real property trade or business. A facility is qualified if it:

• consists of multiple rental dwelling units within one or more structures that generally serve as primary residences on a permanent or semi-permanent basis to individual customers or patients;
• provides supplemental assistive, nursing, or other routine medical services; and
• has an average period of customer or patient use of the individual rental dwelling units that is 90 days or more.

The safe harbor is proposed to apply to tax years beginning after December 31, 2017.

Proposed Regulations

In addition to the final regulations, the IRS has issued new proposed regulations that provide rules regarding:

• different computational methods a taxpayer can choose in determining certain adjustments to tentative taxable income;
• the treatment of EBIE allocated to a partner in 2019, and the election to use ATI from 2019 for the 2020 tax year under Code Sec. 163(j)(10);
• interest expense associated with debt proceeds of partnerships and S corporations (passthrough entities);
• application of the limitation for a partnership’s self-charged lending transactions, partnerships engaged in trades or businesses that are not passive activities, publicly traded partnerships, certain section 734(b) adjustments, and tiered partnership structures;
• application to U.S. shareholders of controlled foreign corporations (CFCs) and to foreign persons with effectively connected income in the United States; and
• application to corporate look-through provisions.

Finally, the IRS has also released FAQs that provide a general overview of the aggregation rules that apply for purposes of the gross receipts test, and that apply to determine whether a taxpayer is a small business that is exempt from the business interest expense deduction limitation.

The IRS has issued proposed regulations that implement the "carried interest" rules under Code Sec. 1061 adopted by Congress as part of the Tax Cuts and Jobs Act of 2017 ( P.L. 115-97). Some key aspects of the lengthy proposed regulations include the definition of important terms, how the rules work in the context of tiered passthrough structures, the definition of "substantial" services provided by the carried interest holder, and the level of activity required for a business to meet the definition of an "applicable trade or business."

The IRS has issued proposed regulations that implement the "carried interest" rules under Code Sec. 1061 adopted by Congress as part of the Tax Cuts and Jobs Act of 2017 ( P.L. 115-97). Some key aspects of the lengthy proposed regulations include the definition of important terms, how the rules work in the context of tiered passthrough structures, the definition of "substantial" services provided by the carried interest holder, and the level of activity required for a business to meet the definition of an "applicable trade or business."

In general, a "carried interest" is an interest in a partnership in the investment management business that consists of the right to receive future partnership profits. Carried interests are given to a partner in exchange for performing asset management services for businesses such as private equity funds, venture capital funds, and hedge funds.

Prior to Code Sec. 1061, taxpayers tended to treat carried interests as interests in partnership profits subject to long-term capital gain rates. Code Sec. 1061, however, reflects that a carried interest may in fact be compensation for services and therefore properly subject to ordinary income rates. As a result, Code Sec. 1061 applies a longer, three-year holding period to certain net long-term capital gain with respect to any "applicable partnership interest" (API)—essentially, any carried interest. The effect of this is to recharacterize as short-term capital gain certain net long-term capital gain of a partner who holds one or more APIs.

The proposed regulations define the amount of otherwise long-term capital gain that fails to meet the three-year holding period as the "recharacterization amount," and refers to the person who is subject to income tax on the recharacterization amount as the "owner taxpayer." In addition, the proposed regulations provide a framework for determining the recharacterization amount when an API is held though one or more tiers of passthrough entities.

A partnership interest is an API if it is transferred in connection with the performance of "substantial" services. Under the proposed regulations, services are presumed to be substantial with respect to a partnership interest transferred in connection with those services. Basically, this means that the partnership is presumed to get good value for the partnership interest it transfers in exchange for services.

Generally, an API is any interest in a partnership that is transferred to or held by the taxpayer in connection with the performance of services by the taxpayer in any "applicable trade or business" (ATB). Under Code Sec. 1061(c)(2), to qualify as an ATB, an activity must be "conducted on a regular, continuous, and substantial basis." Under the proposed regulations, an activity is conducted on a regular, continuous, and substantial basis if it meets the "ATB activity test." Under this test, the total level of activity conducted in one or more entities must meet the level of activity to establish a trade or business for purposes of trade or business expenses under Code Sec. 162.

The Treasury and the IRS have issued temporary and proposed regulations to:

• reconcile advance payments of refundable employment 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), and
• recapture the benefit of the credits when necessary.

The Treasury and the IRS have issued temporary and proposed regulations to:

• reconcile advance payments of refundable employment 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), and
• recapture the benefit of the credits when necessary.

The text of the temporary regulations serves as the text of the proposed regulations.

Background

Under the Families First Act, many employers with fewer than 500 employees must provide paid leave to employees due to circumstances related to the Coronavirus Disease 2019 (COVID-19). Certain employers must provide an employee with up to 80 hours of paid sick leave if the employee cannot work or telework due to specific reasons related to COVID-19. The Families First Act also amends the Family and Medical Leave Act of 1993 to require employers to provide expanded paid family and medical leave to employees who cannot work or telework for certain reasons related to COVID-19.

Eligible employers may receive a refundable payroll credit for required qualified sick leave wages or qualified family leave wages paid to an employee, plus allocable qualified health plan expenses. The credits are allowed against the taxes imposed on employers by Code Sec. 3111(a) (the Old-Age, Survivors, and Disability Insurance tax (social security tax)), first reduced by any credits claimed under Code Sec. 3111(e) and (f), and Code Sec. 3221(a) (the Railroad Retirement Tax Act Tier 1 tax), on all wages and compensation paid to all employees. The credits are increased by the amount of the employer’s share of Medicare tax on qualified leave wages.

The paid leave credits have per-day and maximum dollar limits for each employee, and apply to qualified leave wages paid with respect to the period beginning on April 1, 2020, and ending on December 31, 2020.

The CARES Act provides an employee retention credit for certain employers experiencing economic hardship related to COVID-19 but who pay qualified wages to their employees. Employers eligible for the employee retention credit are those that carry on a trade or business during calendar year 2020 and tax-exempt organizations that either have a full or partial suspension of operations during any calendar quarter in 2020 due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, or experience a significant decline in gross receipts during the calendar quarter.

Qualified wages are those paid by an employer to some or all employees after March 12, 2020, and before January 1, 2021, and include the employer’s qualified health plan expenses that are properly allocable to such wages or compensation. Qualified wages differ depending on whether the employer averaged more than 100 full-time employees during 2019, or 100 full-time employees or fewer during 2019.

The employee retention credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages; the maximum for an eligible employer for qualified wages paid to any employee is $5,000. The credit is allowed against the taxes imposed on employers by Code Sec. 3111(a), first reduced by:

• any credits allowed under Code Sec. 3111(e) and (f),
• the paid leave credits described above, and
• the taxes imposed under Code Sec. 3221(a) that are attributable to the Code Sec. 3111(a) rate in effect, first reduced by any paid leave credits allowed, on all wages and compensation paid to all employees.

The same wages or compensation cannot be counted for both the Families First Act leave credits and the CARES Act employee retention credit.

Refundability of Credits

If the amount of the paid sick and family leave credits is more than the taxes imposed by Code Sec. 3111(a) or Code Sec. 3221(a) for any calendar quarter, the excess is treated as an overpayment that must be refunded under Code Sec. 6402(a) and Code Sec. 6413(b). A similar refund is required for the employee retention credit.

The IRS has revised Form 941, Employer's Quarterly Federal Tax Return, and is revising the other employment tax returns, so that employers can use these returns to claim the paid sick and family leave credits and the employee retention credit. The revised returns will provide for any credits in excess of the employment taxes imposed as described above, to be credited against other employment taxes and then for any remaining balance to be refunded to the employer.

Advance Payment of Credits and Erroneous Refunds

In anticipation of the paid sick and family leave credits, including any refundable portions, these credits may be advanced as provided by IRS forms and instructions, up to the total allowable amount and subject to applicable limits for the calendar quarter.

The IRS has created Form 7200, Advance Payment of Employer Credits Due To COVID-19, which employers can use to request an advance of the paid sick or family leave credits, the employee retention credit, or two or more of them. Employers must reconcile any advance payments claimed on Form 7200 with total credits claimed and total taxes due on their employment tax returns. A refund, a credit, or an advance of any portion of these credits to a taxpayer in excess of the amount to which the taxpayer is entitled is an erroneous refund for which the IRS must seek repayment.

Temporary Regulations

The temporary regulations provide that erroneous refunds of the credits are treated as underpayments of the taxes imposed under Code Sec. 3111(a) or Code Sec. 3221(a), and authorize the IRS to assess any portion of the credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were tax liabilities subject to assessment and administrative collection procedures. This allows the IRS to efficiently recover the amounts, while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with litigation. These procedures will apply in the normal course in processing employment tax returns that report advances in excess of claimed credits and in examining returns for excess claimed credits.

The temporary regulations also provide that employers against whom an erroneous refund of credits can be assessed as an underpayment include persons treated as the employer under Code Sec. 3401(d), Code Sec. 3504, and Code Sec. 3511, consistent with their liability for the employment taxes against which the credit applied.

The temporary regulations apply to all paid leave credit refunds advanced or paid on or after April 1, 2020, and all employee retention credit refunds advanced or paid on or after March 13, 2020. Further, the temporary regulations apply to all paid leave credits (including any increases in the credits) refunded on or after April 1, 2020, including advanced refunds, as well as all employee retention credits that are refunded on or after March 13, 2020, including advanced refunds.

Applicability Date

The temporary regulations are effective July 29, 2020, the date they are scheduled to be published in the Federal Register.

Comments and Requests for Public Hearing

The Treasury Department and IRS request comments on all aspects of the proposed regulations. A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Written or electronic comments and requests for a public hearing must be received by 60 days after the proposed regulations are published in the Federal Register.

Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-111879-20) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have limited personnel available to process public comments that are submitted on paper through the mail. Until further notice, any comments submitted on paper will be considered to the extent practicable. The Treasury and IRS will publish for public availability any comment submitted electronically, and to the extent practicable on paper. Send paper submissions to: CC:PA:LPD:PR (REG-111879-20), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044.

The IRS has provided guidance on the special rules relating to funding of single-employer defined benefit pension plans, and related benefit limitations, under Act Sec. 3608 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136). The guidance clarifies application of the extended contribution deadline, and the optional use of the prior year’s adjusted funding target attainment percentage (AFTAP), with examples.

The IRS has provided guidance on the special rules relating to funding of single-employer defined benefit pension plans, and related benefit limitations, under Act Sec. 3608 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136). The guidance clarifies application of the extended contribution deadline, and the optional use of the prior year’s adjusted funding target attainment percentage (AFTAP), with examples.

Affected Funding Rules

A single-employer defined benefit plan is subject to minimum required contribution rules under Code Sec. 430. The minimum required contribution for a plan year generally depends on a comparison of the value of plan assets (reduced by any credit balances) with the plan's funding target. If the value of plan assets is less than the funding target of the plan for the year, the minimum required contribution for that plan year is the sum of:

• the target normal cost for the plan year;
• the shortfall amortization installments for the plan year; and
• the waiver amortization installments for the plan year.

The minimum required contribution for a plan year must be paid within 8-1/2 months after the close of the plan year ( Code Sec. 430(j)). Payments made on a date other than the valuation date for the plan year must be adjusted for interest accruing for the period from the valuation date to the payment date, at the effective interest rate for the plan for the year. Employers maintaining plans that had a funding shortfall for the preceding plan year (i.e., the value of plan assets, reduced by credit balances, was less than the funding target for the preceding year) must make quarterly contributions to the plan. If the employer fails to pay the full amount of a required quarterly installment, interest is assessed at the plan's effective interest rate plus five percentage points.

Benefit limits apply to plans that have funded target attainment percentage for the preceding year below designated thresholds are deemed to be in "at-risk" status and are subject to increased target liability. The benefit limits on single-employer defined benefit plans are based on the plan’s AFTAP ( Code Sec. 436(b)). Generally, a plan's funding target attainment percentage is the ratio of the value of plan assets for the plan year (reduced by any funding standard carryover balance and prefunding balance) to the funding target for the plan year (determined without regard to the plan's at-risk status) ( Code Secs. 430(d)(2) and 436(j)(1)).

CARES Act Relief
Minimum required contributions to a single-employer retirement plan otherwise due in calendar year 2020 (including any quarterly contributions) are delayed until January 1, 2021. The amount of each such contribution is increased by any interest accruing for the period between the original due date (without regard to the delay) for the contribution and the payment date. A plan sponsor also may elect to treat the plan’s AFTAP for the last plan year ending before January 1, 2020, as the AFTAP for plan years that include calendar year 2020 (Act Sec. 3608 of P.L. 116-136.

Extended Deadline and Interest
The extended contribution due date of January 1, 2021, does not apply to a multiemployer plan, a CSEC plan, a fully-insured plan, or a money purchase pension plan. If the contribution deadline for a plan year is during 2020, a contribution in excess of the amount needed to satisfy the minimum required contribution for the plan year that is made by January 1, 2021, may be designated as a contribution for that plan year.

Any payment made after the original due date for the contribution and by the extended due date must be increased for the period between the original due date and the payment date at the effective interest rate for the plan year that includes the payment date. If the contribution is less than the amount that was due on the original due date for the minimum required contribution, as increased with interest pursuant to the CARES Act, then a portion of the minimum required contribution for that plan year would remain unpaid. The unpaid portion of the minimum required contribution, determined as of the valuation date and based on contributions made on or before January 1, 2021, with the contributions discounted for interest to the valuation date, would give rise to an unpaid minimum required contribution that would be subject to an excise tax. Furthermore, a contribution made after January 1, 2021, to satisfy that unpaid minimum required contribution must be adjusted for interest for the period between the date that the contribution is made and the valuation date at the effective interest rate for the plan year for which the contribution is made (with additional interest as required to reflect any late quarterly installments for the plan year).

The CARES Act specifies that to determine the amount of a quarterly installment due by the extended due date, the amount of that installment is increased from the installment’s original due date to the payment date at the effective interest rate for the plan year that includes the date the quarterly installment is paid. If a plan sponsor does not satisfy a quarterly installment originally due during 2020 by the extended due date, then the unpaid portion of that installment is subject to a higher interest rate for the period during which the installment (or a portion thereof) remains unpaid when determining the amount of the minimum required contribution that is satisfied by a contribution.

A contribution made after the original due date for a plan year but on or before the extended due date is taken into account as of a valuation date for a plan year after the plan year for which the contribution was made. For purposes of determining the value of plan assets, if an employer makes a contribution to the plan after the valuation date for the current plan year and the contribution is for an earlier plan year, then the present value of the contribution determined as of that valuation date is taken into account as an asset of the plan as of the valuation date, provided the contribution is made before a specified deadline. The specified deadline is the deadline for contributions for the plan year immediately preceding the current plan year. However, that deadline is extended by the CARES Act. Furthermore, the interest adjustment rules override the discounting rules that apply generally for this purpose. Note, however, that certification of the AFTAP for a plan year must not take into account contributions that are expected to be made after the certification date.

If the plan year is a plan year for which the extended due date for minimum required contributions applies, then the deadline for a plan sponsor’s election to increase a prefunding balance or to use a prefunding balance or a funding standard carryover balance to offset the minimum required contribution for that plan year is extended to January 1, 2021. However, the extended due date does not change the date by which a contribution must be made in order to be deducted for a tax year. A taxpayer is deemed to have made a payment on the last day of the preceding tax year if the payment is on account of that tax year and is made no later than the time prescribed by law for filing the return for that tax year (including extensions).

Guidance for AFTAP Election

A plan sponsor may elect to apply the AFTAP for the last plan year ending before January 1, 2020, for a plan year that includes any portion of calendar year 2020. For example, if a plan sponsor makes an election for a plan year that runs from July 1, 2019, to June 30, 2020, then the AFTAP that applies is the certified AFTAP from the plan year that ends on June 30, 2019. That plan sponsor may separately elect to use that same AFTAP for the plan year that begins on July 1, 2020.

The AFTAP election must be made using the procedures that apply for elections relating to funding balances. Thus, the plan sponsor must provide written notification of the election to the plan's actuary and the plan administrator. If a plan’s actuary has not certified the plan’s AFTAP for a plan year before the plan sponsor makes the election, then the plan sponsor’s election is treated as a certification of the AFTAP. Thus, beginning with the date of the election, the AFTAP for the last plan year ending on or before December 31, 2019, applies for the plan year for which the election is made, rather than any presumed AFTAP.

A plan’s actuary generally must certify the plan’s AFTAP for a plan year for which the plan sponsor makes the election. However, if the plan sponsor makes the election for a plan year that begins in 2019 and ends in 2020 and also makes an election for the next plan year, then the actuary is not required to certify the plan’s AFTAP for the plan year that begins in 2019. If the plan’s actuary has certified an AFTAP for a plan year, then the Schedule SB of Form 5500, Annual Return/Report of Employee Benefit Plan, for that plan year should reflect the certified AFTAP.

If a plan’s actuary certified the plan’s AFTAP for a plan year before the plan sponsor makes the election, then the plan sponsor’s election is treated as a subsequent determination of the AFTAP for that plan year. However, the plan sponsor’s election is eligible for deemed immaterial treatment, and the election is treated as the recertification on the part of the actuary that is otherwise required for deemed immaterial treatment. Thus, the AFTAP that applies pursuant to the plan sponsor’s election is applied on a prospective basis beginning with the election date.

If the AFTAP that applies is pursuant to a plan sponsor’s election, then the restriction on plan amendments and unpredictable contingent event benefits is applied, except that the AFTAP that applies pursuant to the election is substituted for the presumed AFTAP. Thus, for example, the AFTAP that applies pursuant to the plan sponsor’s election will be used to calculate a presumed adjusted funding target and an inclusive presumed AFTAP.

The AFTAP that applies pursuant to a plan sponsor’s election for a plan year generally will not apply for purposes of the presumptions used in a subsequent plan year. Instead, the actual AFTAP for the plan year that was certified by the plan’s actuary generally is used for purposes of applying the presumption rules the subsequent plan year.

The IRS has released proposed regulations that implement new Code Sec. 7602(f), which bars non-government persons who are hired by the IRS from questioning a witness under oath whose testimony was obtained pursuant to a summons issued under Code Sec. 7602. The regulations prohibit any IRS contractors from asking a summoned person’s representative to clarify an objection or assertion of privilege. The IRS has also withdrawn a notice of proposed rulemaking ( NPRM REG-132434-17) that contained proposed rules addressing the participation of persons described under Code Sec. 6103(n) in the interview of a summoned witness and excluding certain non-government attorneys from participating in an IRS examination.

The IRS has released proposed regulations that implement new Code Sec. 7602(f), which bars non-government persons who are hired by the IRS from questioning a witness under oath whose testimony was obtained pursuant to a summons issued under Code Sec. 7602. The regulations prohibit any IRS contractors from asking a summoned person’s representative to clarify an objection or assertion of privilege. The IRS has also withdrawn a notice of proposed rulemaking ( NPRM REG-132434-17) that contained proposed rules addressing the participation of persons described under Code Sec. 6103(n) in the interview of a summoned witness and excluding certain non-government attorneys from participating in an IRS examination.

Section 7602(f)

The 2016 Summons Interview Regulations under Reg. §301.7602-1(b)(3) were issued, in part, to clarify that persons described in Code Sec. 6103(n) and Reg. §301.6103(n)-1(a) may receive and review books, papers, records, or other data summoned by the IRS. The regulations were also issued to clarify that, in the presence and under the guidance of an IRS officer or employee, these non-government persons could participate fully in the interview of a person whom the IRS had summoned as a witness to provide testimony under oath, allowing a contractor to ask a summoned witness substantive questions. Code Sec. 7602(f) was enacted by section 1208 of the Taxpayer First Act of 2019 ( P.L. 116-25).

Comment Request

Written or electronic comments and requests for a public hearing must be received by October 6, 2020. Commenters are strongly encouraged to submit public comments via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-132434-17) by following the online instructions for submitting comments. Comments submitted on paper will be considered to the extent practicable. The Treasury Department and the IRS will publish for public availability any comment submitted electronically, and to the extent practicable on paper, to its public docket. Paper submissions can be sent to: CC:PA:LPD:PR (REG-132434-17), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.

Proposed regulations adopt the post-2017 simplified accounting rules for small businesses.

Proposed regulations adopt the post-2017 simplified accounting rules for small businesses.

Implementation

The Tax Cuts and Jobs Act ( P.L. 115-97) put in place a single $25 million gross receipts test (adjusted annually for inflation after 2018) for determining whether certain taxpayers can use the cash method of accounting, are not required to use inventories, are not required to apply the uniform capitalization (UNICAP) rules, and are not required to use the percentage of completion method for a small construction contract.

The proposed regulations address a variety of issues. For example, they address application of the gross receipts test to taxpayers that are not corporations or partnerships. The gross receipts test is applied by taking into account the amount of gross receipts derived from all of the taxpayer's trades or businesses. Under the proposed regulations, amounts not related to a taxpayer's trade or business—items such as Social Security benefits, personal injury awards and settlements, disability benefits, and wages received as an employee reported on Form W-2—are generally excluded from gross receipts. Similar rules are provided for each of the exemptions.

Other issues addressed in the proposed regulations include rules:

• implementing the Code Sec. 263A(i) small business taxpayer exemption for purposes of the requirement to capitalize interest;
• permitting farmers who had been using a farming exception to the Code Sec. 263A rules to adopt the small business exception, and vice versa;
• permitting a taxpayer to elect to use the allocated taxable income or loss of the immediately preceding tax year to determine whether the taxpayer is a syndicate for purposes of Code Sec. 448(d)(3) for the current tax year;
• requiring a taxpayer that meets the gross receipts test in the current tax year to obtain IRS written consent before changing to the cash method if the taxpayer had previously changed its overall method from the cash method during any of the five tax years ending with the current tax year;
• applying the look-back method to redetermine the taxpayer’s modified taxable income under Reg. §1.59-3(b) and the taxpayer’s base erosion minimum tax amount (BEMTA) for the tax year; and
• clarifying the treatment under Code Sec. 471(c) for small business taxpayers with and without applicable financial statements.

Applicability Date

The regulations are proposed to apply for tax years beginning on or after the date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register. However, for tax years beginning after December 31, 2017, a taxpayer may rely on the proposed regulations, provided that the taxpayer follows all the applicable rules contained in the proposed regulations for each Code provision that the taxpayer chooses to apply.

The IRS has modified two safe harbor explanations in Notice 2018-74, 2018-40 I.R.B. 529, that can be used to satisfy the requirement under Code Sec. 402(f) that certain information be provided to recipients of eligible rollover distributions. The modifications were necessary due to recent changes in law made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). One safe harbor explanation is for payments not from a designated Roth account, and the other is for payments from a designated Roth account. The Code Sec. 402(f) notice may be provided as many as 180 days before the date on which the distribution is made (or the annuity starting date).

The IRS has modified two safe harbor explanations in Notice 2018-74, 2018-40 I.R.B. 529, that can be used to satisfy the requirement under Code Sec. 402(f) that certain information be provided to recipients of eligible rollover distributions. The modifications were necessary due to recent changes in law made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). One safe harbor explanation is for payments not from a designated Roth account, and the other is for payments from a designated Roth account. The Code Sec. 402(f) notice may be provided as many as 180 days before the date on which the distribution is made (or the annuity starting date).

Qualified Birth and Adoption Distributions

Code Sec. 72(t)(1) generally provides for a 10-percent additional tax on a distribution from a qualified retirement plan, unless the distribution qualifies for an exception. The SECURE Act permits an individual to receive up to $5,000 for a qualified birth or adoption distribution from an applicable eligible retirement plan without being subject to the 10 percent additional tax. A qualified birth or adoption distribution is any distribution from an applicable eligible retirement plan to an individual if made during the 1-year period beginning on the date on which the child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.

Additionally, an individual may recontribute a qualified birth or adoption distribution (not to exceed the amount of the distribution) to an eligible retirement plan in which the taxpayer is a beneficiary and to which a rollover can be made. Although the distributions may be recontributed, a plan administrator is not required to provide a Code Sec. 402(f) notice to a recipient of a qualified birth or adoption distribution.

Required Minimum Distributions

The SECURE Act also amended Code Sec. 401(a)(9) to change the required beginning date for minimum distributions from retirement plans. The new required beginning date for an employee or an IRA owner is April 1 of the calendar year following the calendar year in which the individual attains age 72, rather than April 1 of the calendar year following the calendar year in which the individual attains age 70-1/2. This is effective for distributions required to be made after December 31, 2019, with respect to individuals who will attain age 70-1/2 after that date. As a result of this change, employees and IRA owners who will attain age 70-1/2 in 2020 will not have a required beginning date of April 1, 2021.

Model Notices

To assist with the implementation of the modified safe harbor explanations, the IRS has released two model safe harbor explanations: one for distributions that are not from a designated Roth account, and the other for distributions from a designated Roth account. Both explanations should be provided to a participant if the participant is eligible to receive eligible rollover distributions from both a designated Roth account and an account other than a designated Roth account. A plan administrator or payor may customize a safe harbor explanation by omitting any information that does not apply to the plan. Alternatively, a plan administrator or payor may provide an explanation that is different from a safe harbor explanation. Any explanation must include the information required by Code Sec. 402(f) and must be written in a manner designed to be easily understood.

The IRS has reminded taxpayers that the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) can provide favorable tax treatment for withdrawals from retirement plans and Individual Retirement Accounts (IRAs). Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before December 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans and others.

The IRS has reminded taxpayers that the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) can provide favorable tax treatment for withdrawals from retirement plans and Individual Retirement Accounts (IRAs). Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before December 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans and others.

Also, until September 22, 2020, individuals eligible to take coronavirus-related withdrawals may be able to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan, if their plan allows. Loans are not available from an IRA. For eligible individuals, plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before January 1, 2021. A suspended loan is subject to interest during the suspension period, and the term of the loan may be extended to account for the suspension period.

To be eligible for COVID-19 relief, coronavirus-related withdrawals or loans can only be made to an individual if:

• the individual is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetics Act);
• the individual’s spouse or dependent is diagnosed with COVID-19 by such a test; or
• the individual, their spouse, or a member of the individual’s household experiences adverse financial consequences from: (1) being quarantined, furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed, due to COVID-19; or (2) closing or reducing hours of a business owned or operated by the individual, the individual’s spouse, or a member of the individual’s household, due to COVID-19.

Taxpayers can learn more about these provisions in IRS Notice 2020-50, I.R.B. 2020-28, 35. The IRS has also posted FAQs that provide additional information.

The Treasury and IRS have issued final and proposed regulations under the global intangible low-taxed income (GILTI) and subpart F provisions for the treatment of high-taxed income. The final regulations provide guidance on determining the type of high-taxed income that is eligible for the exclusion (the "GILTI high-tax exclusion" or GILTI HTE).

The Treasury and IRS have issued final and proposed regulations under the global intangible low-taxed income (GILTI) and subpart F provisions for the treatment of high-taxed income. The final regulations provide guidance on determining the type of high-taxed income that is eligible for the exclusion (the "GILTI high-tax exclusion" or GILTI HTE).

Proposed regulations generally conform the rules for the subpart F high-tax exception to the rules for the GILTI high-tax exclusion. A single election is provided under Code Sec. 954(b)(4) for purposes of subpart F and tested income.

Under the Code Sec. 954(b)(4) high tax exception, income received by a controlled foreign corporation (CFC) is excluded under subpart F, if the income is subject to an effective rate of foreign tax that is greater than 90 percent of the maximum U.S. corporate tax rate.

Final Regulations on the GILTI HTE

The final regulations:

• provide that the GILTI HTE applies, on an elective basis, to high-taxed income of a CFC that is excluded from foreign base company (FBCI) ( Code Sec. 954) or insurance income ( Code Sec. 953) under Code Sec. 954(b)(4), regardless if the income would otherwise be FBCI or insurance income;
• provide that the effective foreign tax rate is determined on a tested unit basis;
• provide rules to determine the net amount of income (i.e., tentative tested income) and the foreign taxes paid or accrued with respect to such net amount of income that are used to compute the effective rate of tax;
• indicate how to make a GILTI HTE election; and
• do not provide rules that account for the use of foreign tax NOL carryforwards.

An exception under Code Sec. 954(b)(4) for purposes of the GILTI HTE applies to any item of income that is subject to an effective rate of tax greater than the maximum U.S. corporate tax rate, which is 18.9 percent based on a 21 percent tax. Controlling domestic shareholders of CFCs can elect to apply the exception to items of income that would not otherwise be FBCI or insurance income. An item of gross income is subject to a high-rate of foreign tax, if after taking into account properly allocable expenses, the net item of income is subject to an effective rate of tax above the statutory threshold.

The high-tax exception is applied on the basis of the items of gross income of a tested unit of a CFC, rather than the CFC as a whole. All tested units of a CFC in the same country are generally grouped together to determine the effective foreign tax rate for the purpose of applying the high-tax exclusion. The approach minimizes the blending of tax rates within a CFC and is thought to provide a more accurate idea of the income subject to a high-rate of foreign tax.

The election to exclude high-taxed income from gross tested income is generally made or revoked for a one-year period.

Proposed Regulations Single Election

The proposed regulations provide for a single election under Code Sec. 954(b)(4) for purposes of both subpart F and GILTI, based on the final GILTI high-tax exclusion regulations.

Under the proposed regulations:

• the election is made with respect to all members of a CFC group (rather than on a CFC-by-CFC basis);
• the determination of whether income is high taxed is made on a tested unit-by-unit basis;
• the determination of high tax income is simplified by grouping certain income that would otherwise qualify as subpart F income with income that would otherwise qualify as tested income for purposes of determining the effective foreign tax rate, and for purposes of the high-tax exception; and
• the method for allocating and apportioning deductions to items of gross income is modified for purposes of the high-tax exception.

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.