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Tax Alerts
Tax Briefing(s) 2018 Year-End Tax PlanningTax Reform 2.02018 Post-Filing Season UpdateCongress Approves Sweeping Tax Overhaul
2019 Inflation Adjustment Amounts Released
The IRS has released new inflation-adjusted amounts for 2019. These inflation-adjusted figures generally apply to tax years beginning in 2019 or transactions or events occurring in calendar year 2019.... 2019 Inflation Amounts for Pension Plans, Retirement Accounts Released
The IRS has released the 2019 cost-of-living adjustments (COLAs) for:pension plan dollar limitations, andother retirement-related provisions.Inflation AdjustmentsThe contribution limit has increased f... Final Rules Expand Contraception Coverage Exemption
The government has released a joint agency rule finalizing and expanding the exemption from the contraceptive coverage mandate under the Patient Protection and Affordable Care Act (ACA) ( P.L. 11... Exemptions Under ACA for Various Entities Holding Moral Convictions
The government has released a joint agency rule finalizing and expanding exemptions for various entities and individuals with sincerely held moral convictions opposed to coverage of some or all contra... UNICAP Regs Finalize Modified Simplified Production Method
Final regulations issued under the uniform capitalization (UNICAP) rules adopt a new simplified method—the "modified simplified production method"—for determining additional Code... Leave-Based Donation Programs Allowed for Victims of Hurricane Michael
The IRS has extended leave-based donation programs to victims of Hurricane Michael. These programs allow employees to forgo vacation, sick, or personal leave. In return, the employer makes cash donati... Final Regulations Issued on Return Preparer Due Diligence
Amendments to the return preparer regulations expand the scope of preparer due diligence. The regulations apply to the due diligence penalty as it applies to:the child tax credit;the additional child ... Enrolled Agent Application, Renewal Fees to Double
Becoming and remaining an enrolled agent or enrolled retirement plan agent will soon cost more. The IRS is proposing to increase the fees for becoming and renewing as an enrolled agent to $67. The fee... Adjusted Applicable Dollar Amount for Fee Imposed on Health Insurance Plans Announced
The IRS has announced that the applicable dollar amount used to calculate the fees imposed by Code Secs. 4375 and 4376 for policy and plan years that end on or after October 1, 201... ME - Assessment recomputed because income from sale of property was overstated
A taxpayer’s Maine personal income tax assessment recomputed because the assessment overstated the income the taxpayer received from the sale of a property. The taxpayer argued that the assessme... MA - Assessed value upheld as taxpayer failed to meet burden of proof
A Massachusetts taxpayer’s appeal to abate property taxes on its property was denied by the Appellate Tax Board (Board) because the taxpayer failed to prove that the property’s fair market... NH - Governors responds further to wayfair
Following the decision in South Dakota v. Wayfair, Inc., U.S. Supreme Court, Dkt. No. 17-494, June 21, 2018, New Hampshire Governor Chris Sununu joined Attorney General Gordon MacDonald and Busin... NY - Taxpayer not entitled to credit for taxes paid to another state because income was not derived from that state
For New York personal income tax purposes, taxpayers were not entitled to credit for taxes paid to another state because their income was not derived from that state. In this matter, the taxpayers mai... (UPDATED 12/26/17) Congress has passed the 2017 Tax Cuts and Jobs Act. There are many significant changes to the tax laws that are very complex in its implications and will affect all taxpayers. As the year 2017 comes to a close, there are a few tax planning ideas you could consider. (UPDATED 12/26/17) Congress has passed the 2017 Tax Cuts and Jobs Act. There are many significant changes to the tax laws that are very complex in its implications and will affect all taxpayers. As the year 2017 comes to a close, there are a few tax planning you could consider. 1. Consider prepaying your 2018 real estate taxes before 12/31/17. Many taxpayers will loose the deduction starting next year. However, if you are in AMT in 2017 you might not receive a tax benefit even if you prepay. Please call us to discuss. 2. Consider setting up a Donor Advised (Charitable) Fund before 12/31/17. If you have limited mortgage interest deduction, setting up a Donor Advised Fund for future charitable contribution might provide you with current tax benefits. 3. If you are considering buying a new car for business use before 12/31/17, it might be beneficial to delay the purchase. Please call us to discuss. Please remember that everyone’s tax situation is different and we would encourage you to call us to determine whether any of these or other tax planning strategies would be right under your circumstances. The House and Senate have each passed different versions of the Tax Cuts and Jobs Act. Both bills have a lot in common, including cuts in the corporate tax rates, elimination of a number of tax deductions and changes to the estate tax. Both bills lower the US corporate tax rates and move the United States to a “territorial” dividend exemption rather than a “worldwide” system of international taxation. The House bill replaces the current seven tax brackets with four brackets (highest bracket of 39.6%) while the Senate bill keeps the seven brackets but changes the tax rate in each bracket (highest bracket of 38.5%). Both bills (a) provide a reduced tax rate for pass through entities (partnerships and S corporations) under limited circumstances, (b) increase the individual standard deduction, (c) change the state and local tax deduction, and (d) increase the child tax credit. The House and Senate have to reconcile the two versions of the bills in a conference committee and then pass the final version of the bill in both the House and the Senate. As the US Congress is working on tax reform, below are some of the tax planning strategies that are worth considering. The goal is to minimize tax liability both for 2017 and 2018. Please remember that everyone’s tax situation is different and we would encourage you to call us to determine whether any of these or other tax planning strategies would be right under your circumstances. Retirement Plans The maximum IRA contribution is $5,500 (plus $1,000 if you are over 50 before the end of 2017). Consider making non-deductible contributions if you are not eligible to make a contribution to a Roth IRA or a deductible IRA. Maximize your contributions to 401(k), 403(b) or 457 plans. Participants are permitted to defer up to $18,000 in 2017 and $18,500 in 2018 (plus an additional $6,000 if eligible for catch-up contributions). Your employer may match some of your contributions. For owners of small businesses, a Defined Contribution Retirement Plan with a 401(k) could be set up so that the key people get a large percentage of the total contribution. The maximum annual addition is $53,000 for 2017 ($59,000 if you are eligible for catch-up contributions). If a similar plan is not set up for your business, please call us to review the options. Roth Contributions/Conversions If you are not eligible to contribute to a Roth IRA, you should consider contributing to a nondeductible IRA and then convert the amount to a Roth IRA. However, if you have other IRA accounts, this conversion may be partially taxable. Please call us to discuss if this would apply in your tax situation. Medicare Taxes An additional 0.9% Medicare Hospital Insurance tax may apply to wages/self-employment income of individuals and an additional 3.8% Medicare tax on net investment income including interest, dividends, annuities, royalties, rents, capital gains, etc. for adjusted gross income in excess of specified thresholds. This tax is not applicable to income from self-owned property rented to your trade or business. For owners of S corporations there is a tax planning opportunity of splitting the income between wages, which are subject to Medicare tax and distributions which are not subject to this tax. Rental Income Exclusion Rental income from your primary or second home for less than 15 days is tax-free. Income Deferral and Accelerate Deductions In general, it is advantageous to defer income to a subsequent year and accelerate deductions into the current year. However, if you expect to be in a higher tax bracket in 2018, it may be beneficial to accelerate income to 2017 and delay deductions to next year. Section 179 Depreciation and Bonus Depreciation The Section 179 deduction of $510,000 can be used to expense new or used business assets purchased and placed in service in 2017. This deduction has some limited application for an SUV (Sports Utility Vehicle) weighing between 6,000 and 14,000 pounds and used more than 50% for business. 50% bonus depreciation for new business assets is effective for tax year 2017 but phases down to 40% in 2018. Business Vehicles In case of a trade-in of a business vehicle at the time of buying a new vehicle, IRS rules dictate that the “tax basis” of the old vehicle should be rolled into the cost of the new vehicle. No gain or loss is recognized at the time of purchase. However, in situations where the tax basis is in excess of the trade-in value, it may be beneficial to sell the old vehicle so as to recognize the loss. Kiddie Tax A dependent child’s income may be subject to tax at the parent’s marginal tax rate on the child’s unearned income in excess of $2,100. The kiddie tax includes dependents under 18 years of age or under 24 years of age if a full time student. If not subject to kiddie tax, consider taking advantage of the 0% capital gains tax rate by transferring appreciated property to your children. Consideration would have to be given to gift and estate tax consequences. Health Savings Accounts (HSA) Discuss with health insurance providers to see if they offer a high deductible policy that qualifies for an HSA. The 2017 contributions limits are $6,750 for a family policy and $3,400 for a single policy. Each spouse can contribute an additional $1,000 if they are at least age 55. Contributions to these accounts can be used as a vehicle for long term tax-free growth and the withdrawals will not be taxable if they are used to pay medical expenses. However, HSA distributions used for other purposes may be subject to additional taxes. Flexible Spending Accounts (FSA) Employer-sponsored Flexible Spending Accounts permit you to pay qualified medical expenses on a pretax basis thus reducing your taxable income. Please discuss with your employer to see if this option is available to you. Family Members as Employees Consider shifting income to a child or other family member in a lower tax bracket by employing them in your business. Employing your spouse in the business also provides an opportunity to deduct business travel costs, increase contributions to retirement plans and claim child care credit. For unincorporated businesses where the children are working in the business, payroll payments to children (under age 18) of the taxpayer may not be subject to FICA tax. In addition to a standard deduction, a child with earned income can contribute up to $5,500 of earned income into a traditional or Roth IRA. Household Employees If you hire individuals for various household work you would need to determine from a tax perspective whether these individuals are considered independent contractors or employees. If you pay a household employee more than $2,000 in 2017, you could be liable to pay Social Security and Medicare taxes for that individual when you file your personal 2017 income tax returns. Capital Gains and Losses Review your taxable investment portfolio for potential gains and losses in 2017. Consider offsetting capital losses with capital gains in your taxable investment portfolio. Capital losses are fully deductible against capital gains and an additional $3,000 only against ordinary income. Any excess capital losses are carried forward and offset against future income. If you are in the 10% or 15% income tax brackets, long term capital gains may be tax-free subject to certain limits. Required Minimum Distributions (RMD) For those who turned 70 ½ in 2017 you should consider taking this year’s distribution before December 31, 2017. Alternatively you could wait until April 1, 2018, but that would require you to take two distributions in 2018. The combined tax liability of 2017 and 2018 should be reviewed when making this decision. Deductions In case you have paid business expenses from your personal account, claim reimbursement from your business account. Please make sure to keep supporting documents with your business records. Charges on a credit card in 2017 are deductible on the 2017 tax return even though the payment to the credit card company will be made in 2018. Automobile and entertainment expenses The Tax Court has repeatedly held that vehicle expenses will be disallowed in full unless the taxpayer satisfies strict substantiation requirements which include a contemporaneously completed daily mileage log, with notation regarding person visited and the business purpose of the visit. Meal and entertainment expenses need to be documented by noting who the taxpayer was with, where and when the event took place and what business purpose was served. Alternative Minimum Tax (AMT) Triggers Although expenses paid/deemed paid during the year reduce your regular income tax, they could still result in the payment of alternative minimum tax (AMT), a separate tax system. A few of the expenses that could trigger AMT are (1) large deduction for state income taxes and real estate taxes (2) large deduction for unreimbursed employee business expenses (3) interest on mortgage not used to buy, build or improve your home. Donations Increase your deductible charitable contributions for the year by using a credit card to make a tax-deductible donation in 2017 that you can pay in 2018. Instead of donating cash, consider appreciated publicly traded securities held for more than one year. You would be entitled to a charitable deduction for the market value of the securities and not have to pay tax on the capital gains. Section 529 Qualified Tuition Program Consider funding a Section 529 Qualified Tuition Program (QTP). Contributions to the QTP are not tax deductible but distributions are tax free if they are used to pay qualified education expenses at most post-secondary educational institutions. Mutual Funds Invest cautiously in mutual funds in your taxable accounts at the end of the year. Many funds make distributions towards the end of the year which would be taxable to the investor, unless the investment is held in a tax-sheltered account. Estate and Gift Tax If gifting is part of your estate and income tax planning, utilize the 2017 annual exclusion of $14,000 by making the gift before December 31, 2017. Any tuition costs paid directly to the school for a child’s or grandchild’s tuition, and amounts paid to the provider for medical expenses, do not count towards the annual exclusion. If you are paying graduate school costs for a child by selling stocks in a taxable portfolio, gifting the stocks instead to the child may save taxes. Establishing a Roth IRA for young children/grandchildren has many advantageous if they have earned income. If the children do not want to invest their own money, consider gifting them the amount they are eligible to contribute to the Roth IRA. It is advisable that your estate plan be reviewed periodically. Please call us if you would like us to assist in setting up or updating your estate plan. Foreign Income, Foreign Investments and Bank accounts All US taxpayers are subject to tax on their worldwide income. Also foreign direct investments held by the taxpayers require additional reporting and compliance. These require two common forms: (1) FinCen Form 114 – Report of Foreign Bank and Financial Accounts (FBAR), and (2) Form 8938 – Statement of Specified Foreign Financial Assets. The definition of foreign assets is very broad and includes ownership in foreign entities, brokerage accounts etc. Since the penalties, both civil and criminal, for not complying with these disclosure requirements are very steep, please make sure to compile the necessary information as required to comply with this requirement. Worker Classification IRS is continuing its ongoing reviews of worker’s classification between independent contractor and employee status. Both Federal and Massachusetts state law have a very broad definition of “employee” and you should review the current independent contractors in your business to ensure proper classification. Any independent contractor who feels that he/she was misclassified by the taxpayer could file Form 8919 with their federal income tax return to report such misclassification. This could result in a potential audit by the IRS on this issue and could prove to be expensive for your business. In certain instances the IRS has pursued criminal liability against the “employer” business owners. The House and Senate have each passed different versions of the Tax Cuts and Jobs Act. Both bills have a lot in common, including cuts in the corporate tax rates, elimination of a number of tax deductions and changes to the estate tax. Both bills lower the US corporate tax rates and move the United States to a “territorial” dividend exemption rather than a “worldwide” system of international taxation. The House bill replaces the current seven tax brackets with four brackets (highest bracket of 39.6%) while the Senate bill keeps the seven brackets but changes the tax rate in each bracket (highest bracket of 38.5%). Both bills (a) provide a reduced tax rate for pass through entities (partnerships and S corporations) under limited circumstances, (b) increase the individual standard deduction, (c) change the state and local tax deduction, and (d) increase the child tax credit. The House and Senate have to reconcile the two versions of the bills in a conference committee and then pass the final version of the bill in both the House and the Senate. Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271 Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271 President Donald Trump has signed bipartisan legislation, which expands a religious exemption for the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate. The exemption is effective for taxable years beginning after December 31, 2018. Religious Exemption SUPPORT for Patients and Communities Act ( HR 6) amends Code Sec. 5000A(d)(2)(a) to expand the religious conscience exemption for the ACA individual mandate. Individual taxpayers who rely solely on a religious method of healing for whom the acceptance of medical health services would be inconsistent with their religious beliefs are exempt from the ACA mandate to maintain health insurance or pay a penalty. Tax Reform Additionally, last year’s tax reform legislation essentially repeals the ACA’s individual mandate. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) repeals the ACA’s shared responsibility payment for individuals failing to maintain minimum essential coverage effective January 1, 2019. Congressional Republicans are looking to move forward with certain legislative tax efforts during Congress’s lame-duck session. The House’s top tax writer, who will hand the reins to Democrats next year, has reportedly outlined several tax measures that will be a priority when lawmakers return to Washington, D.C., during the week of November 12. However, President Donald Trump’s recently touted 10-percent middle-income tax cut does not appear to be one of them. Congressional Republicans are looking to move forward with certain legislative tax efforts during Congress’s lame-duck session. The House’s top tax writer, who will hand the reins to Democrats next year, has reportedly outlined several tax measures that will be a priority when lawmakers return to Washington, D.C., during the week of November 12. However, President Donald Trump’s recently touted 10-percent middle-income tax cut does not appear to be one of them. Democrats Take the House Republicans will lose their one-party rule in Washington, D.C. in the 116th Congress beginning in January 2019. As a result of the November 6 midterm elections, Democrats will control the House during the next Congress, and Republicans will retain control of the Senate. Currently, Rep. Kevin Brady, R-Tex., serves as chairman of the House’s tax-writing Ways and Means Committee. Republicans’ majority in both chambers of Congress enabled the GOP, in coordination with the Trump administration, to enact tax reform legislation last year. However, the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) reportedly did not turn out to be as popular as they had hoped. The TCJA’s unpopularity is at least in part why Republicans lost vital seats in the House, according to several reports. Lame-Duck Before the turnover of power, however, Brady is reportedly gearing up to introduce a tax extenders measure during the lame-duck session, which would extend certain temporary or expired tax breaks. Generally, Democrats have been supportive of year-end tax extender legislation. At this time, the details of the tax-extender proposal remain unclear. Additionally, Brady reportedly said on November 7 that a TCJA technical corrections bill with "minor changes" will move in the lame-duck session. Further, the Senate is expected to take up a House-approved retirement savings measure that is part of House Republicans’ "Tax Reform 2.0" efforts. Looking Forward House Ways and Means Committee ranking member Richard Neal, D-Mass., is expected to chair the committee in the 116th Congress. Neal has a fairly moderate tax-legislative record, and is considered on Capitol Hill to be "business-friendly." To that end, Neal has recently sponsored several retirement savings measures, which would enhance employer workplace savings accounts. Additionally, infrastructure and tax-related health care initiatives are expected to be a priority among House Democrats. GOP Retains Senate Republicans will continue to lead the Senate in the 116th Congress. While the GOP Senate majority may not be enough to approve additional GOP tax legislation, it is likely to prevent Democrats from repealing parts of the TCJA. However, it is expected on Capitol Hill that hearings will be held in both chambers’ tax writing committees to examine various provisions of the new tax law. Although a divided Congress can result in fewer tax bills being approved, successful legislation will likely be bipartisan. The Senate Finance Committee’s (SFC) top ranking Democrat has introduced a bill to restore a retirement savings program known as myRA that was terminated by Treasury last year. The myRA program was created by former President Obama through an Executive Order. The Senate Finance Committee’s (SFC) top ranking Democrat has introduced a bill to restore a retirement savings program known as myRA that was terminated by Treasury last year. The myRA program was created by former President Obama through an Executive Order. Retirement Savings "Cost-of-living is soaring with working families having less and less to save for their futures," SFC ranking member Ron Wyden, D-Ore., said in a November 15 tweet. "Today, I’m introducing a bill to address this retirement crisis." The Encouraging Americans to Save Bill is co-sponsored by Sens. Ben Cardin, D-Md., Bob Casey, D-Pa., Amy Klobuchar, D-Minn., and Michael Bennet, D-Colo. An earlier version of the bill, Sen. 2492, was introduced by Wyden in the 114th Congress that also aimed to expand the myRA program. "The Encouraging Americans to Save [Bill] enhances retirement savings incentives by restructuring the existing, nonrefundable saver’s credit into a refundable, government matching contribution of up to $500 a year for middle-class workers who save through 401(k) type plans or IRAs, "Wyden’s November 15 press release noted. Additionally, the bill would restore the myRA program, which Treasury determined last year was too costly to continue. myRA Program The Obama-era myRA program was designed as a government-sponsored retirement savings program available to individuals without access to employer-sponsored retirement plans. Although the program was determined to have very little demand to warrant its high operating costs, Democrats attributed the low sign-up to the program still being in its infancy. However, Republicans criticized the program as an "executive overreach" that could not become successful based on its investments in little interest yielding Treasury bonds and posed certain risks to taxpayers and employees. House House Ways and Means Committee ranking member Richard Neal, D-Mass., along with Wyden, sent a letter last year to Treasury Secretary Steven Mnuchin urging Treasury to continue the myRA program. Neal is expected to become chairman of the House’s tax writing committee this coming January in the 116th Congress. However, considering the Trump administration ended the program, it is seen as unlikely on Capitol Hill that Trump would support legislation to restore it. Moreover, Republicans will retain their majority-hold of the Senate in the next Congress, thus further limiting its chances of success. A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November. A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November. Middle-Income Tax Cut President Donald Trump announced on October 22 that a new 10 percent tax cut would soon be unveiled that will focus specifically on middle-income taxpayers. "President Trump is determined to provide further tax relief for middle-class families," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an October 23 statement. "We will continue to work with the White House and Treasury over the coming weeks to develop an additional 10 percent tax cut focused specifically on middle-class families and workers, to be advanced as Republicans retain the House and Senate," Brady added. Comment. Notably, Brady is essentially highlighting in his statement that any such additional tax cut measure would require a Republican majority for congressional approval. As November midterm elections near, there is "talk" on Capitol Hill that Republicans may lose control of the House. The additional 10 percent tax cut for middle-income taxpayers would aim to build upon the individual tax cuts enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). To that end, the House passed a "Tax Reform 2.0"package last month, which would make permanent the TCJA’s individual and small business tax credits. The TCJA’s individual tax cut provisions were enacted temporarily through 2025 in accordance with certain Senate budget rules. Although the TCJA did not receive one Democratic vote, the Tax Reform 2.0 package did clear the House with some bipartisan support. New Congress, New Tax Cut "We expect to advance this in the new session of Congress if Republicans maintain control of the House and Senate," Brady, said of the tax cut in an October 26 televised interview. However, President Trump said a couple of days before that a " resolution" would be introduced for the tax cut by the week of October 29. Democratic lawmakers have been criticizing Trump’s announcement as nothing more than politically-driven rhetoric ahead of the November 6 midterm elections. Several top congressional Democrats have voiced intent to repeal, at least in part, the TCJA enacted last December. While Republicans, on the other hand, want to continue building upon the TCJA’s tax cuts. "What President Trump is looking at is a 10 percent cut focused on middle-class workers and families…he still believes middle-class families are the ones always in the squeeze," Brady said on October 26. "We’ve been working with the White House and the Treasury on some ideas about how best to do it," he added. Net Neutral Trump has predicted that the tax cut will be net neutral. A chief complaint of last year’s tax reform among Democrats is the TCJA estimated $1.4 trillion price tag over a 10-year budget window. "If you speak to Brady and a group of people, we're putting in a tax reduction of 10 percent, which I think will be a net neutral because we're doing other things, which I don't have to explain now," Trump said. A spokesperson for Brady has reportedly said that cost measures for the tax cut will be addressed once the proposal has been scored. Looking Ahead At this time, it is considered likely on Capitol Hill that Republicans will retain control of the Senate, but several predictions continue to float that the GOP will lose its House majority. Republicans would likely need to retain control of both chambers for any chance of approving further individual tax cuts or making permanent those enacted under the TCJA. Although, the House approved its "Tax Reform 2.0" package last month, which includes measures to make permanent the TCJA’s individual tax cuts and enhance various savings accounts and business innovation, the Senate has showed little interest in taking up the package as a whole before the end of the year. However, consideration of the retirement and savings measure in the lame-duck session remains a possibility. IRS Commissioner Charles Rettig gave his first speech since being confirmed as the 49th chief of the Service at the American Institute of CPAs (AICPA) November 13 National Tax Conference in Washington, D.C. "You’re going to see things [I do] and go, ‘I can’t believe he did that,’" Rettig said. IRS Commissioner Charles Rettig gave his first speech since being confirmed as the 49th chief of the Service at the American Institute of CPAs (AICPA) November 13 National Tax Conference in Washington, D.C. "You’re going to see things [I do] and go, ‘I can’t believe he did that,’" Rettig said. Rettig, nominated by President Donald Trump last February and sworn in as IRS Commissioner on October 1, was a practicing tax attorney for over 30 years. "I’m not going to lose my tax edge," he told CPAs and other tax professionals. Modernizing the IRS Rettig, since being confirmed, has maintained that a top priority of the IRS is updating the Service’s technology. "We must work on our IT modernization efforts," Rettig said in a previous statement. Additionally, Rettig discussed the IRS’s antiquated information technology (IT) systems and software at the AICPA event. "I can call Google…or All State and a recording…says, 'you are 14th in line, we can call you back, you won't lose your place in line," Rettig said. "We don't have those tools, we need those tools." However, Rettig emphasized that the IRS’s employees should have pride in their roles, and that many IRS challenges are a result of constrained financial resources. IRS employees are "people who care,"Rettig said. Further, Rettig said he wants the IRS to gain taxpayers’ respect. Additionally, in line with the IRS’s increased efforts toward transparency, Rettig said that employee training materials for last year’s tax reform will soon be posted to the IRS’s website. The Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) was enacted last December. Rettig is tasked with overseeing the new tax law’s implementation. Tax Reform A copy of Rettig’s prepared remarks for the AICPA event was provided to Wolters Kluwer by the IRS on November 14. Notably, an IRS spokesperson told Wolters Kluwer that Rettig "did not stick to the script." In an informal outline of areas on which Rettig intends to focus, "the top of the list is continuing to implement the Tax Cuts and Jobs Act, which contains the most sweeping tax changes in 30 years,"Rettig stated in the prepared remarks. "The IRS has already made great progress in this area, but more remains to be done." IRS Guidance The IRS is committed to helping taxpayers and tax professionals understand the new tax law changes, as well as file returns next year timely and accurately, Rettig noted. To that end, the IRS will continue to issue guidance this year related to tax reform, according to Rettig. "You can expect additional guidance in the next several weeks in a number of areas," he added, which include TCJA provisions related to the following:
Additionally, the IRS will continue to update taxpayer forms and instructions related to new tax law provisions, Rettig noted. "We’re well on our way to having those completed in time for [the 2019] filing season." The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules. The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules. Transition Tax The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, revived and amended Code Sec. 965. The new Code Sec. 965 generally requires U.S. shareholders pay a mandatory one-time repatriation "transition" tax on untaxed foreign earnings of certain foreign corporations. "The Tax Cuts and Jobs Act treats these foreign earnings as repatriated and places a 15.5 percent tax on cash or cash equivalents, and an 8 percent tax on the remaining earnings. Generally, the transition tax can be paid in installments over an eight-year period when a taxpayer files a timely election under section 965(h),"Treasury Secretary Steven Mnuchin said in a statement. The IRS held an October 22 public hearing on NPRM REG-104226-18, which provides rules for implementing the transition tax created under last year’s tax reform. IRS officials did not provide any feedback at the hearing. AICPA Recommendations In an October 31 comment letter to the IRS, the AICPA offered 15 recommendations to provide taxpayers further clarity and guidance on tax reform’s transition tax requirements. The AICPA’s recommendations include the following:
ABA Recommendations Likewise, the ABA made similar recommendations on the proposed regulations and related guidance in an October 29 letter sent to IRS Commissioner Charles Rettig. The ABA’s 80-page letter grouped its principal recommendations into the three categories:
Last year’s tax reform created a new Opportunity Zone program, which offers qualifying investors certain tax incentives aimed to spur investment in economically distressed areas. Treasury Secretary Steven Mnuchin has predicted that the Opportunity Zone program will create $100 billion in private capital that will be invested in designated opportunity zones. Last year’s tax reform created a new Opportunity Zone program, which offers qualifying investors certain tax incentives aimed to spur investment in economically distressed areas. Treasury Secretary Steven Mnuchin has predicted that the Opportunity Zone program will create $100 billion in private capital that will be invested in designated opportunity zones. The IRS released the much anticipated proposed regulations for the Opportunity Zone program in October ( REG-115420-18). The proposed rules provide "clarity and some good news for taxpayers," Micheal Bernier, partner at Ernst & Young’s National Tax practice, told Wolters Kluwer in an emailed statement. Opportunity Zones The Opportunity Zone program was created under the Tax Cuts and Jobs Act ( P.L. 115-97) enacted in December 2017. The TCJA added Code Secs. 1400Z-1 and 1400Z-2, which include procedural rules for designating opportunity zones and provisions allowing qualifying taxpayers to elect certain income tax benefits. Although not a single Democrat voted for the TCJA, the Opportunity Zone program was based on a bipartisan bill sponsored by Sens. Tim Scott, R-S.C., and Cory Booker, D-N.J. The program "creates tax incentives to help stimulate the flow of capital into communities that need opportunity the most," Cory Booker said in an October 29 tweet. Generally, the proposed rules have been considered on Capitol Hill as leaning favorably toward taxpayers. However, stakeholders and practitioners are reporting that many questions remain. To that end, the Office of Information and Regulatory Affairs (OIRA), housed under the Office of Management and Budget (OMB), has announced that a second package of regulations is expected to be completed by the end of this year. Qualified Opportunity Funds The TCJA’s Opportunity Zone program generally established the following investor tax benefits:
"Most importantly, taxpayers can use the fund as collateral. This was a surprise and is important," Bernier told Wolters Kluwer. "The type of investments made by Opportunity Funds do have some strings attached, which are designed to make sure the investments are creating economic activity in the Opportunity Zones, not just buying and holding existing assets," he added. "Under an Opportunity Zone structure, if you refinance the property and take cash out of the Opportunity Zone fund, that would be a disposition and would trigger the gain, thus reducing the amount of investment that is eligible for the 10-year deferral." Real Estate Investors Additionally, real estate investors stand to receive significant tax advantages through the Opportunity Zone program, according to Bernier. "As collateral, it is possible to borrow against the Opportunity Zone fund, a very important option for real estate investors," he said. "There are a few extra hurdles to using that strategy, but it’s valuable in the real estate world and would be the rough equivalent of a cash-out refinancing." Additionally, Bernier noted the generous latitude that Treasury and the IRS used in defining certain statutory terms. For example, "‘substantially all’ of owned or leased assets was defined as 70 percent [in the proposed regulations]; this could have been as high as 90 percent or more," Bernier said. Further, "the time allowance for working capital is set at 30 months to deal with cash. This helps in getting the development done," he added. Too Flexible? The proposed regulations for the Opportunity Zone program may be too flexible, according to an October article released by the liberal-leaning Urban-Brookings Tax Policy Center (TPC). "Neither the statute nor the guidance ensure that the investments will benefit low- and moderate-income residents of these communities,"the TPC article noted. "The investment flexibility makes it very difficult to evaluate the success of Opportunity Zones." Additionally, TPC researchers noted the need for proper reporting under the Opportunity Zone program. "The next round of IRS regulations and tax forms is expected to detail those reporting requirements,"the TPC article said. "It will be vital that this disclosure provide the public with the answers to a series of basic questions: Who is investing in Opportunity Zones? How much is being invested? How is the money being used?" Likewise, the conservative-leaning Tax Foundation noted in an October 23 article that the proposed regulations do nothing to ensure the program’s success. "The benefits given to investors through opportunity funds are remarkably generous, and many of these regulations only increase and widen those benefits without regard to the results," the article said. Further, stakeholders testifying before the Senate Small Business Committee in early October also emphasized the importance of establishing proper reporting metrics for the program. Questions Remain Although stakeholder feedback has been largely positive, stakeholders and practitioners have noted several areas where additional IRS guidance is needed. Particularly, uncertainties surrounding the application of the QOF penalty, tax treatment of the sale of a QOF asset, and clarity on the definition of qualified opportunity zone business property are reportedly among items circulating the tax community as needing further guidance. After the IRS released the proposed regulations, Sen. Scott praised the guidance while also noting that it is incomplete. "The first set of rules released by the Treasury Department today reinforce that this will not be another bureaucratic process burdened by red tape, but rather a streamlined, efficient process that allows for investments to truly help communities in need," Scott said. Additionally, Bernier told Wolters Kluwer that future regulations are needed to "fill in gaps." The next package of proposed regulations are "anticipated in November and December, "he added. To that end, the House’s top tax writer has urged stakeholders in a recent statement to provide feedback on the proposed regulations. Moreover, those comments should include "identifying any areas where additional technical guidance would be valuable in providing certainty to potential investors and project managers," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said. The IRS is expected to soon release proposed regulations for tax reform’s new business interest limitation. "They are so broad that nearly every domestic taxpayer will be impacted," Daniel G. Strickland, an associate at Eversheds Sutherland, told Wolters Kluwer. The IRS is expected to soon release proposed regulations for tax reform’s new business interest limitation. "They are so broad that nearly every domestic taxpayer will be impacted," Daniel G. Strickland, an associate at Eversheds Sutherland, told Wolters Kluwer. The first set of proposed regulations for the Code Sec. 163(j) business interest limitation is expected to focus primarily on corporations. A second package of proposed regulations, expected sometime in December, will reportedly address the business interest limitation’s treatment of partnerships and S corporations. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, amended Code Sec. 163(j) to include a broader limitation on the business interest expense deduction. Before last year’s tax reform, the former Code Sec. 163(j) "earnings stripping" rules were applied much more narrowly to a specific type of debt-to-equity ratio held by corporations. Now, the amended Code Sec. 163(j)limitation encompasses all debt, regardless of entity or individual. The new business interest limitation was intended by Republicans, at least in part, to serve as a revenue raiser to help offset tax reform’s significant corporate tax rate reduction from 35 to 21 percent. OMB Review Currently, the proposed regulations for the Code Sec. 163(j) business interest limitation are under review at the Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA). OIRA received the proposed regulations from Treasury and the IRS on October 25, according to OIRA’s website. It is expected on Capitol Hill that a 10-day expedited review process that is available for tax reform-related regulations was requested. Business Interest Limitation Under the amended Code Sec. 163(j), a taxpayer’s annual business interest expense for the tax year, effective for tax years after December 31, 2017, is limited to the following three factors:
Under the TCJA, business interest excludes "investment interest" as defined in Code Sec. 163(d). Additionally, the calculation requirements for "adjusted taxable income" are set to change in 2022. Practitioner Insight "In terms of statutory language, phrases like ‘properly allocable’ jump off the page,"Strickland told Wolters Kluwer. Under the TCJA, "business interest" is defined as any interest paid or accrued on indebtedness that is properly allocable to a trade or business. It remains to be seen how the IRS will identify what is "properly allocable,"according to Strickland. "Since propriety differs between taxpayers and the government, it will be interesting to see how the regulations handle it," Strickland said. "Will we get a two-pronged objective and subjective test or will there be a bright line rule?" he posited. Additionally, Strickland said that tax practitioners expect allocation rules will be included, but noted that it remains unclear what form the rules will take. Whether there will be separate rules for different types of entities and how the IRS will treat allocation between exempt and non-exempt entities and within consolidated groups are all interesting yet unsettled components, according to Strickland. Further, Strickland predicted that the forthcoming regulations will clarify how Code Sec. 951A’s global intangible low-taxed income (GILTI) provision will interact with Code Sec. 163(j). "In the same vein, I expect that we will see how 163(j) plays with 168(k) and 267A, among other sections," he added. "As we get each new piece of the puzzle, the whole picture comes into focus." Everybody knows that tax deductions aren't allowed without proof in the form of documentation. What records are needed to "prove it" to the IRS vary depending upon the type of deduction that you may want to claim. Some documentation cannot be collected "after the fact," whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS. This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return. We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit. Everybody knows that tax deductions aren’t allowed without proof in the form of documentation. What records are needed to “prove it” to the IRS vary depending upon the type of deduction that you may want to claim. Some documentation cannot be collected “after the fact,” whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS. This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return. We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit. Charitable contributions. For cash contributions (including checks and other monetary gifts), the donor must retain a bank record or a written acknowledgment from the charitable organization. A cash contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment from the donee. “Contemporaneous” for this purpose is defined as obtaining an acknowledgment before you file your return. So save those letters from the charity, especially for your larger donations. Tip records. A taxpayer receiving tips must keep an accurate and contemporaneous record of the tip income. Employees receiving tips must also report the correct amount to their employers. The necessary record can be in the form of a diary, log or worksheet and should be made at or near the time the income is received. Wagering losses. Gamblers need to substantiate their losses. The IRS usually accepts a regularly maintained diary or similar record (such as summary records and loss schedules) as adequate substantiation, provided it is supplemented by verifiable documentation. The diary should identify the gambling establishment and the date and type of wager, as well as amounts won and lost. Verifiable documentation can include wagering tickets, canceled checks, credit card records, and withdrawal slips from banks. Vehicle mileage log. A taxpayer can deduct a standard mileage rate for business, charitable or medical use of a vehicle. If the car is also used for personal purposes, the taxpayer should keep a contemporaneous mileage log, especially for business use. If the taxpayer wants to deduct actual expenses for business use of a car also used for personal purposes, the taxpayer has to allocate costs between the business and personal use, based on miles driven for each. Material participation in business activity. Taxpayers that materially participate in a business generally can deduct business losses against other income. Otherwise, they can only deduct losses against passive income. An individual’s participation in an activity may be established by any reasonable means. Contemporaneous time reports, logs, or similar documents are not required but can be particularly helpful to document material participation. To identify services performed and the hours spent on the services, records may be established using appointment books, calendars, or narrative summaries. Hobby loss. Taxpayers who do not engage conduct an activity with a sufficient profit motive may be considered to engage in a hobby and will not be able to deduct losses from the activity against other income. Maintaining accurate books and records can itself be an indication of a profit motive. Moreover, the time and activities devoted to a particular business can be essential to demonstrate that the business has a profit motive. Contemporaneous records can be an important indicator. Travel and entertainment. Expenses for travel and entertainment are subject to strict substantiation requirements. Taxpayers should maintain records of the amount spent, the time and place of the activity, its business purpose, and the business relationship of the person being entertained. Contemporaneous records are particularly helpful. The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income.
The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income. IRS does not solicit financial information via email or social media The IRS will never request a taxpayer’s personal or financial information by email or social media such as Facebook or Twitter. Likewise, the IRS will not alert taxpayers to an audit or tax refund by email or any other form of electronic communication, such as text messages and social media channels. If you receive a scam email claiming to be from the IRS, forward it to the IRS at phishing@irs.gov. If you discover a website that claims to be the IRS but does not begin with 'www.irs.gov', forward that link to the IRS at phishing@irs.gov. How identity thieves operate Identity theft scams are not limited to users of email and social media tools. Scammers may also use a phone or fax to reach their victims to solicit personal information. Other means include: -Stealing your wallet or purse How do I know if I am a victim? Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice. If you believe the notice is not from the IRS, contact the IRS to determine if the letter is a legitimate IRS notice. If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification, such as a Social Security card, driver's license or passport, along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 1-978-684-4542. What should I do if someone has stolen my identity? If you discover that someone has filed a tax return using your SSN you should contact the IRS to show the income is not yours. After the IRS authenticates who you are, your tax record will be updated to reflect only your information. The IRS will use this information to minimize future occurrences. What other precautions can I take? There are many things you can do to protect your identity. One is to be careful while distributing your personal information. You should show employers your Social Security card to your employer at the start of a job, but otherwise do not routinely carry your card or other documents that display your SSN. Only use secure websites while making online financial transactions, including online shopping. Generally a secure website will have an icon, such as a lock, located in the lower right-hand corner of your web browser or the address bar of the website with read “https://…” rather than simply “http://.” Never open suspicious attachments or links, even just to see what they say. Never respond to emails from unknown senders. Install anti-virus software, keep it updated, and run it regularly. For taxpayers planning to e-file their tax returns, the IRS recommends use of a strong password. Afterwards, save the file to a CD or flash drive and keep it in a secure location. Then delete the personal return information from the computer hard drive. Finally, if working with an accountant, query him or her on what measures they take to protect your information. The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, requires certain U.S. taxpayers to report their interests in specified foreign financial assets. The reporting requirement may apply if the assets have an aggregate value exceeding certain thresholds. The IRS has released Form 8938, Statement of Specified Foreign Financial Assets, for this reporting requirement under FATCA.
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, requires certain U.S. taxpayers to report their interests in specified foreign financial assets. The reporting requirement may apply if the assets have an aggregate value exceeding certain thresholds. The IRS has released Form 8938, Statement of Specified Foreign Financial Assets, for this reporting requirement under FATCA. Reporting For now, only specified individuals are required to file Form 8938, but specified U.S. entities will eventually also have to file the form. Taxpayers who do not file a federal income tax return for the year do not have to File Form 8938, even if the value of their foreign assets exceeds the normal reporting threshold. Individuals who have to file Form 8938 include U.S. citizens, resident aliens for any part of the year, and nonresident aliens living in Puerto Rico or American Samoa. Reporting applies to specified foreign financial assets. Specified foreign financial assets include:
The aggregate value of the individual’s specified foreign financial assets must exceed specified reporting thresholds, as follows:
Taxpayers who report assets on other forms, such as Form 3520, do not have to report the asset on Form 8938, but must use Form 8938 to identify other forms on which they report. Filing Reporting applies for tax years beginning after March 18, 2010, the date that FATCA was enacted. Most taxpayers, such as those who report their taxes for the calendar year, must start filing Form 8938 with their 2011 income tax return. If you have any questions about Form 8938, please contact our office. |
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