Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.

Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, created the new Section 199A QBI deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, under current law the QBI deduction will sunset after 2025. In addition to the QBI deduction’s impermanence, its complexity and ambiguous statutory language have created many questions for taxpayers and practitioners.

The IRS first released much-anticipated proposed regulations for the new QBI deduction, REG-107892-18, on August 8, 2018. The proposed regulations were published in the Federal Register on August 16, 2018. The IRS released the final regulations and notice of additional proposed rulemaking on January 18, 2019, followed by a revised version of the final regulations on February 1, 2019. Additionally, Rev. Proc. 2019-11 was issued concurrently to provide further guidance on the definition of wages. Also, a proposed revenue procedure, Notice 2019-7, was issued concurrently to provide a safe harbor under which certain rental real estate enterprises may be treated as a trade or business for purposes of Section 199A.

Wolters Kluwer recently interviewed Tom West, a principal in the passthroughs group of the Washington National Tax practice of KPMG LLP, about the Section 199A QBI deduction regulations. Notably, West formerly served as tax legislative counsel at the U.S. Department of the Treasury’s Office of Tax Policy. This article represents the views of the author only and does not necessarily represent the views or professional advice of KPMG LLP.

Wolters Kluwer: What is your general overview of the revised, final regulations for the Section 199A Qualified Business Income (QBI) or "pass-through" deduction?

Tom West: I think it is admirable that Treasury and IRS were able to publish these final regulations so quickly and address so many of the comments and questions that the proposed regulations generated. I think they realized how important this particular package was to so many taxpayers for the 2018 filing season and, while questions obviously remain, having these rules out in time to inform decisions for this year’s tax returns is helpful. In particular, the liberalized aggregation rules and the additional examples regarding certain specified service trades or businesses (SSTBs) are the most consequential in my mind.

Wolters Kluwer: What should taxpayers and practitioners keep in mind in consideration of relying on either the proposed or final regulations for the 2018 tax year?

Tom West: I have to imagine that when choosing between the two, for most taxpayers the final regulations will ultimately provide the better result. The ability to aggregate at the entity level, which was only provided in the final regulations, may be a key consideration for those taxpayers with more complicated or tiered structures. That said, I do think taxpayers need to be careful in their aggregation modeling because you are going to be stuck with your aggregation once you’ve filed. It may be that some taxpayers wait on getting locked into a particular aggregation and continue to study the new rules—and even wait on additional guidance that may be coming. However, it may be important to note that the final regulations provide that if an individual fails to aggregate, the individual may not aggregate trades or businesses on an amended return—other than for the 2018 tax year.

Wolters Kluwer: How is the removal of the proposed 80 percent rule regarding specified service trades or businesses (SSTBs) from the final regulations likely to impact certain taxpayers?

Tom West: First of all, I think the removal of this rule is a demonstration of two important dynamics. One, the critical importance of the engagement of taxpayers in the comment process, and, two, the government’s willingness to listen and adapt in their rule-making. I don’t know if there are particular industries or taxpayers who will be impacted, but I do know that the change is a very logical and appropriate one, and logic doesn’t always prevail in these processes, so I’m happy to give the regulators credit when it does.

Wolters Kluwer: Which industries may have been helped or hindered by the final regulations with respect to SSTB rules?

Tom West: I’m not sure specific industries were helped, but the biggest positive in terms of the SSTB final rules is the carryover from the proposed regulations of the treatment of the skill or reputation provision. Had Treasury and the IRS gone in a different direction, there was a risk of that provision swallowing the rest of the 199A regime—not to mention how much more subjective the already sometimes difficult SSTB determinations would have become.

Wolters Kluwer: Are there any lingering, unanswered questions among taxpayers or practitioners that particularly stand out when determining what constitutes SSTB income?

Tom West: I think many taxpayers who have both SSTB and non-SSTB activities were hoping for more clarity, either in rules or examples, on how to acceptably segregate business lines or on when (or if) certain activities are inextricably tied together. There are also still lingering questions regarding when a trade or business is an SSTB—particularly in the field of health.

Wolters Kluwer: Were there any surprises in the final regulations?

Tom West: I don’t know if I’m surprised, knowing the concerns that led them to the decisions they made, but the fact that Treasury and IRS held the line on some of the SSTB-related rules is notable. I’m thinking specifically of the so-called "cliff" effect of the de minimis rule and the fact that owners of certain kinds of SSTB businesses, e.g., sports teams, are not allowed to benefit from the Section 199A deduction.

Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.

Republicans’ 2017 overhaul of the tax code created a new 20-percent deduction of qualified business income (QBI), subject to certain limitations, for pass-through entities (sole proprietorships, partnerships, limited liability companies, or S corporations). The controversial QBI deduction—also called the "pass-through" deduction—has remained an ongoing topic of debate among lawmakers, tax policy experts, and stakeholders.

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, created the new Section 199A QBI deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, under current law the QBI deduction will sunset after 2025. In addition to the QBI deduction’s impermanence, its complexity and ambiguous statutory language have created many questions for taxpayers and practitioners.

The IRS first released much-anticipated proposed regulations for the new QBI deduction, REG-107892-18, on August 8, 2018. The proposed regulations were published in the Federal Register on August 16, 2018. The IRS released the final regulations and notice of additional proposed rulemaking on January 18, 2019, followed by a revised version of the final regulations on February 1, 2019. Additionally, Rev. Proc. 2019-11, I.R.B. 2019-9, 742, was issued concurrently to provide further guidance on the definition of wages. Also, a proposed Revenue Procedure, Notice 2019-7, I.R.B. 2019-9, 740, was issued, concurrently providing a safe harbor under which certain rental real estate enterprises may be treated as a trade or business for purposes of Section 199A.

Wolters Kluwer recently interviewed Tom West, a principal in the passthroughs group of the Washington National Tax practice of KPMG LLP, about the Section 199A QBI deduction regulations. Notably, West formerly served as tax legislative counsel at the U.S. Department of the Treasury’s Office of Tax Policy. This article represents the views of the author only and does not necessarily represent the views or professional advice of KPMG LLP.

Wolters Kluwer: Neither the proposed nor final regulations for Section 199A give guidance as to when rental real estate activity constitutes a Section 162 trade or business. How might the application of the safe harbor provided for in IRS Notice 2019-7 offer taxpayers clarity? And how might failure to qualify for the safe harbor impact the determination of whether the rental activity is a trade or business under Section 199A?

Tom West: The safe harbor is helpful but it appears to be intended for relatively smaller taxpayers who may have had questions about their activities rising to the level of a trade or business. I don’t think falling outside of the safe harbor is dispositive—especially in light of the recent policy statement from Treasury regarding sub-regulatory guidance.

Wolters Kluwer: Can you speak to the some of the complexity that may be involved in tax planning with respect to achieving the right balance between adequate W-2 wages and QBI?

Tom West: Other than for small taxpayers, there is only a benefit under Section 199A if the limitations are met. It does not do any good to have QBI but then have insufficient W-2 wages and qualified property to meet the limitations. So when taxpayers are evaluating what constitutes a qualified trade or business (or whether to aggregate qualified trades or businesses) they will need to determine the amount of W-2 wages with respect to each QTB. Aligning the W-2 wages with the QTB will be important—but the salary expense will also result in a reduction in the amount of QBI and therefore the amount of any Section 199A benefit—so modeling becomes critical. Consideration should also be given to any collateral consequences—for instance the impact of the alignment on allocation and apportionment for state taxes.

Wolters Kluwer: According to a March 18, 2019, Treasury Inspector General for Tax Administration (TIGTA) report, Reference Number: 2019-44-022, IRS management indicated that the timeline related to the issuance of Section 199A guidance did not provide enough time for the IRS to develop a QBI deduction tax form. Although the IRS did create a worksheet, do you have a prediction on what key elements may be included on the new form once released?

Tom West: I do think that worksheets could be developed that would facilitate the reporting of Section 199A information—particularly through tiered structures—so as to ease the reporting burden and enhance compliance.

Wolters Kluwer: The IRS has estimated that nearly 23.7 million taxpayers may be eligible to claim the Section 199A deduction and that more than 22.2 million (94 percent) of those eligible taxpayers will not require a complex calculation for the deduction. What notable differences do you expect there are between "complex" and the majority of calculations?

Tom West: For taxpayers under the Section 199A income thresholds ($157.5K single, $315K joint), the deduction is very easy to calculate and claim. Those taxpayers don’t need to worry about being in an SSTB, how much wages they paid, or the basis of their property. Once those taxpayers hit those income thresholds though, even in the phase-out range, things very quickly get complex—and that’s as a consequence of the statute; it is not something that the regulators can change.

Wolters Kluwer: Do you anticipate the IRS will issue further guidance on the Section 199A deduction?

Tom West: I do. As I said at the top, I think part of the government’s motivation in finalizing these regulations so quickly was providing guidance to taxpayers ahead of the tax-filing season. And while for the majority of taxpayers who are below the 199A cap there is probably now sufficient guidance, I think there are still a lot of questions for those with more complex situations. Given the number of taxpayers who are eligible for this deduction, and the importance of Section 199A as the big benefit to non-corporate businesses in what the Administration views as a signature legislative achievement, I have to believe that the government will be responsive to taxpayers’ requests for additional help on this provision. However, given that the provision is due to sunset, it will be important that any guidance is forthcoming in fairly short order to be of any usefulness to taxpayers.

Wolters Kluwer: At this time, do you have any recommendations for taxpayers and practitioners moving forward?

Tom West: As people are going through their tax filings this year, I’d keep a list of issues, questions, and areas where additional guidance would be helpful. It often happens that problems with new legislation or regulations don’t reveal themselves until taxpayers have to put pencil to paper and track their real-world numbers through returns. We’ll all have that experience this year and, with those lists of issues and questions in hand, there may be an opportunity to approach the IRS and Treasury in the hopes of getting resolution going forward. Keeping that list could also help identify areas for tax planning and perhaps ease the complexity of filing for 2019.

A bipartisan House bill has been introduced that would fix a GOP tax law drafting error known as the "retail glitch." The House bill, having over a dozen co-sponsors, is a companion measure to a bipartisan Senate bill introduced in March.

A bipartisan House bill has been introduced that would fix a GOP tax law drafting error known as the "retail glitch." The House bill, having over a dozen co-sponsors, is a companion measure to a bipartisan Senate bill introduced in March.

Immediate Expensing

The Restoring Investment in Improvements Act (HR 1869), sponsored by House tax writers Reps. Jimmy Panetta, D-Calif., and Jackie Walorski, R-Ind., would allow restaurants, retailers, and other leaseholders to immediately write off the cost of certain improvements. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted at the end of 2017, inadvertently excludes qualified improvement property (QIP) from the new 100 percent bonus depreciation provision.

The measure is a "small but critical fix for our job creators, and technical corrections like this are a normal part of the process when Congress enacts major reforms," Walorski said in a recent press release. "This bipartisan, commonsense bill will allow restaurants, retailers, and other small businesses to unlock the full benefits of tax reform and continue driving our nation’s economic growth."

Similarly, Panetta highlighted the negative impact that the loss of immediate expensing has caused many small businesses. "Our bill will allow restaurants, retailers, and other businesses to make the improvements they need to keep their stores competitive and safe and plan for the future," he said.

Although the "retail glitch" measure has solid bipartisan support, Democrats in general have seemed hesitant to fix any errors in the GOP tax law. To that end, House Ways and Means Committee Chairman Richard Neal, D-Mass., has said he would like to hold a hearing on technical corrections for the TCJA. The committee’s March 27 hearing on the TCJA did not specifically address technical corrections.

The House on April 9 approved by voice vote a bipartisan, bicameral IRS reform bill. The IRS bill, which now heads to the Senate, would redesign the IRS for the first time in over 20 years.

The House on April 9 approved by voice vote a bipartisan, bicameral IRS reform bill. The IRS bill, which now heads to the Senate, would redesign the IRS for the first time in over 20 years.

IRS Reform

The Taxpayer First Act of 2019 (HR 1957), as amended, cleared the House Ways and Means Committee by voice on April 2. The House and Senate both introduced the bicameral, bipartisan measure on March 28. If enacted, the bill would make numerous reforms to the IRS, some of which include modernizing antiquated information technology systems and enhancing taxpayer services and identity protections.

"With a new tax code, it is time for a new tax administrator," House Ways and Means Committee ranking member Kevin Brady, R-Tex., said in an April 9 statement. "I applaud the House for passing the Taxpayer First Act—a bold step to redesign the IRS to be an agency with one singular mission: putting taxpayers first."

The IRS Reform bill has been "years in the making," Brady said on April 9, echoing a joint statement that he and Ways and Means Chairman Richard Neal, D-Mass., along with other bipartisan tax writers recently issued. "The House Ways and Means Committee and the Senate Finance Committee have carefully and thoughtfully developed this legislation over several years, after numerous hearings and roundtables, in a bipartisan, bicameral manner," the lawmakers said.

AICPA Applauds Taxpayer First Act

The American Institute of CPAs (AICPA) issued an April 9 statement commending the House for passing HR 1957. "The AICPA appreciates the bipartisan recognition by members of the U.S. House of Representatives for bringing the Internal Revenue Service into the 21st Century," Edward S. Karl, vice president of taxation, said in a statement on behalf of the AICPA. "The AICPA has long been interested in and active in working to find ways to modernize the IRS so that it can better serve the needs of taxpayers and tax practitioners."

Free File Alliance

However, the bipartisan, bicameral bill has not advanced without its share of criticism. Several Democratic lawmakers have criticized a provision within the bill that would codify the Free File Alliance, which is an agreement between the IRS and certain tax preparation companies that includes the IRS being unable to directly assist in tax return preparation.

"Again and again in my service in the Senate I have battled the tax-preparation software industry to simplify filing taxes for the typical American," Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., said in an April 9 statement. "During the debate on the tax administration bill, my staff pushed back on a prohibition on the agency competing with private tax preparation services, and I will continue to push for my proposal for the pre-filed ‘simple’ return and the principle that a taxpayer should not have to use a private company to pay their taxes online," he added.

Looking Ahead

It remains unclear when the Senate will take up the Taxpayer First Act bill. However, the bill is presently expected on Capitol Hill to easily be approved in the Senate.

Proposed regulations address gains that may be deferred when taxpayers invest in a qualified opportunity fund (QOF). Taxpayers may generally rely on these new proposed regulations. The IRS has also requested comments.

Proposed regulations address gains that may be deferred when taxpayers invest in a qualified opportunity fund (QOF). Taxpayers may generally rely on these new proposed regulations. The IRS has also requested comments.

The proposed regulations also withdraw and replace placeholder provisions in an earlier set of proposed regulations ( REG-115420-18). These concern:

• the definition of "substantially all"regulations
• transactions that can trigger includible gain;
• the timing and amount of deferred gain that is included;
• treatment of leased property used in the qualified opportunity zone (QOZ) business;
• use of QOZ business property in the QOZ;
• sourcing of income to the QOZ business; and
• the reasonable period for a QOF to reinvest proceeds from the sale of qualifying assets.

In addition, within a few months the IRS expects to address administrative rules for a QOF that fails to maintain the required 90-percent investment standard, as well as information reporting requirements.

Finally, the IRS expects to revise Form 8996, Qualified Opportunity Fund, for 2019 and subsequent tax years. These revisions may require additional information, including the employer identification number (EIN) for the QOF business, and the amounts invested by QOFs and QOZ businesses located in particular QOZs.

"Substantially All" for QOZ Business

The 2018 regulations provided that a trade or business satisfies the "substantially all" test for a QOZ business if at least 70 percent of its tangible property is qualified opportunity zone business property. The new proposed regulations generally extend this 70-percent threshold to the "substantially all" tests for use. However, in the holding period context, the "substantially all" threshold is 90 percent.

Original Use of Purchased Tangible Property

The proposed regulations generally provide that the "original use" of tangible property acquired by purchase by any person starts on the date when that person or a prior person:

• first places the property in service in the qualified opportunity zone for purposes of depreciation or amortization; or
• first uses the property in the qualified opportunity zone in a manner that would allow depreciation or amortization if that person were the property’s owner.

Used tangible property will satisfy the original use requirement with respect to a QOZ so long as the property has not been previously used (that is, has not previously been used within that QOZ in a manner that would have allowed it to depreciated or amortized) by any taxpayer

In addition, a building or other structure that has been vacant for at least five years before being purchased by a QOF or QOZ business satisfies the original use requirement. Improvements made by a lessee to leased property satisfy the original use requirement and are considered purchased property for the amount of the unadjusted cost basis of the improvements.

Land can be treated as QOZ business property only if it is used in a trade or business of a QOF or QOZ business. The holding of land for investment does not give rise to a trade or business, and the land cannot be QOZ business property. Anti-abuse rules determine whether unimproved land can be qualifying property. However, other purchased real property generally must be substantially improved, determined on an asset-by-asset basis.

Leased Tangible Property in QOZ

Leased tangible property may be QOZ property if:

• the lease is entered into after 2017; and
• substantially all of the property’s use is in a QOZ during substantially all of the lease period.

However, the first-use requirement does not apply to leased tangible property. The leased property can generally also be acquired from a related person, though several conditions apply. The proposed regulations also provide methods for valuing the leased property.

QOZ Businesses

The proposed regulations:

• provide that in determining whether a substantial portion of intangible property of a QOZ is used in the active conduct of a trade or business, a substantial portion is at least 40 percent;
• address real property that straddles a QOZ;
• provide three safe harbors and a facts-and-circumstances test for determining whether a corporation or partnership derives at least 50 percent of its gross income from the active conduct of a qualified business;
• define "trade or business" by reference to Code Sec. 162, except that the ownership and operation (including leasing) of real property used in a trade or business can also be the active conduct of a trade or business; and
• provide a safe harbor for working capital.

Other Business Rules

The proposed regulations also address:

• Section 1231 gains;
• relief regarding the 90 percent asset test, including relief for newly contributed assets and QOF reinvestments;
• the amount of an investment for purposes of the deferral election;
• inclusion events, the timing on basis adjustments, includible amounts, and special rules for partnerships and S corporations;
• gifts and bequests;
• exceptions for disregarded transfers and some nonrecognition transactions;
• distributions and contributions;
• consolidated return provisions;
• holding periods and tacking rules;
• anti-abuse rules;
• special rules for Indian tribes and tribally leased property.

Comments Requested; Public Hearing Scheduled

A public hearing on the proposed regulations is scheduled for 10 am on July 9, 2019, at the New Carrollton Federal Building in Latnham, MD. Public comments may be mailed or hand-delivered to the IRS, or submitted via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-120186-18).

The IRS has provided a safe harbor for professional sports teams to avoid the recognition of gain or loss when trading players and/or draft picks. Under the safe harbor provision, the traded player’s contract or the traded draft pick would have a zero basis.

The IRS has provided a safe harbor for professional sports teams to avoid the recognition of gain or loss when trading players and/or draft picks. Under the safe harbor provision, the traded player’s contract or the traded draft pick would have a zero basis.

Value of Professional Sports Contracts

Professional sports teams enter into contracts with their personnel (e.g., managers, coaches, players, etc.). Typical personnel contracts provide an agreed-upon amount of compensation for a certain duration of service. The value of such a contract may fluctuate based on a variety of factors, including:

• player performance;
• the changing needs of the team and of other teams;
• a player’s effect on fan attendance; and
• the number of years until a player becomes a free agent and is able to sign a contract to play for any team in a league.

Other considerations affecting the value of a player contract include:

• the size of the team’s market (i.e., whether a smaller city or a major urban population);
• the cost of player development; and
• the impact of injuries and slumps on player performance.

In most cases, teams do not trade personnel contracts or draft picks unless the team thinks that it is receiving contracts of an equal or greater value. Because each party believes that they are receiving personnel contracts or draft picks of an equal or greater value, it is difficult to assign a monetary value to them. Accordingly, the IRS developed a safe harbor whereby each team is able to treat the traded contracts or draft picks as having a basis of zero, thus avoiding the recognition of gain or loss on the trade.

Safe Harbor Requirements

In order to use the safe harbor, professional sports teams must meet the following requirements:

• all teams involved in the trade must use the safe harbor;
• teams may only trade personnel contracts, draft picks, and/or cash;
• personnel contracts and/or draft picks cannot be Code Sec. 197 intangibles; and
• the financial statements of all teams involved in the trade must not reflect assets or liabilities resulting from the trade other than cash.

Application

Sports teams using the safe harbor will not recognize any gain or loss if they only trade personnel contracts or draft picks. However, teams that receive cash in a trade will recognize the amount of cash received as gain. In addition, the team providing cash to another team in the trade will receive basis in the personnel contract or draft pick equal to the amount of cash that it provided. A team providing cash to another team in a trade for two or more draft picks or personnel contracts must allocate its basis to each personnel contract or draft pick received from the other team by dividing the basis by the number of personnel contracts or draft picks received.

In certain cases, a team may have unrecovered basis in a draft pick or personnel contract under Code Sec. 167(c). In those instances, the team may recognize gain or loss based on the difference between the unrecovered basis and any cash received.

Effective Date

Teams may use the safe harbor for any trades involving personnel contracts or draft picks entered into after April 10, 2019. However, teams may choose to apply these rules in any open tax year.

Responding to growing concerns over the scope of tax-related identity theft, the House has approved legislation to give victims more information about the crime. The House also took up a bill expanding disclosure of taxpayer information in cases involving missing children and the Ways and Means Committee approved a bill impacting disclosures by exempt organizations.

Responding to growing concerns over the scope of tax-related identity theft, the House has approved legislation to give victims more information about the crime. The House also took up a bill expanding disclosure of taxpayer information in cases involving missing children and the Ways and Means Committee approved a bill impacting disclosures by exempt organizations.

Stolen identity refund fraud

Tax-related identity theft occurs when a criminal uses the personal identification of another to obtain a fraudulent refund. According to the IRS and the Treasury Inspector General for Tax Administration (TIGTA), tax-related identity theft continues to grow despite efforts to uncover and apprehend criminals. In 2014, the IRS estimated that it prevented the issuance of nearly $25 billion in fraudulent refunds. However, criminals obtained more than $5 billion in fraudulent refunds.

More often than not, individuals are unware they have been victims until they file their return and discover that a return has already been filed by an identity thief. In some cases, the IRS may send a letter to the taxpayer reporting that the agency identified a suspicious return using the individual’s personal information.

On May 19, the House approved the Stolen Identity Refund Fraud Prevention Act of 2016 (HR 3832). HR 3832 would require the IRS to notify victims of tax-related identity theft as soon as practicable that his or her personal information was used without authorization. The IRS also would be required to notify victims of tax-related identity theft of any criminal changes brought against the alleged identity thief.

Additionally, the bill would create a centralized point of contact for victims of identity theft. The centralized point of contact may be a team or subset of specially trained employees who can work across functions to resolve problems for the victim and who is accountable for handling the case to completion. The makeup of the team may change as required to meet IRS needs, but the procedures must ensure continuity of records and case history and may require notice to the taxpayer in appropriate instances.

The bill also would make willful misappropriation of a taxpayer’s identity for the purpose of making any return a felony. Under the bill, this offense would be punishable by a fine of up to $250,000 ($500,000 for a corporation), imprisonment for up to five years, or both, plus prosecution costs.

Disclosures

The House approved the bipartisan Recovering Missing Children Bill (HR 3209) on May 10. The bill amends the Tax Code to grant law enforcement access to taxpayer information while investigating missing and exploited children. Under Code Sec. 6103, return information is confidential.

Exempt organizations

The Preventing IRS Abuse and Protecting Free Speech Bill (HR 5053) limits the contributor information that must be reported by a Code Sec. 501(c) on its annual return. Generally, the IRS may not require an exempt organization to report the name, address, or other identifying information of any contributor to the organization with respect to any contribution, grant, bequest, devise, or gift of money or property, regardless of amount. The bill is awaiting action by the full House after having been approved by the Ways and Means Committee.

If you have any questions about these or other pending bills, please contact our office.

The IRS is gearing up to outsource some taxpayer collection accounts to private collection agencies. Legislation passed in 2015 directed the IRS to resume working with private collection agencies. The revived program is expected to operate in a similar manner to past ones, with emphasis on taxpayer protections.

The IRS is gearing up to outsource some taxpayer collection accounts to private collection agencies. Legislation passed in 2015 directed the IRS to resume working with private collection agencies. The revived program is expected to operate in a similar manner to past ones, with emphasis on taxpayer protections.

Prior outsourcing

Code Sec. 6306 permits the IRS to use private debt collection agencies. The IRS last contracted with private collection agencies 10 years ago (after prior outsourcing in the 1990s). At that time, the agency initially assigned 12,500 taxpayer accounts to private collection agencies. The accounts were only amounts for which the taxpayer had admitted liability.

The IRS also placed some restrictions on private collection agencies. They were not authorized to take enforcement actions involving liens, levies, or property seizures, work cases where the taxpayer qualified for an installment agreement longer than five years, or be involved in offers-in-compromise, bankruptcies, hardship issues, or litigation.

The IRS ended its work with private collection agencies after three years. The IRS had initially estimated that private collection agencies would collect $88 million. A study by the National Taxpayer Advocate after the program ended reported that private collection agencies had recovered some $86 million.

Revived program

The Fixing America’s Surface Transportation Act of 2015 (FAST Act) instructs the IRS to contract with private collection agencies for the collection of “inactive tax receivables.” The law defines “inactive tax receivables” as a taxpayer account that is:

1. Removed from the IRS’s active inventory for lack of resources or inability to locate the taxpayer;
2. For which more than one-third of the applicable limitations period has lapsed and no IRS employee has been assigned to collect the receivable; or
3. For which, a receivable has been assigned for collection but more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection.

Some taxpayer accounts are expressly excluded and will not be turned over to private collection agencies. These include cases were the taxpayer is seeking innocent spouse relief, taxpayers in combat zones, taxpayers under an installment agreement or offer-in-compromise, cases under examination, and others.

Without delay

President Obama signed the FAST Act into law in December 2015. Congress instructed the IRS to implement private tax collection “without delay.” To carry out the twin goals tax collection and taxpayer rights, lawmakers further directed the IRS to make it a priority to use collection contractors and debt collection centers currently approved by the U.S. Department.

Safeguards

Private collection agencies must adhere to the federal Fair Debt Collections Act. The Act prohibits debt collection companies from using abusive, unfair or deceptive practices to collect past due debts. Additionally, collection agencies cannot telephone at times they know, or should know, are inconvenient, such as before 8 a.m. and after 9 p.m., unless the individual agrees otherwise.

Another protection involves payment. Taxpayers will not make payments directly to the private collection agencies. Payments are required to be processed by IRS employees. Additionally, taxpayers can request that their account be returned to the IRS and no longer worked by the private collection agency.

If you have any questions about private tax collection, please contact our office.

To claim the EITC, a taxpayer must satisfy two tests with respect to earned income. First, the taxpayer must have some earned income. Additionally, the taxpayer’s earned income must fall within certain ranges as the credit is subject to income phaseout. As the taxpayer's adjusted gross income (or, if greater, earned income) rises beyond the phaseout threshold, the credit is reduced according to a percentage phaseout, until it is eliminated at the completed phaseout amount.

To claim the EITC, a taxpayer must satisfy two tests with respect to earned income. First, the taxpayer must have some earned income. Additionally, the taxpayer’s earned income must fall within certain ranges as the credit is subject to income phaseout. As the taxpayer's adjusted gross income (or, if greater, earned income) rises beyond the phaseout threshold, the credit is reduced according to a percentage phaseout, until it is eliminated at the completed phaseout amount.

For 2016, a taxpayer is able to claim the EITC if:

• The taxpayer had three or more qualifying children and earned less than $47,955 ($53,505 if married filing jointly)
• The taxpayer had two qualifying children and earned less than $44,648 ($50,198 if married filing jointly)
• The taxpayer had one qualifying child and earned less than $39,296 ($44,846 if married filing jointly), or
• The taxpayer did not have a qualifying child and earned less than $14,880 ($20,430 if married filing jointly).

For 2016, the maximum amount of investment income a taxpayer can have and qualify for the credit is $3,400.

For 2016, the maximum amount of EITC is:

• $6,269 with three or more qualifying children
• $5,572 with two qualifying children
• $3,373 with one qualifying child
• $506 with no qualifying children

A qualifying child must meet satisfy four tests: (1) relationship; (2) age; (3) residency; and (4) joint return. Examples of a qualifying child are a taxpayer’s son, daughter, stepchild, foster child, or a descendant of any of them (for example, grandchild), or brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them.

Special EITC rules apply to members of the U.S. Armed Forces. For purposes of the EITC, the term “Armed Forces” refers to officers and enlisted personnel in all regular and reserve units under the command of the U.S. Secretaries of Defense, Army, Navy, Marine Corps, Air Force, and Coast Guard.

Members of the U.S. Armed Forces do not have to report nontaxable pay for purposes of the EITC. They can elect to exclude from the EITC calculation the Basic Allowance for Housing (BAH), the Basic Allowance for Subsistence (BAS) and the amount of combat pay. Taxpayers must exclude all combat pay and not only a part of combat pay from earned income. A number of areas across the world have been designated as combat zones. These include Afghanistan, beginning Sept. 19, 2001; Somalia, beginning January 1, 2004; Yemen, beginning April 10, 2002, and other areas. The amount of a taxpayer’s nontaxable combat pay is reflected on the taxpayer’s Form W-2, in box 12, with code Q.

Example. Eugene, who serves in the U.S. Navy, and Karla are married and file a joint federal income tax return. The couple has one daughter, who is a qualifying child for purposes of the EITC. Eugene earned $10,000 in nontaxable combat pay. Eugene and Karla can elect to exclude the $10,000 in nontaxable combat pay from their calculation of the EITC or they can include the amount in the calculation of the EITC.

Yes …but only if it is a medical necessity. The IRS has ruled that uncompensated amounts paid to participate in a weight-loss program as treatment for a specific disease or diseases (including obesity) diagnosed by a physician are deductible expenses for medical care. The deduction is subject to the limitations of Code Sec. 213 and its regulations.

Yes …but only if it is a medical necessity. The IRS has ruled that uncompensated amounts paid to participate in a weight-loss program as treatment for a specific disease or diseases (including obesity) diagnosed by a physician are deductible expenses for medical care. The deduction is subject to the limitations of Code Sec. 213 and its regulations.

Generally, Code Sec. 213(a) provides a deduction for uncompensated expenses for medical care of an individual, the individual’s spouse or a dependent, subject to certain limitations. The term medical care is broad and encompasses the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. If an expense is merely beneficial to a person’s general health, the expense is not a qualified expense for medical care for tax purposes.

In 1979, the IRS ruled that the cost of participation in a weight loss program merely to improve appearance, general health or sense of well-being was not deductible. The individual’s participation in the weight loss program was not to cure or treat a disease or specific illness.

The IRS modified its position in 2002. That year, the IRS announced that expenses for certain weight-loss programs would qualify as a medical deduction. The IRS explained that in 2000, the World Health Organization (WHO) recognized that obesity is a disease. Where a physician has diagnosed an individual with suffering from a disease (including obesity) the cost of the individual’s participation in the weight-loss program as treatment for his obesity is an amount paid for medical care under Code Sec. 213. Uncompensated amounts paid to participate in the weight-loss program as treatment for the disease are deductible expenses for medical care, subject to the limitations of Code Sec. 213. Keep in mind that only taxpayers who itemize their deductions may claim the deduction for qualified medical expenses. Reimbursement for weight-loss expenses from a flexible spending account are also subject to the Code Sec. 213 rules, as well as review by the plan administrator.

Please contact our office for more information about deductible medical expenses.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of June 2016.

June 2
Employers. Semi-weekly depositors must deposit employment taxes for May 25–27. 

June 3
Employers. Semi-weekly depositors must deposit employment taxes for May 28–31. 

June 8
Employers. Semi-weekly depositors must deposit employment taxes for Jun 1–3. 

June 10
Employers. Semi-weekly depositors must deposit employment taxes for Jun 4–7.

Employees who work for tips. Employees who received $20 or more in tips during May must report them to their employer using Form 4070. 

June 15
Individuals. U.S. citizens or resident aliens living and working (or on military duty) outside the United States and Puerto Rico must file Form 1040 and pay any tax, interest, and penalties due.

Employers. For those to whom the monthly deposit rule applies, deposit employment taxes and nonpayroll withholding for payments in May. 

Employers. Semi-weekly depositors must deposit employment taxes for Jun 8–10.

Individuals, partnerships, pass-through entities and corporations make the second installment of 2016 estimated quarterly tax payments. 

June 17
Employers. Semi-weekly depositors must deposit employment taxes for Jun 11–14. 

June 22
Employers. Semi-weekly depositors must deposit employment taxes for Jun 15–17. 

June 24
Employers. Semi-weekly depositors must deposit employment taxes for Jun 18–21. 

June 29
Employers. Semi-weekly depositors must deposit employment taxes for Jun 22-24. 

July 1
Employers. Semi-weekly depositors must deposit employment taxes for Jun 25–28. 

July 7
Employers. Semi-weekly depositors must deposit employment taxes for Jun 29–30.

The 2016 filing season has closed with renewed emphasis on cybersecurity, tax-related identity theft and customer service. Despite nearly constant attack by cybercriminals, the IRS reported that taxpayer information remains secure. The agency also continued to intercept thousands of bogus returns and prevent the issuance of fraudulent refunds.

The 2016 filing season has closed with renewed emphasis on cybersecurity, tax-related identity theft and customer service. Despite nearly constant attack by cybercriminals, the IRS reported that taxpayer information remains secure. The agency also continued to intercept thousands of bogus returns and prevent the issuance of fraudulent refunds.

Cybersecurity

Concerns about cybersecurity and the confidentiality of taxpayer information were paramount during the filing season. According to the IRS, its basic systems are attacked “millions of times” every day by cybercriminals looking for weaknesses. In April, IRS Commissioner John Koskinen told Congress that the agency’s basic systems are secure. However, cybercriminals did breach its Get Transcript app in 2015 and other applications are under constant probing and attack by cybercriminals.

Koskinen assured Congress that the agency is beefing up its cybersecurity staffing. The IRS has hired 55 new cybersecurity experts. However, he acknowledged that the agency’s cybersecurity head has left and the position is open. This has drawn criticism from lawmakers who have questioned why such an important job is open. Koskinen said that the lengthy government hiring process is a deterrent to hiring cybersecurity professionals and urged Congress to reinstate the agency’s fast-track hiring process.

Identity theft

Closely related to cybersecurity is tax-related identity theft. The breach of the Get Transcript App in 2015 resulted in $50 million in fraudulent refunds paid to cybercriminals, according to a government watchdog.

Because the filing season has just ended, final statistics will not be released until later this year. However, interim statistics give a snapshot of the vastness of the problem of tax-related identity theft. As of March 5, 2016, the IRS had successfully prevented the issuance of some $180 million in fraudulent refunds.

To help prevent tax-related identity theft, the IRS has enhanced its return processing filters. Many of these enhancements, the IRS has explained, are invisible to taxpayers. Other enhancements have been made working with return preparers and tax software providers.

Customer service

The IRS’s level of customer service hit historic lows during the 2015 filings season. Almost two-thirds of all calls to the IRS went unanswered and the agency disconnected millions of callers (so-called “courtesy disconnects.”) There were also long lines for in-person assistance at IRS service centers nationwide. The IRS blamed the poor customer service on budget cuts and its inability to hire more employees to answer taxpayer questions.

In December 2015, Congress gave the IRS an additional $290 million and instructed the agency to use the money to improve customer service, along with boosting cybersecurity and combating identity theft. Koskinen told Congress in April that the agency spent more than $100 million of the $290 million on customer service. As a result, the agency’s level of customer service reached as high as 65 percent during the filing season. However, that level will fall to around 50 percent for all of 2016, Koskinen said. The additional employees hired during the filing season were merely temporary employees and their employment ended with the close of the filing season, Koskinen explained.

Return processing

The IRS expects to receive some 150.6 million returns this filing season. That number includes an estimated 13.5 million returns on extension. Taxpayers on extension have until October 17, 2016 to file.

If you have any questions about the 2016 filing season, please contact our office.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended:

Section 179 expensing. The PATH Act permanently extended the Code Section 179 dollar of investment limitations at the higher $500,000 and $2 million, levels, which are adjusted for inflation for tax years beginning after 2015 (it is $500,000 and $2,010,000 for 2016). In addition, starting only in 2016, the $250,000 limitation on the amount of section 179 property that can be attributable to qualified real property has been eliminated. Further, for tax years beginning after 2015, the Code Section 179 expense deduction is now allowed for air conditioning and heating units.

Bonus depreciation. In addition to the big news that the PATH Act extended Code Section 168(k) bonus depreciation to apply to most qualifying property placed in service before January 1, 2020, it made a number of modifications, including:

• replacement of the bonus allowance for qualified leasehold improvement property with a bonus allowance for additions and improvements to the interior of any nonresidential real property, effective for property placed in service after 2015; and
• allowance to farmers of a 50 percent deduction in place of bonus depreciation on certain trees, vines, and plants in the year of planting or grafting rather than the placed-in-service year, effective for planting and grafting after 2015.

Section 181 expensing. Special Section 181 expensing for qualified film and television productions is extended for two years to apply to qualified film and television productions commencing before January 1, 2017. However, the expensing rule is also expanded to apply to qualified live theatrical productions commencing after December 31, 2015.

WOTC. The Work Opportunity Tax Credit (WOTC) has been extended five years through December 31, 2019. In addition, the credit has been expanded and made available to employers who hire individuals who are qualified long-term unemployment recipients who begin work for the employer after December 31, 2015.

Research credit. The PATH Act permanently extended the research credit that applies to amounts paid or incurred after December 31, 2014. However, a new allowance of the research credit against alternative minimum tax liability applies to credits determined for tax years beginning after December 31, 2015. In addition, a new payroll tax credit associated with the research credit applies only to tax years beginning after December 31, 2015 (Act Sec. 121(d) (3) of the PATH Act).

Military differential pay. The PATH Act extended the employer tax credit for differential wage payments made to qualified employees on active military duty has been made permanent and applies to payments made after December 31, 2014. Effective only for tax years beginning after December 31, 2015, however, the credit may be claimed by all employers regardless of the average number of individuals employed during the tax year. The credit is also no longer limited to eligible small business employers with less than 50 employees.

Teachers' classroom expense deduction. The PATH Act permanently extended the above-the-line deduction for elementary and secondary school teachers' classroom expenses. Additionally, for tax years after 2015, the Act includes "professional development expenses" within the scope of the deduction. These expenses include courses related to the curriculum in which the educator provides instruction.

Nonbusiness energy property credit. The PATH Act extended the nonrefundable nonbusiness energy property credit allowed to individuals under Code Sec. 25C for two years, making it available for qualified energy improvements and property placed in service before January 1, 2017. For property placed in service after December 31, 2015, the standards for energy efficient building envelope components are modified to meet new conservation criteria. 

If you have any questions about these new “extenders,” please contact our office.

The IRS has issued its annual Data Book for fiscal year (FY) 2015, which provides statistical information on activities such as examinations and collections conducted by the IRS from October 1, 2014 to September 30, 2015. For FY 2015, the Data Book shows the total number of audits conducted by the IRS was 1.37 million, down from the 1.38 million examined in FY 2014.

The IRS has issued its annual Data Book for fiscal year (FY) 2015, which provides statistical information on activities such as examinations and collections conducted by the IRS from October 1, 2014 to September 30, 2015. For FY 2015, the Data Book shows the total number of audits conducted by the IRS was 1.37 million, down from the 1.38 million examined in FY 2014.

Returns filed

Categories reflecting the main functions of the IRS, processing federal tax returns and collecting revenue, saw a marked increase in FY 2015 in comparison to the same time last year. The information in the Data Book shows that the IRS processed more than 243 million tax returns and related forms and issued more than 199 million refunds, amounting to $403.3 billion. The IRS collected more than $3.3 trillion in gross taxes.

Audit coverage

In total, the IRS audited 0.7 percent of all returns filed in calendar year (CY) 2014. The data shows that the number of audited returns has been decreasing since 2010, the IRS reported.

A majority of the audits, nearly 73 percent, were conducted via correspondence. The remainder was field audits. The IRS reported that 28,000 taxpayers did not agree with the examiner’s determination. The amount disputed across those who disagreed with the IRS was approximately $7.4 billion.

For FY 2015, the Data Book states that examinations protected approximately $2.1 billion in refund payments for taxpayers. Of that amount, $2.0 billion came from field examinations and $122.3 million from correspondence examinations.

Individuals. Individual returns filed in 2014, including both business and nonbusiness taxpayers, were audited at 0.8 percent, which amounted to approximately 1.2 million returns, during FY 2015, based on more than 146.8 million individual returns filed. The audit rate rose significantly for income levels of $1 million or more. The audit rate for individuals in the $10 million or more level rose to 34.69 percent, more than double the audit rate reported in FY 2014.

The IRS noted that the total number of individual tax return examinations has decreased by 22 percent over the last five years. The agency attributes the decrease to the fact that FY 2015 marks the fifth consecutive year that the IRS budget has been decreased, which brought about a 15-percent reduction in full-time staff as compared to five years ago. Accordingly, operations across a number of areas, including return examinations, were downsized. Of the 1.2 million individual income tax returns examined, almost 40,000 resulted in additional refunds to taxpayers, totaling more than $1.1 billion.

Although the audit rate for higher income individual taxpayers experienced a considerable jump in CY 2014, the number of returns filed for this category, as a percentage of the total returns filed, remained fairly constant.

Partnerships. Partnerships and S corps filed a total of approximately 8.4 million returns during FY 2015, a slight increase from FY 2014 when these types of entities filed almost 8.2 million returns. In addition, the audit rate increased slightly from 0.39 percent in FY 2014 to 0.45 percent in FY 2015. In FY 2014, IRS officials announced that the agency intended to concentrate more heavily on partnership audits. The data appears to reflect this movement, as the audit rate rose 0.1 percent to 0.5 in FY 2015.

Corporations. The IRS examined nearly 1.3 percent of all corporate returns (other than S corps) during FY 2015, based on a total of nearly 1.9 million returns and 24,761 examinations. The IRS reported that during FY 2015, it recommended more than $10.36 billion in additions to tax for corporate returns. The additions to tax recommended for returns filed by corporate taxpayers with more than $20 billion in assets comprised approximately 38 percent of the total additions to tax. Large corporations with total assets between $5 billion and $20 billion experienced an audit rate of 36.1 percent, showing a decrease from FY 2014 when the audit rate for this same category was 44.3 percent. In addition, large corporations with total assets greater than $20 million experienced a substantial decrease in terms of audit rate with 64 percent, whereas in FY 2014, the audit rate was 84.2 percent, the IRS added. 

Tax-exempt organizations. The IRS reported that it received 787,339 returns from tax-exempt organizations in CY 2014 and examined 6,392 tax-exempt entities and related taxable returns in FY 2015. This shows a decrease over the 8,084 tax-exempt entities examined out of 765,395 returns filed in CY 2013.

Individual taxpayers may claim a nonrefundable personal tax credit for qualified residential alternative energy expenditures. The residential alternative energy credit generally is equal to 30 percent of the cost of eligible solar water heaters, solar electricity equipment, fuel cell plants, small wind energy property, and geothermal heat pump property. After 2016, the credit is available only for qualified solar electric property and qualified solar water heating property placed in service before 2022.

Individual taxpayers may claim a nonrefundable personal tax credit for qualified residential alternative energy expenditures. The residential alternative energy credit generally is equal to 30 percent of the cost of eligible solar water heaters, solar electricity equipment, fuel cell plants, small wind energy property, and geothermal heat pump property. After 2016, the credit is available only for qualified solar electric property and qualified solar water heating property placed in service before 2022.

Solar electric property. A qualified solar electric property expenditure must meet these requirements:

• an individual taxpayer must make the expenditure for qualified solar electric property,
• the qualified solar electric property must use solar energy to generate electricity,
• the electricity must be for use in a dwelling unit,
• the dwelling unit must be located in the United States, and
• the dwelling unit must be used as a residence by the taxpayer (but it does not have to be the taxpayer’s principal residence).

Expenditures for purposes of the credit include labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified solar electric property and for piping or wiring to interconnect such property to the dwelling unit. Generally, for purposes of determining the tax year when the credit is allowed, an expenditure with respect to an item is treated as made when the original installation of the item is completed.

Solar electric property panels, such as photovoltaic panels, are eligible for the credit even if they constitute structural components of a building, such as when they are installed as a roof or a portion of a roof. Conversely, qualified solar electric property does not have to be installed directly on the taxpayer’s home, as long as the panels use solar energy to generate electricity for use in a home that the taxpayer uses as a residence. Under certain circumstances, a purchase of solar panels that are placed on an off-site solar array may meet the definition of qualified solar electric property expenditures. 

Caution. This credit should not be confused with the credit for nonbusiness energy property. For property placed in service through 2016, a tax credit is available for nonbusiness energy property that meets the requirements for qualified energy efficiency improvements (building envelope components) and residential energy property expenditures (furnaces, central air conditioners, water heaters, certain heat pumps, biomass stoves).

Social media has helped to make our world smaller and when natural disasters and tragedies occur we want to help with contributions of money and/or other types of aid. At home, countless charitable organizations are providing all types of help and generally, your contributions to U.S. charities are tax-deductible. Contributions to foreign charities generally are not tax-deductible; however, special rules apply to charitable organizations in Canada, Israel and Mexico.

Social media has helped to make our world smaller and when natural disasters and tragedies occur we want to help with contributions of money and/or other types of aid. At home, countless charitable organizations are providing all types of help and generally, your contributions to U.S. charities are tax-deductible. Contributions to foreign charities generally are not tax-deductible; however, special rules apply to charitable organizations in Canada, Israel and Mexico.

First, let’s take a brief look at some of the rules for U.S. charities. A charitable deduction is allowed only for a gift of money or property made to or for the use of an organization that meets qualification requirements. Charitable contributions of $250 or more must be substantiated by a contemporaneous written acknowledgment from the charitable organization to be deductible.

It is not enough that a domestic charity is “tax-exempt.” The charitable organization must be qualified at the time of the contribution. It is the organization’s responsibility to ensure that its character, purposes, activities, and method of operation satisfy the qualification requirements, so donors have assurance that their contributions are tax-deductible at the time made.

While a domestic charity can use contributions abroad, it cannot merely transfer them to a foreign charity. Contributions generally are deductible only if it can be shown, among other requirements, the domestic charitable organization is not serving as an agent for, or conduit of, a foreign charitable organization.

Special rules apply to charitable organizations in Canada, Israel and Mexico. Contributions to certain Canadian charitable organizations covered under an income tax treaty with Canada may be tax-deductible. Generally, the taxpayer must have income from sources in Canada.

The U.S.-Israel income tax treaty provides that a contribution to an Israeli charitable organization is deductible if and to the extent the contribution would have been treated as a charitable contribution if the organization had been created or organized under U.S. law. Among other requirements, the taxpayer must have income from sources in Israel.

The same approach applies to contributions to Mexican charitable organizations. Under the U.S.-Mexico income tax treaty, a contribution to a Mexican charitable organization may be deductible, but only if and to the extent the contribution would have been treated as a charitable contribution to a public charity created or organized under U.S. law. Among other requirements, the taxpayer must have income sources in Mexico.

Please contact our office for more details.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of May 2016.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of May 2016.

May 2
Employers. File Form 941 for the first quarter of 2016 for employment taxes if you have not deposited the tax for the quarter timely, properly, and in full. Deposit or pay any undeposited tax under the accuracy of deposit rules. 
Deposit federal unemployment tax owed through March if more than $500. 

May 4
Employers. Semi-weekly depositors must deposit employment taxes for April 27–29. 

May 6
Employers. Semi-weekly depositors must deposit employment taxes for April 30 and May 1–3. 

May 10
Employers. File Form 941 for the first quarter of 2016 for employment taxes if you deposited the tax for the quarter timely, properly, and in full.
Employees who work for tips. Employees who received $20 or more in tips during April must report them to their employer using Form 4070. 

May 11
Employers. Semi-weekly depositors must deposit employment taxes for May 4–6. 

May 13
Employers. Semi-weekly depositors must deposit employment taxes for May 7–10. 

May 16
Employers. For those to whom the monthly deposit rule applies, deposit employment taxes and nonpayroll withholding for payments in April. 

May 18
Employers. Semi-weekly depositors must deposit employment taxes for May 11–13. 

May 20
Employers. Semi-weekly depositors must deposit employment taxes for May 14–17. 

May 25
Employers. Semi-weekly depositors must deposit employment taxes for May 18–20. 

May 27
Employers. Semi-weekly depositors must deposit employment taxes for May 21–24. 

June 2
Employers. Semi-weekly depositors must deposit employment taxes for May 25–27. 

June 3
Employers. Semi-weekly depositors must deposit employment taxes for May 28–31.

Tax reform continues to be highly touted in Congress as lawmakers from both parties call for simplification of countless complex rules, overhaul of tax rates, and more. At times this year, President Obama and Congressional Republicans seem far apart on a way forward, but at similar times in the past, agreements have quickly and often surprisingly emerged, most recently in the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). As the November elections approach more closely every passing day, lawmakers from both parties and the President have a short window to agree on tax legislation. The weeks leading up to Congress’ summer recess may be decisive.

Tax reform continues to be highly touted in Congress as lawmakers from both parties call for simplification of countless complex rules, overhaul of tax rates, and more. At times this year, President Obama and Congressional Republicans seem far apart on a way forward, but at similar times in the past, agreements have quickly and often surprisingly emerged, most recently in the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). As the November elections approach more closely every passing day, lawmakers from both parties and the President have a short window to agree on tax legislation. The weeks leading up to Congress’ summer recess may be decisive.

PATH Act as path forward

The scope of the PATH Act surprised many Hill observers. Instead of merely extending the so-called tax extenders (including the state and local sales tax deduction, research tax credit, teachers’ classroom expense deduction), Congress voted to make permanent many of the incentives. Although there had been hearings and discussions about permanently extending some of the incentives, the prospect of getting a bill through Congress and to the President’s desk seemed remote right up to December. Behind the scenes negotiations between the White House and Congressional Republicans resulted in the largest tax bill since the American Tax Relief Act of 2012. The PATH Act went far beyond the extenders. It made changes to the rules for IRS administration, real estate investment trusts (REITs), how the Tax Court works, and more.

Passage of the PATH Act shows that another tax bill, possibly an even larger tax reform package, could make it out of Congress before year-end. Speaking in Washington, D.C. earlier this year, Senate Finance Committee (SFC) ranking member Ron Wyden, D-Oregon, suggested such an outcome. “Against all odds, Democrats and Republicans reached a bipartisan agreement on the PATH Act," Wyden said. "The December agreement (leading to passage of the PATH Act worked out because of the approach members took to the negotiations." Wyden predicted that lawmakers would use the PATH Act as a "blueprint for broader reform."

Everything on the table

Almost everything in the Tax Code appears to be on the table at this time. House Ways and Means Chair Kevin Brady, R-Texas, who is a leading proponent of tax reform, in the House has said as much. "Not all deductions and exclusions will stay; not all will go. The question to ask is: how will these policies drive economic growth?" Among the provisions/ideas being discussed by legislators are:

• Consolidation of the individual income tax rates
• Enhancing incentives for lower and middle income taxpayers
• Revising/repealing some of the tax measures under the Affordable Care Act
• Lowering the U.S. corporate tax rate
• Consolidating education tax incentives
• Eliminating/consolidating some energy tax breaks
• Repealing the alternative minimum tax (AMT)
• Tweaking the child tax credit, earned income tax credit, child and dependent care credit

International tax reform

Reforming the rules for international taxation, such as the complex rules for corporate inversions, transfer pricing, and more, has been of special interest this year to the House Ways and Means Committee. One unanswered question is whether international tax reform can move forward by itself or if proponents need to add “sweeteners” such as expanded tax breaks for lower and middle income taxpayers to win support in Congress. Some lawmakers want to link international tax reform to a cut in the U.S. corporate tax rate. How to pay for any rate cuts also is generating questions and few answers. President Obama has proposed to tighten the international tax rules and use the expected revenue to pay for infrastructure projects, along with reducing the corporate tax rate.

Energy tax measures

Before Congress’ summer recess, a package of energy tax breaks could be approved by the House and Senate. Many of these are temporary incentives that were not included in the PATH Act, such as the special credits for fuel cell vehicles. There appears to be bipartisan support to make permanent some, if not all, of these tax breaks. SFC ranking member Wyden is spearheading the movement to win passage of these energy tax incentives, seeking to attach them to a bipartisan aviation bill.

Please contact our office if you have any questions about tax reform and what measures might be taken now in anticipation of various changes.

Six years ago, Congress passed the Foreign Account Tax Compliance Act (FATCA), which set in motion a wave of new reporting and disclosure requirements by individuals, foreign financial institutions, and others. In response, the IRS created a host of new rules and regulations; and new forms for these reporting requirements. One key FATCA form – Form 8938, Statement of Specified Foreign Financial Assets – has seen usage steadily increase since passage of FATCA, the IRS recently reported. At the same time, more individuals are filing a related form – FinCEN Form 114, Report of Foreign Bank and Financial Accounts (known as the FBAR), which reached a record high in 2015.

Six years ago, Congress passed the Foreign Account Tax Compliance Act (FATCA), which set in motion a wave of new reporting and disclosure requirements by individuals, foreign financial institutions, and others. In response, the IRS created a host of new rules and regulations; and new forms for these reporting requirements. One key FATCA form – Form 8938, Statement of Specified Foreign Financial Assets – has seen usage steadily increase since passage of FATCA, the IRS recently reported. At the same time, more individuals are filing a related form – FinCEN Form 114, Report of Foreign Bank and Financial Accounts (known as the FBAR), which reached a record high in 2015.

Two key forms

FATCA generally requires U.S. citizens, resident aliens and certain non-resident aliens to report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Examples of financial accounts include: savings, deposit, checking, and brokerage accounts held with a bank or broker-dealer. And, to the extent held for investment and not held in a financial account, individuals must report stock or securities issued by someone who is not a U.S. person, any other interest in a foreign entity, and any financial instrument or contract held for investment with an issuer or counterpart that is not a U.S. person. Examples of these assets that must be reported if not held in an account include (but are not limited to) stock or securities issued by a foreign corporation; a note, bond or debenture issued by a foreign person; a partnership interest in a foreign partnership; and any interest in a foreign-issued insurance contract or annuity with a cash-surrender value. Reporting thresholds vary based on whether a taxpayer files a joint income tax return or lives abroad.

Individuals with an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 have a separate reporting requirement. This requirement is satisfied by filing the FBAR. The FBAR is filed through the BSA E-Filing System (with Treasury’s Financial Crimes Enforcement Network (FinCEN).

Note. Treasury’s Financial Crimes Enforcement Network (FinCEN) has proposed revisions to the rules for filing FBARs. The revisions generally would apply to financial professionals who file FBARs due to their employment responsibilities

Increase in filings

According to the IRS, taxpayers filed more than 300,000 Forms 8938 with their returns in tax year (TY) 2014. The number of filings was approximately the same as in 2014 but up from 200,000 filing for TY 2011, which was the first year for filing Form 8938. Form 8938 is filed with the taxpayer’s annual return.

FinCEN received 1,163,229 FBARs in 2015, representing an eight percent increase compared to 2014. During the past five years, the number of FBAR filings has increased on average by 17 percent each year, the IRS reported.

IRS investigations

Since passage of FATCA, the IRS has stepped up its investigations into reports of undisclosed foreign accounts. The IRS often uses its summons authority to discover foreign accounts and the federal courts have upheld the agency’s authority when challenged by taxpayers.

In Chan, 2016-1 ustc ¶50,205, February 29, 2016, the First Circuit Court of Appeals found that foreign bank account records fell within the required records exception to the Fifth Amendment. The First Circuit joined seven other circuits in holding that the required records exception applies.

The court found that the Bank Secrecy Act requires individuals engaged in foreign banking to file reports and maintain certain records. These records must be retained for a certain time and must be available for inspection. The required records doctrine prevents individuals, who possess records the government requires to be maintained as a result of voluntary participation in certain regulated activities, from asserting their Fifth Amendment privilege.

If you have any questions about Form 8938, the FBAR, or the required records exception, please contact our office.

Legislation enacted in 2015 provides new rules for IRS partnership audits. The new rules are a drastic departure from current rules and the IRS is hopeful that the rules will simplify the audit process and allow the IRS to conduct more partnership audits.

Legislation enacted in 2015 provides new rules for IRS partnership audits. The new rules are a drastic departure from current rules and the IRS is hopeful that the rules will simplify the audit process and allow the IRS to conduct more partnership audits.

The provisions do not take effect until partnership tax years beginning on or after January 1, 2018, until an existing partnership may elect to apply the new rules to tax years after November 2, 2015. The IRS is working on guidance for the new audit regime and has requested comments by April 15, although agency officials said that comments after that date will be accepted.

Background

Under current rules, as provided by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), when the IRS audits a partnership with more than 10 partners, the IRS determines any changes to the partnership return in a single administrative proceeding with the partnership. The partnership must designate a tax matters partner (the “TMP”) to handle the audit and any subsequent litigation. After determining the appropriate adjustments for the partnership as a whole, the IRS must recalculate the tax liability of each partner for the year under audit.

For partnerships with 10 or fewer partners, the IRS must audit the partner and the partnership separately. These small partnerships may elect to be audited under the TEFRA procedures.

Electing out 

A partnership with 100 or fewer partners may opt out of the new regime. Partnerships that elect out will be audited under the general rules for individual taxpayers. Unlike the TEFRA regime, which applies TEFRA to partnerships with 11 or more partners, the new rules will not apply unless the partnership has over 100 partners. Thus, the IRS conceivably would have to conduct up to 100 audits of individual taxpayers.

The Tax Code requires that partners be individuals, C corporations, foreign entities that would be domestic C corporations, S corporations (special rules apply for counting owners as partners), and estates of deceased partners. The number of partners would be based on the number of Schedules K-1 issued by the partnership. The IRS may prescribe rules for treating other entities as eligible partners.

Partnership representative

Unlike the TMP procedures under TEFRA, the partnership will designate a partnership representative (PR) to deal with the IRS, who does not have to be a partner. The PR will have sole authority to act on behalf of the partnership. The partnership and all partners will be bound by the actions of the partnership. The new law does away with TEFRA rights for individual partners to receive notice of the audit and to participate in the audit. Partnerships could organize a group of partners to advise the PR.

Partnership/partner liability

The partnership will pay an IRS audit adjustment (the “imputed underpayment”) unless the partnership elects to provide each partner (and the IRS) with a statement of the partner’s share of the adjustment. Partnerships that pay the tax will provide amended Schedules K-1 to their partners. Thus, under the new law, the partnership will determine the partner’s liability for the increase in taxes that the partnership pays; under TEFRA, the IRS had to calculate the partners’ adjustments.

Under Code Sec. 1031, a taxpayer can make a tax-free exchange of property held for productive use in a trade or business or for investment. The exchange must be made for other property that the taxpayer will continue to use in a trade or business or for investment. Ordinarily, the exchange is made directly with another taxpayer who holds like-kind property. For example, an investor in real estate may exchange a building with another person who also owns real estate for use in a trade or business or for investment.

Under Code Sec. 1031, a taxpayer can make a tax-free exchange of property held for productive use in a trade or business or for investment. The exchange must be made for other property that the taxpayer will continue to use in a trade or business or for investment. Ordinarily, the exchange is made directly with another taxpayer who holds like-kind property. For example, an investor in real estate may exchange a building with another person who also owns real estate for use in a trade or business or for investment.

Another way to take advantage of Code Sec. 1031 is to make a deferred like-kind exchange, using a third person to facilitate the exchange. This can be advantageous when the taxpayer cannot find another holder of like-kind property to make a direct exchange with. The taxpayer identifies a third person to act as a qualified intermediary (QI) and enters into a legal agreement with the QI. The QI is not treated as the agent of the taxpayer. The QI acquires from the taxpayer the property that the taxpayer is relinquishing, and sells the property to another person identified by the taxpayer. As part of the transaction, the QI acquires legal title to the property and transfers it to the person buying the property.

The agreement between the taxpayer and the QI must provide that the taxpayer has no right to the proceeds received by the QI. Otherwise, the taxpayer would be in actual or constructive receipt of the proceeds. If this occurred, the exchange would not be tax-free.

To complete the deferred like-kind exchange, the taxpayer will identify other like-kind property that it wishes to acquire, perhaps from a fourth person. The QI will use the proceeds from the original sale to purchase the property sought by the taxpayer, again acquiring legal title to the property. Finally, the QI will transfer the acquired property to the taxpayer. The taxpayer’s transfer of the relinquished property and acquisition of the replacement property qualify as a like-kind exchange.

Individuals may contribute up to $5,500 to a traditional and a Roth IRA for 2016. This is the same limit as 2015. An individual age 50 and older can make a catch-up contribution of an additional $1,000 for the year. The contribution is limited to the taxpayer’s taxable compensation for the year, minus contributions to all non-Roth IRAs.

Individuals may contribute up to $5,500 to a traditional and a Roth IRA for 2016. This is the same limit as 2015. An individual age 50 and older can make a catch-up contribution of an additional $1,000 for the year. The contribution is limited to the taxpayer’s taxable compensation for the year, minus contributions to all non-Roth IRAs.

Taxpayers can contribute to a Roth IRA as long as the taxpayer’s adjusted gross income for the year is less than:

• $193,000 for married filing jointly or qualifying widow(er),
• $131,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
• $10,000 for married filing separately and you lived with your spouse at any time during the year.

Unlike traditional IRAs, the owner of a Roth IRA can make contributions to the IRA after turning age 70 ½ and does not have to begin taking contributions at that age. The mandatory distribution rules that normally begin at age 70 ½ do not apply until the owner dies.

Although contributions to a Roth IRA are not deductible, income accumulates tax-free and “qualified” distributions will also be tax-free, if certain conditions are satisfied:

• The distribution must be made after the owner turns 59 ½, unless the owner is disabled or the payment is made to a beneficiary after the owner’s death; and
• The amount contributed must be held in the Roth IRA for at least five years.

Taxpayers can also roll over benefits from an eligible retirement plan to a Roth IRA, without the rollover being counted against the annual contribution limit, provided the payment from the retirement plan is an eligible rollover distribution. The retirement plan can be qualified plan, 401(k) plan, tax-sheltered annuity, or governmental deferred contribution plan. The payment will still be taxable, since contributions to a Roth IRA are not deductible and must be made with after-tax dollars.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of April 2016.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of April 2016. 

April 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll date March 26–29.
Individuals. Taxpayers who turned 70½ during 2015 must start to receive required minimum distributions (RMDs) from their IRAs; retirees who turned 70½ during 2015 must receive RMDs from workplace retirement plans. 

April 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll date March 30–31 and April 1. 

April 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 2–5. 

April 11
Employees who work for tips. Employees who received $20 or more in tips during March must report them to their employer using Form 4070. 

April 13
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 6–8. 

April 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 9–12.
Employers. Employers deposit Social Security, Medicare, and withheld income tax for March. Employers who paid cash wages of $1,900 or more in 2015 to a house-hold employee, file Schedule H (Form 1040).
Farmers and fisherman. File 2015 income tax return (Form 1040) by April 18 if not previously filed.
Individuals. Individuals file a 2015 income tax return (Form 1040 series) and pay any tax due.
Partnerships. File a 2015 calendar year return (Form 1065). Provide each partner with a Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1. 

April 20
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 13–15. 

April 22
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 16–19. 

April 27
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 20–22. 

April 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll date April 23–26. 

May 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 27–29. 

May 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 30–May 3.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made permanent many popular but previously temporary tax breaks for individuals and businesses. The PATH Act also enhanced many incentives. These enhancements should not be overlooked in tax planning both for 2016 and future years. Some of the enhancements are discussed here. If you have any questions about these or other tax breaks in the PATH Act, please contact our office. 

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made permanent many popular but previously temporary tax breaks for individuals and businesses. The PATH Act also enhanced many incentives. These enhancements should not be overlooked in tax planning both for 2016 and future years. Some of the enhancements are discussed here. If you have any questions about these or other tax breaks in the PATH Act, please contact our office.

Business incentives

Code Sec. 179 expensing. The PATH Act made permanent the Code Sec. 179 $500,000 dollar limit and $2 million investment limit. For tax years beginning after 2015 these amounts are adjusted for inflation. The IRS has announced that 2016 will not see any increase in the $500,000 limit and only a slight rise to $2,010,000 for the investment limit.

Enhancements, for tax years only beginning after 2015, include allowing the Code Sec. 179 expense deduction for air conditioning and heating units. Additionally, the $250,000 limitation on the amount of Code Sec. 179 property that can be attributable to qualified real property is eliminated, with a corresponding removal of carryforwards of disallowed amounts.

Bonus depreciation. Under the PATH Act, bonus depreciation is available at its 50 percent level starting in 2015 through 2017. However, the bonus rate is reduced from 50 percent to 40 percent for property placed in service in 2018 and to 30 percent for property placed in service 2019, after which it sunsets (ending after 2020, in the case of certain noncommercial aircraft and property with a longer production period). Effective for property placed in service after 2015, bonus depreciation for qualified leasehold improvement property is replaced with a bonus depreciation deduction for "qualified improvement property" made to the interior portion of a nonresidential building whether or not the building is subject to a lease; and the improvement need not be made only more than three years after the building was placed in service.

Research tax credit. The PATH Act made permanent the research tax credit. Effective for tax years beginning after December 31, 2015, a qualified small business during a tax year may elect to apply a portion of its research credit against the 6.2 percent payroll tax imposed on the employer’s wage payments to employees. The research credit is also added to the list of general business credit components designated as "specified credits" that may offset alternative minimum tax (AMT) as well as regular tax.

Work Opportunity Tax Credit. The Work Opportunity Tax Credit (WOTC) is extended through December 31, 2019 by the PATH Act. The WOTC also is expanded and made available to employers that hire individuals who are qualified long-term unemployment recipients beginning work for the employer after December 31, 2015.

Film/TV/live theatrical productions. The special expensing provision for qualified film and television productions is expanded by the PATH Act to apply to qualified live theatrical productions. These productions must commence after December 31, 2015, and before January 1, 2017.

Incentives for individuals

Exclusion from gross income of discharges of acquisition indebtedness on principal residences. The PATH Act extended for two additional years (through December 31, 2016) the exclusion from gross income for discharges of qualified principal residence indebtedness. The provision also provided for an exclusion from gross income in the case of those taxpayers whose qualified principal residence indebtedness was discharged on or after January 1, 2017, if the discharge was pursuant to a binding written agreement entered into prior to January 1, 2017.

Code Sec. 25C credit. The PATH Act extended and modified the popular Code Sec. 25C credit for energy-efficient improvements. For property placed in service after December 31, 2015, the standards for energy efficient building envelope components are modified to meet new conservation criteria.

Teachers’ classroom expense deduction. The $250 annual limit for the now permanent above-the-line deduction for classroom expenses under the PATH Act is inflation-adjusted starting in 2016. Due to low inflation, the $250 limit will not rise for 2016. Starting in 2016, expenses for professional development are added to the list of eligible expenses.

Your tax planning needs to respond to changes in the tax laws. Please contact our office and we can discuss how these and other changes in recent tax legislation may impact your comprehensive tax planning.

Tweaks to enhanced Code Sec. 179 expensing and the high-dollar health care excise tax are two proposals in President Obama’s fiscal year (FY) 2017 budget that could become law before the end of his term. President Obama released his FY 2017 budget proposals in February. Other proposals that could be passed by Congress include enhancements to small business tax incentives, expanded opportunities for retirement saving, revisions to the net investment income (NII) tax, and more.

Tweaks to enhanced Code Sec. 179 expensing and the high-dollar health care excise tax are two proposals in President Obama’s fiscal year (FY) 2017 budget that could become law before the end of his term. President Obama released his FY 2017 budget proposals in February. Other proposals that could be passed by Congress include enhancements to small business tax incentives, expanded opportunities for retirement saving, revisions to the net investment income (NII) tax, and more.

Small businesses

A long-sought goal of many small businesses was made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act): enhanced Code Sec. 179 expensing. President Obama proposed more tweaks to Code Sec. 179 expensing. Under the President’s proposal, the annual expensing limitation would increase from an inflation-adjusted $500,000 to an inflation-adjusted $1 million. The phase-out threshold would remain at an inflation-adjusted $2 million level. President Obama also proposed to increase the deduction for start-up expenses and the tax break for small employers that obtain health coverage for their employees through SHOP.

High-cost health plans

Certain employer-sponsored health insurance plans (high-cost plans also known as “Cadillac plans”) may be liable for an excise tax. Generally, if the aggregate cost of applicable employer-sponsored coverage provided to an employee exceeds a statutory dollar limit, adjusted annually, the excess benefit is subject to a 40 percent excise tax.

Originally, the Affordable Care Act (ACA) imposed the excise tax on high-cost health plans effective after 2017. The PATH Act delayed the excise tax on high dollar health plans until after 2019. President Obama has proposed to increase the excise tax threshold to the greater of the current law threshold or a "gold plan average premium."

Retirement savings

In his 2016 State of the Union Address, President Obama urged lawmakers to expand the availability of retirement savings plans, especially to part-time employees and workers at businesses without retirement plans. The President’s FY 2017 budget follows through on some of these approaches. The President proposed to require employers in business for at least two years and having more than ten employees and offering no retirement plan to offer an automatic payroll-deduction IRA option. Another proposal would allow unaffiliated employers to maintain a single multiple-employer retirement plan.

NII tax

The ACA also created the NII tax to help fund health care reform. Generally, individuals with incomes over certain threshold amounts are subject to the 3.8 percent tax on NII. Under current law, the NII tax does not apply to self-employment earnings. The President has proposed to ensure that the 3.8 percent is paid (either through the NII tax or the Self-Employed Contributions Act (SECA)) by amending the definition of net investment income to include gross income and gain from any trades or businesses of an individual that is not otherwise subject to employment taxes.

Higher income individuals

President Obama renewed previous proposals to tighten tax breaks for higher income individuals. The so-called “Buffett Rule” would impose a minimum 30 percent tax on higher income taxpayers with large deductions and other tax preferences. Certain tax expenditures of higher income individuals would be capped at 28 percent. Tax rates on capital gains and qualified dividends would also be increased in individuals in the higher brackets.

EITC and other incentives

In 2012 and subsequent years, Congress made permanent some enhancements to the earned income tax credit (EITC). President Obama has proposed to continue this pattern of enhancements, by, among other changes, expanding the EITC to qualified taxpayers without children. Other proposals targeted to individuals’ income include a second-earner credit (for two-earner families), reforms to the child and dependent care tax credit, and some enhancements to the American Opportunity Tax Credit (AOTC).

Fossil fuels

As in past years, President Obama proposed to repeal fossil fuel tax preferences. The President also proposed a new revenue raiser: a fee of $10.25 (adjusted for inflation from 2016) per barrel on oil to be phased-in over a five year period beginning October 1, 2016. The fee would be collected on domestically produced as well as imported petroleum requirements.

If you have any questions about the President’s proposals, please contact our office.

As February gets underway, the 2011 filing season is about to kick into high-gear. The IRS began processing 2010 returns from individuals in January but some taxpayers have to wait until mid-February to file their returns. Additionally, the traditional April 15 filing deadline is extended three more days in 2011, so taxpayers have some extra time to file. All these changes and more may make the start of the filing season challenging. Individuals who are informed about the changes can better navigate their return preparation.

 Filing delays

In December 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act). The new law renewed many individual and business tax incentives that had expired after 2009 for 2010 (and sometimes for 2011 and beyond).

All of these late changes to the Tax Code required the IRS to quickly redesign its forms and reprogram its computer systems. The IRS began processing 2010 returns in January. However, some individuals must wait until February 14, 2011 to file their 2010 returns because of the late legislation. They are:

• Taxpayers claiming itemized deductions on Form 1040, Schedule A: Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses, as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction, which was extended by the 2010 Tax Relief Act.
• Taxpayers claiming the higher education tuition deduction. This deduction for parents and students is claimed on Form 8917.
• Taxpayers claiming the teacher's classroom expense deduction. This deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.

The delays affect individuals who file their 2010 Forms 1040 on paper or electronically. Individuals who electronically file their returns can get a head start because many major software providers will accept these impacted returns immediately. The software providers will hold on to the returns and then electronically submit them after the IRS systems open on February 14, 2011 for the delayed forms.

Some of the late changes to the Tax Code have not resulted in delays. For example, the 2010 Tax Relief Act provides for higher 2010 exemption amounts for the alternative minimum tax (AMT). The IRS was able to reprogram its operating systems for this development without any delay for affected taxpayers. Other changes in the 2010 Tax Relief Act do not have any affect on 2010 returns. These include the extension of the American Opportunity Tax Credit and creation of a two percent payroll tax cut for 2011. These changes have no effect on 2010 returns.

April 18

Because of a little-known holiday in the District of Columbia, taxpayers get extra days to file their 2010 returns in April. Friday, April 15, 2011, is Emancipation Day in the District of Columbia. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do. Therefore, all taxpayers will have three extra days to file this year: 2010 individual returns are due April 18, 2011. Taxpayers requesting an extension will have until October 17, 2011 to file their 2010 tax returns.

Form 1040

Form 1040 and its schedules (especially Schedule A for itemized deductions) for 2010 looks very similar to Form 1040 for 2009 but there are some changes. Among the changes are:

Standard deduction. The basic standard deduction amounts for 2010 are $5,700 for single individuals; $11,400 for married couples filing a joint return and surviving spouses; $8,400 for heads of household filers; and $5,700 for married taxpayers filing separate returns.

Taxes paid. Taxpayers can elect to deduct state and local sales taxes paid in 2010 in lieu of deducting state and local income taxes paid in 2010. To calculate their deduction, taxpayers can use either actual expenses or the IRS optional sales tax tables.

Adoption credit. Effective for 2010 (and 2011), the adoption credit is refundable. For 2010, the amount of the adoption credit (and maximum exclusion) is $13,170.

Roth IRAs and designated Roth accounts. For tax years beginning before January 1, 2010, an individual may not convert amounts in a traditional IRA to a Roth IRA if his or her modified adjusted gross income (AGI) for the year of distribution exceeds $100,000 (or, if married, do not file jointly). The $100,000 limit and the requirement that a married distributee file a joint return do not apply to distributions made on or after January 1, 2010.

Under a default rule for 2010, half of the taxable amount that results from a rollover or conversion to a Roth IRA from another retirement plan is reported in 2011 and the other half is reported in 2012. An individual may elect to report the entire taxable amount in 2010. The same rule applies to a rollover after September 27, 2010 to a designated Roth account in the same plan. The election may not be revoked after the due date (including extensions) of the individual's 2010 return.

Casualty losses. For 2010, each personal casualty or theft loss is limited to the excess of the loss over $100 (down from $500 for 2009). This is in addition to the 10 percent of AGI limit that generally applies to the net loss.

Health insurance. The health care reform law enacted in early 2010 provides that the value of any employer-provided health insurance coverage for an employee's child is excluded from the employee's income through the end of the tax year in which the child turns age 26. The tax benefit is effective March 30, 2010. Consequently, the exclusion applies to any coverage that is provided to an adult child from that date through the end of the tax year in which the child turns age 26.

Small employer health insurance credit. The health care reform law also created a new tax credit to help small employers provide health insurance to their employees. The credit reaches 35 percent (25 percent for tax-exempt employers) of qualified premium costs. The credit is subject to various limitations, including phase-out based on wages and number of full-time equivalent employees (Line 53).

Self-employed individuals. The Small Business Jobs Act of 2010 allows the deduction for income tax purposes for the cost of health insurance in calculating net earnings from self-employment for purposes of self-employment taxes. The provision only applies to the self-employed taxpayer's first tax year beginning after December 31, 2009.

These are just some of the changes that may impact you. Please contact our office for more details.