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

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

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

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

Payroll Tax Forgiveness

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

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

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

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

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

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

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

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

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

SALT Limit

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

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

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

Payments by Individuals

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

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

Payments by Business Entities

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

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

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

Benefits from Third Party

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

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

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

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

Section 163(j) Limitation

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

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

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

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

Final Regulations

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

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

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

Qualified Residential Living Facilities

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

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

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

Proposed Regulations

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

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

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

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

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

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

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

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

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

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

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

• reconcile advance payments of refundable employment tax credits provided under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136), and
• recapture the benefit of the credits when necessary.

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

• reconcile advance payments of refundable employment tax credits provided under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136), and
• recapture the benefit of the credits when necessary.

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

Background

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

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

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

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

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

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

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

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

Refundability of Credits

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

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

Advance Payment of Credits and Erroneous Refunds

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

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

Temporary Regulations

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

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

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

Applicability Date

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

Comments and Requests for Public Hearing

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

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

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

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

Affected Funding Rules

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

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

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

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

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

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

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

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

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

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

Guidance for AFTAP Election

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

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

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

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

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

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

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

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

Section 7602(f)

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

Comment Request

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

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

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

Implementation

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

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

Other issues addressed in the proposed regulations include rules:

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

Applicability Date

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

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

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

Qualified Birth and Adoption Distributions

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

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

Required Minimum Distributions

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

Model Notices

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

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

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

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

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

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

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

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

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

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

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

Final Regulations on the GILTI HTE

The final regulations:

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

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

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

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

Proposed Regulations Single Election

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

Under the proposed regulations:

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

A taxpayer changing its method of accounting must either request advance IRS consent or apply for automatic IRS consent on Form 3115, Application for Change in Accounting Method, to make the change. Automatic consent is more favorable because the taxpayer can request the change on its return filed after the year it makes the change. A taxpayer requesting automatic consent must submit Form 3115 by the due date of the return for the year of the change. Recent IRS actions indicate that a taxpayer who fails to make a timely request for a change of accounting method may qualify for an extension of time to request the change.

A taxpayer changing its method of accounting must either request advance IRS consent or apply for automatic IRS consent on Form 3115, Application for Change in Accounting Method, to make the change. Automatic consent is more favorable because the taxpayer can request the change on its return filed after the year it makes the change. A taxpayer requesting automatic consent must submit Form 3115 by the due date of the return for the year of the change. Recent IRS actions indicate that a taxpayer who fails to make a timely request for a change of accounting method may qualify for an extension of time to request the change.

In 2013, the IRS issued “repair regs” that determine whether a taxpayer must capitalize or can deduct its costs related to the use of tangible property. To take advantage of the treatment provided in the regs, taxpayers often had to change their accounting methods. The IRS provided automatic consent for taxpayers to change their methods of accounting to comply with the repair regs.

Regulatory Elections

If a taxpayer fails to make a “regulatory” election on time, the IRS has discretion to grant an extension of time for making the election. A regulatory election is whose deadline is established by the IRS in regulations or other guidance, in contrast to an election whose deadline is set by statute. A taxpayer must submit a private letter request asking for an IRS ruling that grants relief. The IRS will grant relief only if it is satisfied that the taxpayer acted reasonably and in good faith when it failed to make a timely election, and that granting an extension will not prejudice the government.

Extensions Granted

The IRS has granted extensions of time to several taxpayers who missed the deadline for requesting automatic IRS consent to change a method of accounting under the repair regs. The IRS gave the taxpayer an additional 60 days (after the IRS issued the favorable letter ruling) to make the election.

In one sample ruling request, the taxpayer (a corporation) was required to submit the original of Form 3115 with its timely income tax return filed for the year of change, and to provide a copy of the Form 3115 to the IRS in Ogden, Utah. The taxpayer’s return preparer timely e-filed the taxpayer’s Form 1120, prepared Form 3115, and submitted a copy of the form to Ogden. However, the preparer inadvertently failed to scan the Form 3115 and include it with the taxpayer’s return. The preparer discovered the omission and the taxpayer applied for an extension. The IRS granted the taxpayer an additional 60 days to elect the change of accounting method permitted under the repair regs.

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.

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.

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.

The IRS has issued the 2016 optional standard mileage rates for calculating the deductible costs of operating an automobile for business, charitable, medical, and moving purposes (Notice 2016-1; IR-2015-137). The decline in gas prices appeared to spur the drop in the optional rates.

The IRS has issued the 2016 optional standard mileage rates for calculating the deductible costs of operating an automobile for business, charitable, medical, and moving purposes (Notice 2016-1; IR-2015-137). The decline in gas prices appeared to spur the drop in the optional rates.

The optional standard mileage rate for business will drop from 57.5 cents a mile (for 2015) to 54 cents a mile for 2016, a decrease of 3.5 cents, and the lowest rate in five years. The optional standard mileage rates for medical and moving expenses drops from 23 cents for 2015 to 19 cents per mile for 2016, a decrease of four cents and, again, the lowest rate in five years. The optional standard mileage rate for charitable expenses, which is set by statute, remains at 14 cents per mile for 2016.

Rules for use

Rev. Proc. 2010-51 provides rules for computing deductible costs of operating an automobile, including the use of the optional standard rates. The business standard mileage rate is a substitute for all the costs of an automobile for business use, including depreciation, maintenance and repairs, and gasoline.

However, a taxpayer may not use the business standard mileage rate after using a depreciation method under Code Sec. 168 or after claiming the Code Sec. 179 deduction for that vehicle. Furthermore, a taxpayer may not use the business rate for more than four vehicles at a time.

To compute the allowance under a fixed and variable rate plan, the standard automobile cost may not exceed $28,000 for cars or $31,000 for trucks and vans.

Depreciation

For automobiles used for business, a taxpayer must use 24 cents per mile as the portion of the standard mileage rate treated as depreciation for 2016. For prior years, these amounts are 24 cents for 2015, 22 cents for 2014, and 23 cents for both 2012 and 2013. These amounts are used to calculate basis reductions for depreciation taken under the standard mileage rate.

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

Dependency deduction

You are allowed one dependency exemption deduction for each person you claim as a qualifying dependent on your federal income tax return. The deduction amount for the 2010 tax year is $3,650. If someone else may claim you as a dependent on their return, however, then you cannot claim a personal exemption (also $3,650) for yourself on your return. Additionally, your standard deduction will be limited.

Only one taxpayer may claim the dependency exemption per qualifying dependent in a tax year. Therefore, you and your spouse (or former spouse in a divorce situation) cannot both claim an exemption for the same dependent, such as your son or daughter, when you are filing separate returns.

Who qualifies as a dependent?

The term "dependent" includes a qualifying child or a qualifying relative. There are a number of tests to determine who qualifies as a dependent child or relative, and who may claim the deduction. These include age, relationship, residency, return filing status, and financial support tests.

The rules regarding who is a qualifying child (not a qualifying relative, which is discussed below), and for whom you may claim a dependency deduction on your 2010 return, generally are as follows:

-- The child is a U.S. citizen, or national, or a resident of the U.S., Canada, or Mexico;

-- The child is your child (including adopted or step-children), grandchildren, great-grandchildren, brothers, sisters (including step-brothers, and -sisters), half-siblings, nieces, and nephews;

 -- The child has lived with you a majority of nights during the year, whether or not he or she is related to you;

 -- The child receives less than $3,650 of gross income (unless the dependent is your child and either (1) is under age 19, (2) is a full-time student under age 24 before the end of the year), or (3) any age if permanently and totally disabled;

 -- The child receives more than one-half of his or her support from you; and

 -- The child does not file a joint tax return (unless solely to obtain a tax refund).

Qualifying relatives

The rules for claiming a qualifying relative as a dependent on your income tax return are slightly different from the rules for claiming a dependent child. Certain tests must also be met, including a gross income and support test, and a relationship test, among others. Generally, to claim a "qualifying relative" as your dependent:

-- The individual cannot be your qualifying child or the qualifying child of any other taxpayer; -- The individual's gross income for the year is less than $3,650; -- You provide more than one-half of the individual's total support for the year; -- The individual either (1) lives with you all year as a member of your household or (2) does not live with you but is your brother or sister (include step and half-siblings), mother or father, grandparent or other direct ancestor, stepparent, niece, nephew, aunt, or uncle, or inlaws. Foster parents are excluded.

Although age is a factor when claiming a qualifying child, a qualifying relative can be any age.

Special rules for divorced and separated parents

Certain rules apply when parents are divorced or separated and want to claim the dependency exemption. Under these rules, generally the "custodial" parent may claim the dependency deduction. The custodial parent is generally the parent with whom the child resides for the greater number of nights during the year.

However, if certain conditions are met, the noncustodial parent may claim the dependency exemption. The noncustodial parent can generally claim the deduction if:

-- The custodial parent gives up the tax deduction by signing a written release (on Form 8332 or a similar statement) that he or she will not claim the child as a dependent on his or her tax return. The noncustodial parent must attach the statement to his or her tax return; or

-- There is a multiple support agreement (Form 2120, Multiple Support Declaration) in effect signed by the other parent agreeing not to claim the dependency deduction for the year.