The Treasury and IRS have issued guidance on the recent order by President Trump to defer certain employee payroll tax obligations on wages paid from September 1, 2020, through December 31, 2020. Under the guidance:
The Treasury and IRS have issued guidance on the recent order by President Trump to defer certain employee payroll tax obligations on wages paid from September 1, 2020, through December 31, 2020. Under the guidance:
- the due date for the withholding and payment of the employee’s portion of the 6.2-percent old-age, survivors and disability insurance (OASDI) tax (Social Security tax) under Code Sec. 3101(a), and the employee’s portion of the Railroad Retirement Tax Act (RRTA) Tier 1 tax that is attributable to the 6.2-percent Social Security tax under Code Sec. 3201, on applicable wages is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021; and
- the deferred taxes must be withheld and paid from wages and compensation paid between January 1, 2021, and April 30, 2021.
The guidance states that it does not separately postpone the deposit obligation for employee Social Security tax. This is because the deposit obligation does not arise until the tax is withheld, so by postponing the time for withholding the employee Social Security tax, the deposit obligation is delayed by operation of the tax regulations.
7508A Relief
In light of the coronavirus (COVID-19) disaster, President Trump issued a memorandum on August 8, 2020, directing the Treasury Secretary to use his Code Sec. 7508A authority to defer the withholding, deposit, and payment of the employee’s portion of Social Security tax, and the employee’s portion of the RRTA equivalent tax, on wages and compensation paid from September 1, 2020, through December 31, 2020. The deferral is available only for employees whose biweekly, pre-tax pay is less than $4,000, or a similar amount where a different pay period applies.
The Treasury Secretary has determined that employers required to withhold and pay the employee share of the Social Security tax under Code Sec. 3102(a) or the RRTA tax equivalent under Code Sec. 3202(a) are affected by the COVID-19 emergency for purposes of the relief described in the presidential memorandum.
Applicable Wages
The deferral applies to wages under Code Sec. 3121(a) or compensation under Code Sec. 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020 (collectively "applicable wages"), but only if the amount of wages or compensation paid for a biweekly pay period is less than $4,000, or the equivalent threshold amount with respect to other pay periods.
Applicable wages are determined on a pay period-by-pay period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered applicable wages for the pay period. In that case, the relief provided in the guidance applies to the wages or compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.
Paying Deferred Taxes
An affected employer must withhold and pay the total applicable taxes that it has deferred ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021, on any unpaid deferred taxes.
If necessary, the employer can make arrangements to otherwise collect the total deferred taxes from the employee.
The IRS has released the 2020-2021 special per diem rates. Taxpayers use the per diem rates to substantiate the amount of ordinary and necessary business expenses incurred while traveling away from home. These special per diem rates include the special transportation industry meal and incidental expenses (M&IEs) rates, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Taxpayers using the rates and list of high-cost localities provided in the guidance must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390.
The IRS has released the 2020-2021 special per diem rates. Taxpayers use the per diem rates to substantiate the amount of ordinary and necessary business expenses incurred while traveling away from home. These special per diem rates include the special transportation industry meal and incidental expenses (M&IEs) rates, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Taxpayers using the rates and list of high-cost localities provided in the guidance must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390.
The guidance is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only, that are paid to any employee on or after October 1, 2020, for travel away from home on or after October 1, 2020. For computing the amount allowable as a deduction for travel away from home, the guidance is effective for M&IEs or for incidental expenses only paid or incurred on or after October 1, 2020.
Transportation Industry Rates
The special M&IE rates for taxpayers in the transportation industry are:
- $66 for any locality of travel in the continental United States (CONUS), and
- $71 for any locality of travel outside the continental United States (OCONUS).
Incidental Expenses Only Rate
The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.
High-Low Substantiation Method
For purposes of the high-low substantiation method, the per diem rates in lieu of the rates described in Notice 2019-55 (the per diem substantiation method) are:
- $292 for travel to any high-cost locality, and
- $198 for travel to any other locality within CONUS.
The amount of these rates that is treated as paid for meals, and the per diem rates in lieu of the rates described in Notice 2019-55 (the M&IE only substantiation method), are:
- $71 for travel to any high-cost locality, and
- $60 for travel to any other locality within CONUS
The guidance provides a list of localities that have a federal per diem rate of $245 or more, and are high-cost localities for a specified portion of the calendar year. The list differs from the high-cost locality list in Notice 2019-55:
- Added to the list: Los Angeles, California; San Diego, California; Gulf Breeze, Florida; Kennebunk/Kittery/Sanford, Maine; Virginia Beach, Virginia.
- Localities that have changed the portion of the year in which they are high-cost localities: Sedona, Arizona; Monterey, California; Santa Barbara, California; District of Columbia; Naples, Florida; Jekyll Island/Brunswick, Georgia; Boston/Cambridge, Massachusetts; Philadelphia, Pennsylvania; Jamestown/Middletown/Newport, Rhode Island; Charleston, South Carolina.
- Removed from the list: Midland/Odessa, Texas; Pecos, Texas.
The Treasury and IRS have issued final regulations that limit the Code Sec. 245A dividends received deduction and the Code Sec. 954(c) exception on distributions supported by certain earnings and profits not subject to the integrated international tax regime created by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Proposed regulations and temporary regulations, issued on June 18, 2019, are adopted and removed, respectively.
The Treasury and IRS have issued final regulations that limit the Code Sec. 245A dividends received deduction and the Code Sec. 954(c) exception on distributions supported by certain earnings and profits not subject to the integrated international tax regime created by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Proposed regulations and temporary regulations, issued on June 18, 2019, are adopted and removed, respectively.
TCJA Provisions
The TCJA transitioned the United States from a primarily deferral-based international system of taxation (i.e., current taxation of subpart F income) to a participation exemption system with immediate taxation of certain offshore earnings. The TCJA introduced:
- the Code Sec. 245A dividends received deduction;
- the Code Sec. 965 transition tax; and
- the global intangible low-taxed income (GILTI) regime under Code Sec. 951A.
The Code Sec. 245A deduction provides a 100-percent deduction to domestic corporations for certain dividends received from a specified foreign corporations (SFC) after December 31, 2017. Earnings and profits generated before the deduction became available are subject to the Code Sec. 965 transition tax on post-1986 earnings and profits.
The GILTI regime subjects certain intangible income of a controlled foreign corporation (CFC) to current taxation, for tax years starting in 2018.
The subpart F regime was retained for tax years starting in 2018. The regime subjects certain earnings of a CFC to current taxation. The regime also provides that dividends received by a CFC, from a related CFC, are not included in the recipient CFC’s income and subject to current tax under subpart F, if certain requirements are met under the Code Sec. 954(c) exception.
Earnings and profits that are previously taxed under the transition tax, or subpart F or GILTI regimes, are treated as being distributed before non-previously taxed earnings and profits, and a distribution of previously taxed earnings and profits (PTEP) is not treated as a distribution of a dividend eligible for the Code Sec. 245A deduction.
Limits on Deduction
The final regulation limit the Code Sec. 245A deduction with respect to a dividend received by a U.S. corporation from certain SFCs so that the deduction is not available for the earnings and profits attributable to base erosion-type income. The final regulations limit the deduction to the portion of the dividend that exceeds the ineligible amount of the dividend. The ineligible amount is the sum of (1) 50 percent of the extraordinary disposition amount, and (2) the extraordinary reduction amount.
An extraordinary disposition is a disposition of an asset by a SFC that:
is outside of the ordinary course of activities to a related party during the disqualified period (between January 1, 2018, and the end of the foreign corporation's last taxable year beginning before January 1, 2018), and
exceeds the lesser of $50 million or 5 percent of the gross value of the SFC’s assets.
The Code Sec. 245A deduction is limited with respect to extraordinary dispositions, because earnings and profits generated in those transactions are not subject to tax under the transition tax, or the GILTI and subpart F regimes and, as a result, are not of the residual type for which the Code Sec. 245A deduction is intended to potentially be available.
Extraordinary reductions result from transfers of CFC stock where:
a controlling Code Sec. 245A shareholder transfers more than 10 percent of its stock of the CFC, or
there is a greater than 10 percent change in the controlling Code Sec. 245A shareholder’s overall ownership of the CFC.
The Code Sec. 245A deduction is limited in connection with extraordinary reductions because the deduction can result in complete avoidance of U.S. tax with respect to subpart F income or tested income that, absent the extraordinary reduction, would have been included in income by the selling U.S. shareholder under the subpart F or GILTI regimes, respectively
The final regulations require taxpayers to compute, track, and report information relevant for determination of extraordinary dispositions and extraordinary reductions. If an SFC is sold and there is no Code Sec. 245A shareholder of the target SFC after the transaction, the extraordinary disposition account of the target SFC is generally eliminated.
A taxpayer may elect to close the tax year of the CFC for all purposes of the Code on the date of an extraordinary reduction. This prevents disallowance of the Code Sec. 245A deduction. Under the election, the CFC’s earnings and profits for the tax year up to the date of the extraordinary reduction are subject to taxation under the subpart F or GILTI regimes in the seller’s hands, while the remaining earnings and profits of the CFC for the year would be subject to taxation under the subpart F or GILTI regimes in the buyer’s hands. The final regulations clarify that there must be agreement between the buyer and seller of the CFC that was subject to the extraordinary reduction for the election to be made.
Limits on Exception
Application of the Code Sec. 954(c)(6) is also limited when portion of a dividend is paid out of an extraordinary disposition account, or when an extraordinary reduction occurs.
The Code Sec. 954(c)(6) exception is limited where its application would otherwise allow earnings and profits that had accrued after December 31, 2017 (the last measurement date for determining the amount of earnings and profits subject to the transition tax), and that was generated by income that had never been tested under the subpart F and GILTI regimes, to inappropriately qualify for an exception to the subpart F regime.
Treasury has issued final and amended regulations on the rules for distributions made by terminated S corporations during the post-termination transition period (PTTP). These regulations apply after an S corporation has become a C corporation.
Treasury has issued final and amended regulations on the rules for distributions made by terminated S corporations during the post-termination transition period (PTTP). These regulations apply after an S corporation has become a C corporation.
Generally, the regulations are applicable as of the date they are published in the Federal Register.
Eligible Terminated S Corporation (ETSC) Under Section 481
In the case of an S election revocation with a retroactive effective date, the revocation may be treated as occurring on the retroactive effective date for ETSC qualification as well.
The treasury department amended Reg. §§1.481-5(b)(2) and (3) so that a corporation may test compliance with the revocation requirement and the shareholder identity requirement on either:
- the date the revocation was made; or
- in the case of a revocation with a retroactive effective date, the date the revocation was effective.
To qualify as an ETSC under Code Sec. 481, a corporation must satisfy the revocation requirement by making a revocation of its S election during the two-year period beginning on December 22. It also must satisfy the shareholder identify requirement that the owners of the stock of the corporation on the date the S election was revoked are the same owners as on December 22, 2017.
The two year period during which an S corporation can revoke its S election ends on December 23. Reg. §1.1362-2(a)(2) provides that Code Sec. 7503 applies where the last day for making a revocation occurs on a Saturday, Sunday, or legal holiday.
No Newcomer Rule
Reg. §1.1377-2(b) applies to a corporation’s taxable years beginning after the date of the publication of final regulations. It eliminates the no-newcomer rule for special treatment under Code Sec. 1371(e)(1) of distributions of money by a corporation with respect to its stock during the PTTP.
In the case of a corporation using the calendar year as its annual accounting period, newcomers are not entitled to receive distributions of the accumulated adjustments account (AAA) before January 1, 2021, unless the corporation chooses to apply Reg. §1.1377-2(b) before January 1, 2021.
The final regulations allow but do not require corporations to apply the final regulations addressing distributions made during the ETSC period to tax years beginning on or before the date that the final regulations are published.
Distributions of Money by ETSC
Reg. §1.1371-1 addresses distributions of money by an ETSC. It provides rules for qualified distributions and distributions where Code Sec. 301 applies during the tax years of the ETSC period, including the tax year in which the ETSC period ends.
Under Reg. §1.1371-2, if an intervening audit PTTP arises, the ETSC period immediately stops. Then, the ETSC period resumes provided that the ETSC’s AAA balance is greater than zero. Otherwise, later distributions by the ETSC are treated in the manner provided in Code Sec. 301(c).
Applicability Dates of the Regulations
A corporation may choose to apply the rules set forth in Reg. §§1.481-5, 1.1371-1, and 1.1371-2 to tax years beginning on or before the date the regulations are published in the Federal Register. In addition, a corporation generally may choose to not apply the no-newcomer rule in Reg. §1.1377-2(b) to tax years beginning on or before publication as long as the three year period described in Code Sec. 6501(a) has not expired.
Final regulations clarify that the amount of the rehabilitation credit for a qualified rehabilitated building (QRB) is determined as a single credit in the year the QRB is placed in service. This is the case even though the credit is allocated ratably over a five-year period. The final regulations adopt without modification proposed regulations released earlier this year ( NPRM REG-124327-19).
Final regulations clarify that the amount of the rehabilitation credit for a qualified rehabilitated building (QRB) is determined as a single credit in the year the QRB is placed in service. This is the case even though the credit is allocated ratably over a five-year period. The final regulations adopt without modification proposed regulations released earlier this year ( NPRM REG-124327-19).
TCJA Changes to Rehabilitation Credit
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) amended the rehabilitation credit for amounts paid or incurred after 2017. The credit is now claimed ratably over a five-year period that begins in the year the QRB is placed in service. The ratable share for each year is 20 percent of the qualified rehabilitation expenditures (QREs) for the building. However, a transition rule allows certain taxpayers to claim the credit all in one year under pre-TCJA rules if the 24- or 60-month period selected for the substantial rehabilitation test began by June 20, 2018.
Final Rehabilitation Credit Regs Include Coordination Rules and Examples
The amended version of the rehabilitation credit is still determined in the year the QRB is placed in service. This single credit is then claimed ratably over five years. This single-credit approach also applies to the recapture, basis adjustment, and leased property rules. These results are consistent with pre-TCJA law.
To reflect these changes, the final regs provide:
- a general rule for calculating the rehabilitation credit;
- definitions of "ratable share" and "rehabilitation credit determined;"
- a rule coordinating the amended credit with the Code Sec. 50 rules for the investment credit; and
- examples illustrating the interaction of the credit with Code Sec. 50(a) (recapture in case of dispositions, etc.), Code Sec. 50(c) (basis adjustment to investment credit property); and Code Sec. 50(d)(5) (relating to certain leased property when the lessee is treated as owner and subject to an income inclusion requirement).
Effective Date for Rehab Credit Regs
The final regulations apply to tax years beginning on or after the date they are published in the Federal Register. However, taxpayers may apply them to QREs paid or incurred after December 31, 2017, as long as they apply them in their entirety and in a consistent manner.
The IRS has released final regulations that clarify the definition of a "qualifying relative" for purposes of various provisions for tax years 2018 through 2025. These regulations generally affect taxpayers who claim federal income tax benefits that require a taxpayer to have a qualifying relative.
The IRS has released final regulations that clarify the definition of a "qualifying relative" for purposes of various provisions for tax years 2018 through 2025. These regulations generally affect taxpayers who claim federal income tax benefits that require a taxpayer to have a qualifying relative.
Effective Date
These regulations are effective on the date of publication in the Federal Register.
Exemption Amount
On June 9, 2020, the Treasury and the IRS published a notice of proposed rulemaking REG-118997-19. Consistent with Notice 2018-70, the proposed regulations provide that, in determining whether an individual is a qualifying relative for purposes of various provisions that refer to Code Sec. 152 in tax years in which the exemption amount is zero, the Code Sec. 151(d) exemption amount will be the inflation-adjusted Code Sec. 152(d)(1)(B) exemption amount in the annual revenue procedure setting forth inflation-adjusted items that is published in the Internal Revenue Bulletin. Thus, the exemption amount to be used for this purpose is $4,150 for tax year 2018 (section 3.24 of Rev. Proc. 2017-58, 2017- 45 I.R.B. 489, modified and superseded by Rev. Proc. 2018-18, 2018-10 I.R.B. 392); $4,200 for tax year 2019 (section 3.25 of Rev. Proc. 2018-57, 2018-49 I.R.B. 827); and $4,300 for tax year 2020 (section 3.25 of Rev. Proc. 2019-44, 2019-47 I.R.B. 1093).
The IRS has announced that Medicaid coverage of Coronavirus Disease 2019 (COVID-19) testing and diagnostic services is not minimum essential coverage for purposes of the premium tax credit under Code Sec. 36B.
The IRS has announced that Medicaid coverage of Coronavirus Disease 2019 (COVID-19) testing and diagnostic services is not minimum essential coverage for purposes of the premium tax credit under Code Sec. 36B.
Under the Affordable Care Act (ACA), certain taxpayers who obtain their coverage through an Exchange may claim a premium tax credit under Code Sec. 36B. However, taxpayers are only allowed the credit for months they are not otherwise eligible for minimum essential coverage.
Minimum essential coverage includes coverage under government-sponsored programs, including Medicaid, but certain health care coverage providing limited benefits is exempted.
The Treasury Department and the IRS have determined that Medicaid coverage limited to COVID-19 testing and diagnostic services is not minimum essential coverage under a government-sponsored program. Thus, an individual’s eligibility for this coverage for one or more months does not prevent the individual from claiming the premium tax credit under Code Sec. 36B.
The IRS has released guidance in the form of questions and answers with respect to certain provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and the Bipartisan American Miners Act of 2019 (Miners Act).
The IRS has released guidance in the form of questions and answers with respect to certain provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and the Bipartisan American Miners Act of 2019 (Miners Act).
Business Credit
The SECURE ACT added a new Code Sec 45T, which provides a business credit to an eligible employer that establishes an eligible automatic contribution arrangement under a qualified employer plan. The credit is equal to $500 per year and applies to tax years beginning after December 31, 2019.
The notice clarifies than an eligible employer can only receive a credit during a single three year credit period. For example, if Employer X includes an automatic contribution arrangement for Plan A during 2021, 2022, and 2023 and then includes an automatic contribution arrangement for Plan B during 2022, 2023, and 2024, they can receive no more than $500 as a credit for 2021, 2022, and 2023, and are not permitted to receive a credit for 2024. The employer must include the same arrangement in the same plan for years two and three.
The credit applies separately to each eligible employer that participates in a multiple employer plan.
IRA Contribution Age Limit
Prior to the SECURE Act, an individual was not permitted to make contributions to their IRA if they were age 70 and 1/2 or older by the last day of the year. The SECURE Act eliminated that age limit for contributions after 2019.
The notice clarifies that a financial institution is not required to accept contributions after age 70 and 1/2, but if it does choose to accept them, it must amend its IRA contract and distribute a copy of the amendment and disclosure statement to each individual.
Individuals are not permitted to offset the amount of their required minimum distribution by the amount of their post-age 70 and 1/2 contributions for the same year.
Individuals are able to take their required minimum distributions as qualified charitable distributions. The example below illustrates how this would interact with the new lack of age limit on contributions.
Imagine Bob is over 70 and a 1/2 before 2020. He deducts $5,000 for contributions for 2020 and 2021, but makes no contribution for 2022. He makes no qualified charitable distributions for 2020 and makes qualified charitable distributions of $6,000 for 2021 and $6,500 for 2022. Bob’s excludable amount of qualified charitable distributions for 2021 is the $6,000 of qualified charitable distributions reduced by the $10,000 aggregate amount of post-age 70 1/2 contributions for 2021 and earlier taxable years. For this individual, these amounts are $5,000 for each of 2020 and 2021, resulting in no excludable amount of qualified charitable distributions for 2021 (that is, $6,000 - $10,000 = ($4,000)). The excludable amount of the qualified charitable distributions for 2022 is $2,500 ($6,500 - $4,000 = $2,500). Because the $4,000 amount reduced the excludable amount of qualified charitable distributions for 2022, that $4,000 amount does not apply again in later years, and no amount of post-age 70 1/2 contributions remains to reduce the excludable amount of qualified charitable distributions for subsequent taxable years.
Qualified Birth or Adoption Distributions
Code Sec. 72(t)(1) generally imposes a 10 percent additional tax on an early distribution from a qualified retirement plan (including an IRA or Roth IRA), unless the distribution qualifies for an exception. The SECURE Act provides a new exception to the 10 percent penalty for any qualified birth or adoption distribution up to $5,000 from an applicable retirement plan if made during the 1-year period beginning on the date on which the child is born or the adoption is finalized. The parent must include the name, age and the Taxpayer Identification Number of the child on their tax return the year the distribution is made.
The distribution can be made from any eligible retirement plan described in Code Sec. 402(c)(8)(B), other than a defined benefit plan. Therefore, a Code Sec. 401(a) qualified defined contribution plan, a Code Sec. 403(a) annuity plan, a Code Sec. 403(b) annuity contract, a governmental Code Sec. 457(b) plan, or an IRA is eligible to permit a qualified birth or adoption distribution. Eligible adoptees include any individual who has not attained age 18 or is physically or mentally incapable of self support as defined in Code Sec. 72(m)(7), but does not include an individual who is a child of the taxpayer’s spouse. Each parent can receive a qualified distribution up to $5,000 with respect to the same adoptee, and can receive multiple distributions if they have multiple births (ex. Twins or triplets).
Eligible retirement plans are not required to permit distributions for qualified birth or adoption distributions, but if they do not, individuals can still take the distribution and treat it as a qualified birth or adoption distribution on their federal tax return. Plans must accept recontribution of the distribution, if the following apply:
(a) the plan permits qualified birth or adoption distributions;
(b) the individual received a qualified birth or adoption distribution from that plan; and
(c) the individual is eligible to make a rollover contribution to that plan at the time the individual wishes to recontribute the qualified birth or adoption distribution to the plan.
Qualified birth or adoption distributions are not treated as eligible rollover distributions for purposes of the direct rollover rules, Code Sec. 402(f) notice requirements, and the mandatory withholding rules.
Difficulty of Care Payments
Code Sec. 408(o) provides that designated nondeductible contributions may be made on behalf of an individual to an IRA. A difficulty of care payment is a type of qualified foster care payment that is excludable from gross income.
The notice clarifies that difficulty of care payments received by an employee from a person other than his or her employer are not included as compensation. If an employer does not make difficulty of care payments, then the plan does not need to amend the plan to include the payments in the plan’s definition of compensation. However, if the employer begins to make difficulty of care payments, the plan must be amended.
Participation Rights Expanded for Part-Time Employees
Prior to the SECURE Act, employers that maintained a 401(k) plan were not required to offer it to part-time employees who work less than 1,000 hours per year. The rules require only that employers offer the plan to any employee who has both attained age 21 and has completed at least one year of service. A "year of service" is defined as a 12-month period during which the employee has worked at least 1,000 hours. Someone who works a bare 1,000 hours would be averaging 19.2 hours per week.
Under the SECURE Act, employers with 401(k) plans must offer employees who work between 500 and 1000 hours year an additional track to 401(k) participation. Employees must be able to satisfy participation requirements by completing either:
- the existing one year of service requirement, working at least 1,000-hours, or
- the new three consecutive 12-month periods of service requirement working at least 500 hours in each period.
The three-consecutive-years-of-service track is not available for an employee unless the employee reaches age 21 by the close of the last of the 12-month periods.
For purposes of determining vesting rights to employer contributions for 500-hour track employees, each 12-month period for which the employee has at least 500 hours of service is treated as a year of service. For purposes of the break-in-service rules, a 1-year break in service includes a year in which the employee has not completed at least 500 hours of service.
These amendments apply to plan years beginning after December 31, 2020, except that 12-month periods beginning before January 1, 2021, are not taken into account. The IRS guidance clarifies that this exception does not extend to the special vesting rules.
Plan Amendments
The deadlines to amend a retirement plan for provisions of the SECURE Act, the regulations thereunder, or Act Sec. 104 of the Miners Act are as follows. Note these amendment deadlines apply to both required and discretionary plan amendments.
- Qualified plans. For a qualified plan that is not a governmental plan or an applicable collectively bargained plan, the deadline is the last day of the first plan year beginning on or after January 1, 2022. The plan amendment deadline for a qualified governmental plan or for an applicable collectively bargained plan is the last day of the first plan year beginning on or after January 1, 2024. A plan sponsor may amend its plan after these dates, but they are not entitled to anti-cutback relief.
- Section 403(b) plans. The deadline for a Code Sec. 403(b) plan that is not maintained by a public school is the last day of the first plan year beginning on or after January 1, 2022. The deadline is for a plan maintained by a public school is the last day of the first plan year beginning on or after January 1, 2024. A plan sponsor may amend its plan after these dates, but they are not entitled to anti-cutback relief.
- Code Sec. 457(b) governmental plans. The deadline is the later of (i) the last day of the first plan year beginning on or after January 1, 2024, or (ii) if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the Secretary that the plan was administered in a manner that is inconsistent with the requirements of Code Sec. 457(b).
- IRAs. The deadline to amend the trust governing an IRA is December 31, 2022, or such later date as the Secretary prescribes in guidance. In the case of a deemed IRA, the deadline is the deadline applicable to the plan under which the deemed IRA is established.
Reduction in Minimum Age for In-Service Distributions
A qualified pension plan cannot make distributions to an employee who is still in-service (that is, working for the employer) prior to a certain age. The Miners Act lowered the minimum age from age 62 to age 59 1/2. Similarly, the Miners Act changed the rule for an eligible government deferred compensation plans under Code Sec. 457(b), reducing the minimum age to the calendar year the participant turns age 70 1/2 to age 59 1/2. These amendments apply to plan years beginning after December 31, 2019.
IRS guidance clarifies that neither a qualified plan nor a Code Sec. 457(b) governmental plan is required to provide for in-service distributions due to changes in the Miners Act. For example, a qualified plan that provides for in-service distributions commencing at age 62 is not required to be amended to provide for in-service distributions commencing at age 59 1/2. Also, the guidance clarifies that a change in the in-service distribution minimum age does not necessarily affect the plan’s existing normal retirement age.
Final regulations provide additional guidance on the base erosion and anti-abuse tax (BEAT) under Code Sec. 59A. The regulations also address certain aspects of the BEAT under Code Secs. 1502 and 6031.
Final regulations provide additional guidance on the base erosion and anti-abuse tax (BEAT) under Code Sec. 59A. The regulations also address certain aspects of the BEAT under Code Secs. 1502 and 6031.
The final regulations retain the basic approach and structure of the 2018 proposed regulations ( NPRM REG-112607-19), with certain revisions. The final regulations generally provide rules addressing the following:
- the determination of a taxpayer’s aggregate group for purposes of determining gross receipts and the base erosion percentage;
- an election to waive deductions for purposes of the BEAT;
- the application of the BEAT to partnerships; and
- the anti-abuse rule provided in Reg. §1.59A-9(b)(4) with respect to certain basis step-up transactions.
Determination of Taxpayer’s Aggregate Group
The final regulations provide guidance regarding how a taxpayer determines its aggregate group. Specifically, rules are provided for the calculation of gross receipts and the base erosion percentage when either the taxpayer or a member of the taxpayer’s aggregate group has a short tax year. The final regulations generally retain the rule in the 2018 proposed regulations that permits the use of a reasonable approach to determine whether a taxpayer’s aggregate group meets the gross receipts test and base erosion percentage test with respect to a short tax year of the taxpayer. The final rules provide examples of methods that may or may not constitute a reasonable approach.
In addition, the final regulations provide guidance on how the gross receipts and the base erosion percentage of an aggregate group are determined when members join or leave a taxpayer’s aggregate group, such as through a sale of the stock of a member to a third party. Clarification is provided regarding the close of the tax year rule for determining gross receipts and base erosion percentage. The final rules also address concerns regarding over-and under-counting of gross receipts of aggregate group members with different tax years.
Finally, guidance is provided on the application of the aggregate group rules to predecessors and successors.
Election to Waive Allowable Deductions
The final regulations address the election to waive allowable deduction and more specifically:
- when a taxpayer is eligible to make the BEAT waiver election;
- the effect of the BEAT waiver election on the base erosion percentage (whether deductions
- waived pursuant to the BEAT waiver election should be included in the denominator of the base erosion percentage);
- a reduction of waived deductions during audit or on an amended return;
- a waiver of life and non-life reinsurance premiums;
- procedures for making the BEAT waiver election;
- the application of the BEAT waiver election to partnerships;
- the application of the BEAT waiver election to consolidated groups; and
- the interaction of the BEAT waiver election with other regulations.
Application of the BEAT to Partnerships
The final regulations expand the ECI exception to apply to certain partnership transactions. The regulations also clarify the treatment of curative allocations and the partnership anti-abuse rule for derivatives.
Anti-abuse Rules of Reg. §1.59A-9 for Basis Step-up Transactions
The anti-abuse rule of Reg. §1.59A-9 is revised to address concerns about the breadth of this rule and its potential to create a "cliff effect," whereby a minimal amount of pre-transaction basis step-up could disqualify an entire transaction that would have otherwise qualified for the specified nonrecognition transaction exception.
Possible Future Guidance Concerning the QDP Reporting Requirements
The IRS is currently studying the interaction of the QDP exception, the BEAT netting rule in Reg. §1.59A-2(e)(3)(iv), and the QDP reporting requirements in Reg. §1.59A-6 and Reg. §1.6038A-2(b)(7)(ix) and considering whether future guidance may be appropriate.
Applicability Date
The final regulations generally apply to tax years beginning on or after the date they are published in Federal Register. Certain rules apply to tax years ending on or after December 2, 2019. However, taxpayers may apply these final regulations in their entirety for tax years beginning after December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply these regulations in their entirety for all subsequent tax years. Alternatively, taxpayers may apply only Reg. §§1.59A-3(c)(5) and (6) for tax years beginning after December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply them in their entirety for all subsequent tax years. Taxpayers may also rely on Proposed Reg. §§1.59A-2(c)(2)(ii) and (c)(4) through (c)(6), and 1.59A-3(c)(5) and (c)(6) in their entirety for tax years beginning after December 31, 2017, and before the date of publication of these final regulations in the Federal Register.
The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.
The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.
Even with a wait time of 120 days, taxpayers who find themselves victims of tax refund identity theft likely find the road to resolution a frustrating and time consuming process. This article seeks to explain the various pulleys and levers at play when communicating with the IRS about an identity theft case.
Initiating an ID theft case
A taxpayer may become aware that he or she is a victim of tax-related identity theft when the IRS rejects their tax return because someone has already filed a return using the taxpayer's name and/or social security number. A taxpayer may also receive correspondence directly from the IRS that informs them, prior to filing, that someone has filed a suspicious return under their information. In other cases, a taxpayer may have had his or her identity information compromised and wishes to alert the IRS as to the possibility that he or she may be targeted by an identity thief.
For all such cases, the IRS has created Form 14039, Identity Theft Affidavit. Taxpayers who are actual or potential victims of tax-related identity theft may complete and submit the Affidavit to ensure that the IRS flags the tax account for review of any suspicious activity. Taxpayers who have been victimized are asked to provide a short explanation of the problem and how they became aware of it.
The Identity Theft Affidavit may also be submitted by taxpayers that have not yet become victims of tax-related identity theft, but who have experienced the misuse of their personal identity information to obtain credit or who have lost a purse or wallet or had one stolen, who suspect they have been targeted by a phishing or phone scam, etc. The form asks these taxpayers to briefly describe the identity theft violation, the event of concern, and to include the relevant dates.
Once the Form 14039 has been completed and submitted, the taxpayer should expect to receive a Notice CP01S from the IRS by mail. The Notice CP01S simply acknowledges that the IRS has received the taxpayer's Identity Theft Affidavit and reminds the taxpayer to continue to file all federal tax returns.
IDVerify.irs.gov
The IRS has implemented a pre-screening procedure for suspicious tax returns. Rather than halt the refund process entirely, which can prevent a refund claimed on a legitimately filed return, the IRS has provided taxpayers with the opportunity to verify their identity.
Now when the IRS receives a suspicious return, it will send a Letter 5071C or Notice CP01B to the taxpayer requesting him or her to either visit idverify.irs.gov or call the toll-free number listed on the header of the letter (1-800-830-5084) within 30 days. When the taxpayer does this, the taxpayer will encounter a series of questions asking for personal information. If the taxpayer fails to respond to the verification request or responds and answers a question incorrectly the IRS will flag the return as fraudulent and follow the prescribed procedures for resolving identity theft cases.
Resolving the case
After a tax return has been flagged with the special identity theft processing code, the IRS will assign the case to a tax assistor. TIGTA reported that the IRS assigns each case priority based first on its age and then by case type—for example, with cases nearing the statute of limitations placed first, followed by cases claiming disaster relief, and then identity theft cases. However, TIGTA has reported that cases are frequently reassigned to multiple tax assistors, and there are often long lag times where no work is accomplished toward resolution. National Taxpayer Advocate Nina Olson also noted in her recent "Identity Theft Case Review Report" on a statistical analysis of 409 identity theft cases closed in June 2014 that a significant number of cases experience a period of inactivity averaging 78 days.
After resolution
The IRS has also created the Identity Protection Personal Identification Number (IP PIN) project, which is meant to prevent taxpayers from being victimized by identity thieves a second time after the IRS has resolved their cases and closed them. The IP PIN is a unique six-digit code that taxpayers must entered on their tax return instead
The IRS assigns an IP PIN to a taxpayer by sending him or her a Notice CP01A. Generally this Notice is issued in December in preparation for the upcoming filing season. The taxpayer then enters it into the appropriate box of his or her federal tax return (i.e. Forms 1040, 1040A, 1040EZ or 1040 PR/SS). On paper returns, this box is located on the second page, near the signature line. When e-filing, the tax software or tax return preparer will indicate where the taxpayer should enter the IP PIN, social security number or taxpayer identification number (TIN) at time they file their tax return. The IP PIN is only good for one tax year.
Taxpayers who have been assigned an IP PIN, but who have lost or misplaced it cannot electronically file their tax returns until they have located it. Previously such taxpayers had no way to retrieve their IP PIN and had to file on paper. Beginning on January 14, 2015, however, taxpayers who had lost their IP PINs were able to retrieve them by accessing their online accounts and providing the IRS with specific personal information and answer a series of questions to verify identity.
Latest breach
The IRS announced on May 26th that 100,000 taxpayers became victims of a new identity theft scheme discovered in mid-May 2015. Identity theft criminals used stolen personal identification information to access the IRS's online "Get Transcript" application and illegally download these taxpayers' tax transcripts. The IRS is concerned that the criminals intend to use taxpayers' past-year return information to file false tax returns claiming tax items and refunds that look legitimate and that do not trigger the IRS's filters for finding suspicious returns.
Within this latest breach of security, identity thieves had attempted to download a total of 200,000 transcripts, but had only been successful half of the time, according to an announcement by IRS Commissioner John Koskinen. Because the IRS has yet to see how many taxpayers were actually victimized, the IRS may not provide IP PINs to all of these 200,000 taxpayers. However, the 100,000 taxpayers whose tax transcripts were downloaded will receive free credit monitoring services at the IRS's expense, Koskinen stated.
Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.
Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.
Payments and Withholding
As a household employer, the parent must withhold and pay Social Security and Medicare taxes if the cash wages paid to the nanny exceed the threshold amount for the year. If the amount paid is less than the threshold, the parent does not owe any Social Security or Medicare taxes. For 2017, the domestic employee coverage threshold, as adjusted for a slightly different inflation factor and subject to rounding, will be $2,000, which is the same as for 2016 after rising from $1,900 in 2015. Earnings of any domestic employee are not subject to Social Security taxes if they do not exceed that threshold for the year. If the employee earns more than $1,000 in any calendar quarter, the parent must also pay federal unemployment (FUTA) tax on wages paid, up to $7,000. Publication 926, Household Employer's Tax Guide, has more information about withholding and paying employment taxes.
If the amount paid is more than the threshold, the parent must withhold the employee's share of Social Security and Medicare taxes unless the parent chooses to pay both the employee's and the employer's share. The taxes are 15.3 percent of cash wages, 7.65 percent each for the employee and the employer. This includes 6.2 percent for Social Security and 1.45 percent for Medicare (hospitalization insurance).
The parent is not required to withhold income tax from the nanny's wages. However, the parent and the nanny may agree to withholding income tax from the nanny's wages. The nanny must provide a filled-out Form W-4, Employee's Withholding Allowance Certificate, to the employer.
The employment taxes amounts are part of the parent's tax liability and can trigger an estimated tax penalty if not enough is paid during the year. The parent submits estimated tax payments on Form 1040-ES, Estimated Tax for Individuals.
Forms to File
If the parent must pay Social Security and Medicare taxes, or if the parent withholds income tax, the parent must file Schedule H, Household Employment Taxes, with the parent's Form 1040. The parent may also need to file a Form W-2, Wage and Tax Statement, and furnish a copy of the form to the nanny. To complete Form W-2, the parent must obtain an employer identification number (EIN) from the IRS, either by applying online or by submitting Form SS-4, Application for Employer Identification Number.
Please do not hesitate to contact this office if you have any questions regarding your “nanny tax” responsibilities.
The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.
The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.
Tax-related identity theft
Tax-related identity theft most often occurs when a criminal uses a stolen Social Security number to file a tax return claiming a fraudulent refund. Often, criminals will claim bogus tax credits or deductions to generate large refunds. Fraud is particularly prevalent for the earned income tax credit, residential energy credits and others. In many cases, the victims of tax-related identity theft only discover the crime when they file their genuine return with the IRS. By this time, all the taxpayer can do is to take steps to prevent a recurrence.
Being proactive
However, there are steps taxpayers can take to reduce the likelihood of being a victim of tax-related identity theft. Personal information must be kept confidential. This includes not only an individual's Social Security number (SSN) but other identification materials, such as bank and other financial account numbers, credit and debit card numbers, and medical and insurance information. Paper documents, including old tax returns if they were filed on paper returns, should be kept in a secure location. Documents that are no longer needed should be shredded.
Online information is especially vulnerable and should be protected by using firewalls, anti-spam/virus software, updating security patches and changing passwords frequently. Identity thieves are very skilled at leveraging whatever information they can find online to create a false tax return.
Impersonators
Criminals do not only steal a taxpayer's identity from documents. Telephone tax scams soared during the 2015 filing season. Indeed, a government watchdog reported that this year was a record high for telephone tax scams. These criminals impersonate IRS officials and threaten legal action unless a taxpayer immediately pays a purported tax debt. These criminals sound convincing when they call and use fake names and bogus IRS identification badge numbers. One sure sign of a telephone tax scam is a demand for payment by prepaid debit card. The IRS never demands payment using a prepaid debit card, nor does the IRS ask for credit or debit card numbers over the phone.
The IRS, the Treasury Inspector General for Tax Administration (TIGTA) and the Federal Tax Commission (FTC) are investigating telephone tax fraud. Individuals who have received these types of calls should alert the IRS, TIGTA or the FTC, even if they have not been victimized.
Tax-related identity theft is a time consuming process for victims so the best defense is a good offense. Please contact our office if you have any questions about tax-related identity theft.
The IRS requires that taxpayers substantiate their donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS's requirements.
The IRS requires that taxpayers substantiate their donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS's requirements.
Substantiation
One way to understand the IRS's requirements is to break them down by monetary amount and the type of donation, money and/or household items or clothing.
- To deduct a contribution of cash, check, or other monetary gift (of less than $250), a taxpayer must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.
- To claim a deduction for contributions of cash or property equaling $250 or more, the taxpayer must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.
- If the total deduction for all noncash contributions for the year is over $500, the taxpayer must file Form 8283, Noncash Charitable Contributions, with the IRS.
- Donations valued at more than $5,000 generally require an appraisal by a qualified appraiser.
The IRS also requires that donations of clothing and household items be in good used condition or better to be deductible. Special rules apply to donations of motor vehicles, boats and aircraft.
Tax Court sheds light
In April, the U.S. Tax Court issued an instructive decision (Kunkel, TC Memo. 2015-71) on the steps taxpayers must take to deduct a contribution to a charitable organization. The taxpayers in Kunkel made a number of donations, some by cash and others of household items and clothing, but the court disallowed nearly all of the claimed deductions because the taxpayers failed to follow the rules.
In this case, the taxpayers reported $42,000 in charitable contributions, comprising $5,000 in cash and $37,000 in noncash donations. The noncash contributions were donations of books, clothing, furniture, and household items. The taxpayers told the IRS that they took the household items, clothing and books to charities in batches, which they claimed were worth less than $250 because they believed this eliminated the need to get receipts. Other times, one or more charities came to the taxpayers' residence and picked up the household items (however, the taxpayers were not home at the time of the pickup and the charities left undated doorknob hangers as receipts).
The Tax Court reminded the taxpayers that for all contributions of $250 or more, a taxpayer generally must obtain a contemporaneous written acknowledgment from the charity. The court found it implausible that the taxpayers had made their donations in batches worth less than $250. The court calculated that this would mean they had made these donations on 97 different occasions in one year. The court also found that the doorknob hangers were inadequate substantiation of their claimed donations. The doorknob hangers not specific to taxpayer, did not describe the property contributed, and were not contemporaneous written acknowledgments, the court found.
This article is a very high level overview of the IRS's substantiation requirements for donations to charity. If you have any questions about the substantiation or other requirements for a gift you are making to a charity, please contact our office for more details.
Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.
Under the Patient Protection and Affordable Care Act (PPACA), small employers can claim a credit for providing health insurance for employees and their families. Health insurance includes not only basic medical and hospital care, but dental or vision, long-term care, and coverage for specific diseases or illness. Self-funded plans do not qualify; the insurance must be provided through a third party.
For 2010-2013, for-profit employers can claim a credit of 35 percent of the employer's nonelective contributions, increasing to 50 percent for 2014 and 2015. Nonprofit employers can claim a credit of 25 percent through 2013, and 35 percent for the two succeeding years. Beginning in 2012, the credit for nonprofit employers is limited to the payroll taxes paid by the employer.
Small employers
Employers can claim the full credit if their full-time equivalent (FTE) employees are 10 or less, and their average annual wages per employee are $25,000 or less. FTEs are determined by figuring total hours of service for all employees and dividing the total by 2,080.
The credit is phased out for employers with 11 to 25 employees or with average wages between $25,000 and $50,000. The credit percentage is reduced 6.67 percent per "excess" employee (over 10) and four percent for each $1,000 of average wages in excess of $25,000.
To determine the amount of the credit, employers must add up the total premiums they paid on behalf of their employees during the year, subject to the state average premium limit. This total is then multiplied by the applicable percentage (25 or 35 percent for 2013, minus any phase-out). The credit is then reduced for FTEs in excess of 10, and for average annual wages (in units of $1,000) over $25,000. The result is the total credit that the employer can claim.
Other requirements
Under current law, employers must pay at least 50 percent of the insurance costs and must pay a uniform percentage for all employees. The credit is reduced if the employer premiums exceed the state's average premium for small group markets.
In its proposed fiscal year 2014 budget, the Obama administration would modify or eliminate some of these requirements. The credit phase-out would apply to employers with 21-50 employees, rather than 11-25. The phase-out rate would also be more gradual. Furthermore, the administration would eliminate the requirement that employers make a uniform contribution for each employee, and would eliminate the limit for state average premiums.
Reports indicate that the small business health insurance credit is being underutilized, with many businesses leaving this tax money on the table without claiming it or arranging their affairs to do so.
If you have any questions about how you might be able to position your business to claim this credit or claim a larger credit, do not hesitate to call this office for an update.
