The 2017 tax act signed into law on December 22, 2017 imposes a broad limit on the deductibility of business interest expense for tax years beginning in 2018 and later, which may result in increased tax liability for corporations and investors in pass-through businesses that finance acquisitions with debt.

Date: 12/22/2019 (PDF)

The 2017 tax act signed into law on December 22, 2017 imposes a broad limit on the deductibility of business interest expense for tax years beginning in 2018 and later, which may result in increased tax liability for corporations and investors in pass-through businesses that finance acquisitions with debt.

For purposes of the limitation on the deduction of business interest expense, “interest” also includes substitute interest payments, debt issuance costs, loan commitment fees, certain amounts that affect the economic cost of funds or yield of a borrowing or an interest-generating asset, and certain amounts predominantly associated with the time value of money.

If the business interest limitation applies to any of your businesses, then the amount of business interest expense that you may deduct is limited to the sum of: (1) 30% of adjusted taxable income; plus (2) 100% of business interest income; plus (3) 100% of floor plan financing interest.

For tax years beginning in 2018 through 2021, adjusted taxable income (ATI) is computed by starting with your taxable income for the tax year (disregarding the business interest limitation), and then adding to it and subtracting from it the following amounts:

Add to Taxable Income:

• business interest expense;
• net operating loss deduction;
• deduction for qualified business income;
• depreciation, amortization, or depletion deduction;
• capital loss carrybacks or carryovers; and
• any deduction or loss not properly allocable to a non-excepted trade or business.

Subtract from Taxable Income:

• business interest income;
• floor plan financing interest expense;
• the lesser of (i) gain realized on sale or disposition of property or (ii) deductions for depreciation, amortization or depletion taken for such property during a tax year beginning after 2017 (and similar adjustments for sales or dispositions of property held by a partnership or member of a consolidated group upon the sale or other disposition of the partnership interest or stock of the member); and
• any income or gain that is not properly allocable to a non-excepted trade or business.

For tax years beginning in 2022 and later, deductions for depreciation, amortization, or depletion are not taken into account in computing ATI.

Special rules and other adjustments apply to certain types of taxpayers when computing ATI.

Business interest expense does not include investment interest expense. However, all interest income and all interest expense of a C corporation (including, in certain cases, members of a consolidated group of corporations, REITs, and RICs) is treated as business interest income and business interest expense, unless the interest income or interest expense is allocable to an “excepted trade or business” (defined below). For example, investment interest expense that is passed through by a partnership to a C corporation partner generally would be considered business interest expense.

The business interest limitation generally applies to all taxpayers that have business interest expense. However, a small business taxpayer that meets the “gross receipts test” is exempt from the limitation. A business meets the gross receipts test if it is not a tax shelter and it has average annual gross receipts of $25 million or less for the three previous tax years. The $25 million amount is adjusted for inflation. Please note that “tax shelter” is defined broadly for this purpose, and includes any partnership or S corporation that allocates more than 35% of its losses for the year to limited partners or limited entrepreneurs.

The business interest limitation generally applies at the entity level to all business debt incurred, including debt incurred before 2018.

Interest that is allocable to an “excepted trade or business” is not treated as business interest.

Excepted trades and businesses are those in the trade or business of providing services as an employee, certain regulated utility trades or businesses, certain real property trades or businesses that make an irrevocable election to be excepted from the business interest limitation, and certain farming businesses that make an irrevocable election to be excepted from the business interest limitation.

For those businesses electing to be excepted from the business interest expense limitation, making the election involves a tradeoff: a real property business or farming business that makes the election must use the Alternative Depreciation System to depreciate certain types of property, which requires straight-line depreciation over a longer depreciable recovery period compared to depreciation under the General Depreciation System.

If you are engaged in both an excepted trade or business and a non-excepted trade or business, interest expense that is allocable to an excepted trade or business is not subject to the business interest limitation, and the amount of your items of income, gain, deduction, or loss, including interest income that is allocable to an excepted trade or business, is excluded in determining the business interest limitation. Therefore, you must allocate your tax items between excepted and non-excepted trades and businesses to determine the limitation.

Business interest expense not allowed as a deduction for a tax year is treated as a business expense paid or accrued in the next tax year, and can be carried forward indefinitely. Disallowed business interest expense carryforwards are subject to limitation in change-of-ownership situations.

Special rules regarding the carryover of disallowed business interest apply to partnerships and S corporations. For partnerships, any business interest expense that is not allowed as a deduction is passed through to the partners, and can be deducted by the partners only to the extent that there is excess taxable income from that specific partnership to absorb the deduction. For S corporations, disallowed business interest expense is carried over to the next tax year of the S corporation and is treated as interest expense paid or accrued by the S corporation in that year.

The business interest limitation applies at the consolidated return level, and a consolidated group has a single limitation. In calculating the limitation, a consolidated group's business interest expense and business interest income is, respectively, the sum of its members’ business interest expense and business interest income.

The business interest limitation applies to a foreign corporation that is a controlled foreign corporation (CFC), generally in the same manner as it applies apply to a domestic C corporation. If a CFC is a partner in a partnership, the limitation applies to the partnership in the same manner as if the CFC were a domestic C corporation.

The business interest limitation rules are complex and can significantly impact your tax liability. We suggest that you meet with us as soon as possible to discuss strategies to minimize the impact of the limitation, including determining whether your business qualifies to make an election to be excepted from the limitation, whether making the election is advisable in your situation, and if so, what steps we need to take to make the election.

This article contains general information only.  It is not tax advice and it should not be used as a basis for any business or tax decision. You should consult with a qualified professional before taking any action that may affect your business or you personally.

This article will give you a better understanding of the first-year expensing (also referred to as §179 expensing) and additional first-year depreciation (also referred to as bonus depreciation). Businesses that purchase capital assets are allowed to deduct the decline in value of the assets over their useful lives. This depreciation deduction is intended to help businesses to eventually recover the costs of capital assets.

Date: 12/20/2019 (PDF)

Certain provisions in the tax code enable you to accelerate recovery of your cost of certain plants, machinery, equipment, computer software, and other qualified property that you acquire for business use, rather than having to depreciate those costs over several tax years. Expensing (immediate write-off) is the primary cost recovery vehicle for capital assets (acquired for business use) placed in service from 2018 through 2022. The two mechanisms for deducting the cost of assets in the year they are placed in service are first-year expensing under Internal Revenue Code §179 and bonus depreciation under Internal Revenue Code §168(k).

Individuals and business entities that have taxable income greater than or equal to the amount of qualified first-year expensing property placed in service during the tax year, can elect to claim a first-year expensing deduction for up to $1 million of the cost such property. Most machinery and equipment, certain commercial building improvements, property used to furnish lodging, and certain computer software that businesses purchase (or lease under a capital lease) are qualified first-year expensing property, but rental real estate is not. First-year expensing is available for both new and used assets, and for both purchased and leased (under a capital lease) assets. To be eligible for the first-year expensing deduction, the assets must be used in the United States.

The $1 million annual limit on the first-year expensing deduction is reduced if you place in service more than $2.5 million in qualified first-year expensing property during the year. No first-year expensing deduction is allowed if you place in service $3.5 million or more in qualified first-year expensing property during the year. Because of this property cost limit, larger businesses generally claim bonus depreciation rather than first-year expensing.

In contrast to the first-year expensing deduction, there is no annual dollar limit on the bonus depreciation deduction amount, and bonus depreciation may be deducted even in a loss year. And unlike the first-year expensing deduction, the bonus depreciation deduction is not elective (except in the case of qualifying fruit- and nut-bearing plants). However, you may elect not to deduct bonus depreciation for any class of qualified property.

The bonus depreciation deduction is available to individuals, estates, trusts, and business entities that invest in new or used capital assets that have a depreciation recovery period of 20 years or less, as well as depreciable computer software, certain water utility property, qualified film, television, and live theater productions, and for farmers, specified fruit- and nut-bearing plants. Bonus depreciation is available for both purchased and leased (under a capital lease) assets. To be eligible for bonus depreciation, the assets must be used in the United States.

The percentage of the adjusted basis of qualified property that is deducted as bonus depreciation is 100% for most qualified property placed in service before 2023, but it is scheduled to be reduced by 20% per year from 2023 through 2026, and fully phased out by 2027.

Qualified improvement property — which before 2018 could qualify for both first-year expensing and bonus depreciation — now qualifies for first-year expensing only (subject to the annual dollar limit and the taxable income limit), but does not qualify for bonus depreciation. Qualified improvement property is an improvement to an interior portion of a commercial building if the improvement is placed in service after the date the building was first placed in service. However, qualified improvement property does not include building enlargements, elevators and escalators, and the internal structural framework of a building.

Both first-year expensing and bonus depreciation are highly technical in nature and subject to limits and exceptions. To fully leverage these deductions, it is important to understand their specific requirements. It is also advisable to monitor these provisions for further legislative amendment.

This article contains general information only.  It is not tax advice and it should not be used as a basis for any business or tax decision. You should consult with a qualified professional before taking any action that may affect your business or you personally.

The Patient Protection and Affordable Care Act (PPACA), 816 enacted March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 (HCERA), 817 enacted March 30, 2010, ushered in a series of changes to the rules for obtaining and providing health care. The laws, as amended, are commonly referred to as the Affordable Care Act (or “ACA”). These rules are administered by the Departments of Treasury (and the IRS), Labor (DOL) and Health and Human Services (HHS), jointly or separately, as appropriate. 818

Date: 12/10/2019 (PDF)

The Patient Protection and Affordable Care Act (PPACA), 816 enacted March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 (HCERA), 817 enacted March 30, 2010, ushered in a series of changes to the rules for obtaining and providing health care. The laws, as amended, are commonly referred to as the Affordable Care Act (or “ACA”). These rules are administered by the Departments of Treasury (and the IRS), Labor (DOL) and Health and Human Services (HHS), jointly or separately, as appropriate. 818

816 Pub. L. No. 111-148.

817 Pub. L. No. 111-152.

Note however that White House Executive Order 13765 dated January 20, 2017, directs governmental departments and agencies with authority and responsibility under the Affordable Care Act to “exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the [ACA] that would impose a fiscal burden on any State or a cost, fee, tax, penalty or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products or medications.” These directives are to be carried out “[t]o the maximum extent permitted by law,” indicating that compliance with ACA is required until other regulations or guidance is issued. Also, White House Executive Order 13813 dated October 12, 2017, directs the IRS, DOL, and HHS to consider proposing regulations and revising guidance to: expand small businesses’ access to association health plans (AHPs) (see ¶5920.11.C.4.); make available short-term, limited-duration insurance that lasts longer than three months and is renewable (see ¶5920.11.B.21.); and increase the availability of health reimbursement arrangements (HRAs) to workers and allow their use with nongroup coverage (see ¶5920.09.D.3.). In addition, White House Executive Order 13877, dated June 24, 2019, contains several directives, including but not limited to, that: (1) the IRS, DOL, and HHS to solicit comment on a proposal to require providers, issuers, and self-insured group health plans to provide or facilitate access to information about expected out-of-pocket costs before patients receive care; (2) the IRS issue guidance to expand patients' ability to select high-deductible health plans that can be used alongside an HSA, and that cover low-cost preventive care, before the deductible, for medical care that helps maintain health status for individuals with chronic conditions (see ¶5920.08.C.2.b.); (3) the Treasury propose regulations to treat expenses related to certain types of arrangements, potentially including direct primary care arrangements and healthcare sharing ministries, as eligible medical expenses; and (4) the Treasury issue guidance to increase the amount of FSA carryover funds.

(1) Individuals —   TPS 5920.16.A.1.

U.S. citizens and legal residents, unless exempted, must maintain minimum essential health care coverage or face penalties (which are reduced to zero for months beginning after 2018). Individuals may qualify for a health care premium tax credit or cost-sharing reductions to assist them in paying for coverage. 819

819 These requirements took effect starting in 2014. The 2017 tax act (Pub. L. No. 115-97) reduced to penalty amount to zero after 2018, as discussed in ¶5920.16.B.1. The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, §10108, would have allowed qualifying low-income employees whose employer offers a free choice voucher to obtain health care coverage on their own using funds from the voucher, and would have provided tax benefits to employers offering the vouchers. Pub. L. No. 112-10, §1858, removed the voucher provisions of Pub. L. No. 111-148, §10108.

Group health plans generally are prohibited from imposing any preexisting condition exclusions on individuals. 820

820 This requirement also took effect starting in 2014. From 2010 through 2013, eligible individuals with a preexisting condition may have been able to obtain coverage under a temporary high risk health insurance pool program to provide health insurance coverage that does not impose any preexisting condition exclusion.

(2) Employers —   TPS 5920.16.A.2.

Employers are not required to offer health care coverage to their employees. However, as of 2015, 821 large employers—with 50 or more full-time-equivalent employees in the prior year—who do not offer health care coverage, or who offer coverage that does not meet minimum standards or is unaffordable to their employees, generally are subject to excise taxes (sometimes referred to as “play or pay” penalties) if any of their full-time employees obtain subsidized health insurance coverage through an Exchange.

821 Notice 2013-45 (transition relief provided for one year).

Also, large employers must report information about the health coverage that they offer, and all employers must report information about the health coverage that they provide.

Businesses with fewer than 25 employees may be eligible for tax credits to assist them in setting up or maintaining health plans. Small businesses also may offer plans to their employees through state health exchanges.

In addition, beginning in 2022, employers with self-insured plans and health insurance issuers that offer coverage beyond the required coverage (sometimes called “Cadillac” plan coverage) may have to pay an excise tax.

(3) Group Health Plans and Health Insurance Issuers —   TPS 5920.16.A.3.

Group health plans and health insurance issuers are faced with a variety of plan design and reporting and disclosure changes under the 2010 health care reform legislation. For example, for plan years beginning on or after September 23, 2010, insured group health plans cannot discriminate in favor of highly compensated individuals; plans that offer dependent child coverage must extend the coverage to children under the age of 26; plans cannot impose lifetime or annual limits (with restricted limits allowed during a phase-in period) or rescind coverage; plans must cover preventive health services; plans cannot contain preexisting condition exclusions for enrollees under age 19; and plans must develop and use uniform explanation of coverage documents and standardized definitions. See ¶5920.11.B., above.

Among the many requirements imposed for plan years beginning in and after 2014, plans cannot contain preexisting condition exclusions for adult enrollees or otherwise discriminate against any enrollees based on health status; and plans cannot impose excessive waiting periods. Health plans and health insurance coverage in existence on March 23, 2010, must comply with many new requirements, but are excluded from some requirements to the extent they retain “grandfathered” status. See ¶5920.11.B., above, for discussion of these plan requirements. See ¶5920.16.D.4., below, for discussion of the criteria a plan must satisfy to have grandfathered status.

Some requirements that apply to health plan insurers, but not funded group health plans, also apply to self-funded group health plans. Examples include the requirement to provide a summary of benefits and coverage explanation (see ¶5910.03.D.6.) and the payment of health insurance fees based on the average number of lives covered for each plan year ending after September 30, 2012, through plan years ending after September 30, 2019. 822

822 §4375, added by Pub. L. No. 111-148, §6301(e)(2) (health insurance issuers), discussed at ¶5920.16.E.3, below; §4376, added by Pub. L. No. 111-148, §6301(e)(2) (self-insured plans), discussed at ¶5920.16.D.5., below.

(4) Public Health Insurance Exchanges (Health Insurance Marketplaces) —   TPS 5920.16.A.4.

Each state can elect to establish an American Health Benefit Exchange (health exchange) — a governmental agency or nonprofit entity established to offer qualified health plans to qualified individuals and to provide for the establishment of a Small Business Health Options Program (SHOP Exchange) to assist qualified employers in enrolling their employees in qualified health plans offered in the small group market. 823 If a state does not set up a health exchange, the Secretary of HHS must establish and operate a health exchange within the state to offer qualified health plans. 824 This may be set up as a federally-facilitated exchange (with minimal state involvement) or a state partnership exchange. See ¶5920.11.B.19.b. Most exchanges fall within these last two categories.

823 Pub. L. No. 111-148, §1311(b) and 1311(d), as amended by Pub. L. No. 111-148, §10104(e). See ¶5920.16.C.6. Exchanges under the Affordable Care Act first became available in 2014.

824 Pub. L. No. 111-148, §1321(c); Pub. L. No. 111-148, §1322, as amended by Pub. L. No. 111-148, §10104(l).

This article contains general information only.  It is not tax advice and it should not be used as a basis for any business or tax decision. You should consult with a qualified professional before taking any action that may affect your business or you personally

This article will explain under what circumstances you may be eligible for the §199A deduction for qualified business income (QBI). 

Date: 01/15/2020 (PDF)

Editor's Note: The preamble to the final regulations indicates that for tax years ending in 2018 only, taxpayers may rely on the final regulations (T.D. 9847, 84 Fed. Reg. 2952 (Feb. 8, 2019)) in their entirety, or on the proposed regulations (REG-107892-18, 83 Fed. Reg. 40,884 (Aug. 16 2018)) in their entirety. The final regulations are effective for tax years ending after February 8, 2019. Anti-abuse rules are effective retroactively to the date of enactment of the 2017 tax act (December 22, 2017).

This article will explain under what circumstances you may be eligible for the §199A deduction for qualified business income (QBI).  

If you have income from a pass-through entity (or sole proprietorship) you may be entitled to a deduction equal to the lesser of the deductible amount of your QBI (generally 20% subject to the W-2 wage limitation) or 20% of your taxable income. You may also be able to deduct 20% of your qualified REIT dividends and qualified publicly traded partnership (PTP) income. Special rules apply for these additional items. The deduction applies to reduce your taxable income and is available whether or not you itemize. The deduction does not impact your calculation of self-employment tax.

QBI is your net amount of qualified items of income, gain, deduction, and loss with respect to each of your “qualified trades or businesses.” Qualified items are items that are allowed in the determination of your taxable income for the tax year, and are effectively connected with the conduct of a trade or business within the United States or Puerto Rico. Many items of income, gain, deduction, and loss are not qualified items. These items generally include capital gains and loss, dividends, interest, etc. In the case of a partnership or S corporation, your net amount of qualified items is the net amount of your allocable share of each qualified item. QBI does not include any amount paid by an S corporation to its shareholders that is treated as reasonable compensation; any guaranteed payment by a partnership to a partner for services rendered with respect to the trade or business; or any amount paid by a partnership to a partner who is not acting in his or her capacity as a partner for services rendered to the partnership. While the former three payment items are not QBI, they may serve to reduce QBI if the entity takes a deduction for these payments.

Your QBI must be earned through a trade or business. Trade or business has the same general meaning as it does for other purposes of tax law, with a few exceptions. First, if you rent or license tangible or intangible property to a trade or business which is commonly controlled, your rental activity may be a trade or business for purposes of the QBI deduction. Second, the IRS has proposed a safe harbor under which certain real estate enterprises may qualify as a trade or business if owners, employees, agents, or independent contractors perform 250 or more hours of rental services and other requirements are met. The trade or business of being an employee, is not a trade or business for purposes of the deduction. Additional rules may apply if your trade or business is a specified service trade or business.

If your deduction results from ownership of a pass-through entity, the Schedule K-1 you receive from the entity should report the net amount of QBI attributable to each trade or business or the aggregated trade or business of the entity. If the Schedule K-1 is blank in this regard, QBI is presumed to be zero, and we may need to contact the entity to issue amended schedules.

If the net amount of qualified items from your trade or business is a loss, you will have negative QBI and must proportionally offset your positive QBI from any other trades or businesses. If the net amount of QBI from all your trades or businesses is negative, you must carryover this amount to next year where it will proportionally offset positive QBI from other trades or businesses.

You must determine whether you have one trade or business or multiple trades or businesses. If you have multiple trades or businesses, it is possible that they can be aggregated together as one under special rules. In some cases, due to the W-2 wage limitation discussed below, aggregation may increase the amount of your deduction. You may have also received documentation from a pass-through entity in which you own an interest. If the entity aggregated any of its trades or businesses, you may not treat these trades or businesses as separate trades or businesses. You may, however, aggregate additional trades or businesses with the entity's aggregated group.

Calculation of the deduction is a fact intensive inquiry. If you claim the deduction and you understate the amount of tax required to be shown on your return by 5% or more, you could be subject to the substantial understatement of tax penalty.

If your taxable income does not exceed a threshold of $315,000 (joint filers), or $157,500 (all other taxpayers), your deduction is generally the lesser of: (1) 20% of your net QBI from all of your trades, plus 20% of your qualified REIT dividends and qualified PTP income; or (2) 20% of your taxable income.

Is your pass-through income from a “qualified trade or business”?

A qualified trade or business is defined as any trade or business other than a specified service trade or business or the trade or business of being an employee. A specified service trade or business cannot be aggregated with another trade or business. While no deduction is allowed for your income from the trade or business of being an employee, a deduction is allowed for your income from a specified service trade or business to the extent that your taxable income does not exceed the threshold amount. However, as your taxable income exceeds the threshold amount, your specified service trade or business income is partially or fully excluded from the deduction. The exclusion phases in based on the ratio of your table income in excess of the threshold amount to $100,000 (joint filers) and $50,000 (all other taxpayers). Thus, no deduction is allowed for your income from a specified service trade or business if your taxable income is more than $415,000 (joint filers) or $207,500 (all other taxpayers).

If your trade or business is operated as a pass-through entity, the entity should report to you whether the trade or business is a specified service trade or business. If your trade or business is operated as a sole proprietorship, you will need to determine whether you are engaged in a specified service trade or business. A specified service trade or business generally involves the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners (generally, a trade or business where a person receives fees, compensation, or other income, for endorsing a product, use of their likeness or other associated symbols, or appearances on television or other media), or which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities. If only a small portion of the gross receipts of your trade or business are attributable to one of the listed fields, a de minimis rule may permit you to treat your trade or business as a qualified trade or business.

Application of the W-2 wage limitation

If your taxable income exceeds the threshold amount, the deductible amount of your QBI is equal to the lesser of 20% of your QBI with respect to the trade or business or the W-2 wage limitation. As your taxable income exceeds the threshold above, the W-2 wage limitation phases in and you will reduce the excess amount of your deduction based on the ratio of your table income in excess of the threshold amount to $100,000 (joint filers) and $50,000 (all other taxpayers).

The W-2 wage limitation is equal to the greater of: (1) 50% of the business's W-2 wages; or (2) the sum of (a) 25% of the business's W-2 wages, plus (b) 2.5% of the unadjusted basis (immediately after acquisition) of all qualified property.

In the case of a partnership or S corporation, you take into account your allocable share of W-2 wages and unadjusted basis (immediately after acquisition) of qualified property for the tax year. These items should be reported to you by the partnership or S corporation on Schedule K-1. If these items are blank they will be presumed to be zero, and we may need to contact the entity to amend the schedule.

W-2 wages are the total wages subject to wage withholding, elective deferrals, and deferred compensation paid by the qualified trade or business with respect to employment of its employees during the calendar year ending during the tax year of the taxpayer. W-2 wages do not include: (1) any amount that is not properly allocable to the QBI as a qualified item of deduction; and (2) any amount that was not properly included in a return filed with the Social Security Administration on or before the 60th day after the due date (including extensions). Amounts paid to independent contractors are not W-2 wages. If your business uses a third party such as a certified professional employer organization to pay your employees’ wages, you may still be able to include these wages in your W-2 wage calculation subject to certain additional rules.

Qualified property is tangible property of a character subject to depreciation: (1) that is held by, and available for use in, the qualified trade or business at the end of the tax year; (2) that is used in the production of QBI; and (3) for which the depreciable period has not ended before the end of the tax year. The depreciable period with respect to qualified property is the period beginning on the date the property is first placed in service by the taxpayer and ending on the later of: (1) the date 10 years after that date; or (2) the last day of the last full year in the applicable recovery period that applies to the property. The unadjusted basis (immediately after acquisition) of qualified property is determined on the date the qualified property is placed in service.

Do you have any qualified REIT dividends or qualified PTP income?

If you have dividends from a REIT that are taxed as ordinary income, you have qualified REIT dividends. Income from a REIT that is taxed as capital gain, such as qualified dividend income and capital gains dividends, is not eligible for the deduction.

If you have income from a publicly traded partnership that is not taxed as a corporation, you may deduct up to 20% of the qualified PTP income from that publicly traded partnership. Qualified PTP income is the QBI, as described above, earned through a publicly traded partnership. If your taxable income is above the threshold amount, and your income from the publicly traded partnership is attributable to a specified service trade or business, your deduction may be partially or fully excluded based on ratio of your taxable income in excess of the threshold amount to $100,000 (joint filers) and $50,000 (all other taxpayers).

If you received either of these items from a pass-through entity, they should be reported to you on Schedule K-1.

This article contains general information only.  It is not tax advice and it should not be used as a basis for any business or tax decision. You should consult with a qualified professional before taking any action that may affect your business or you personally.

As a fundamental rule, taxpayers are entitled to take deductions only where specifically authorized by the Internal Revenue Code. Thus, because deductions are a matter of “legislative grace,” courts closely scrutinize taxpayers’ claims and reject those that do not clearly respect the letter of the law. Each taxpayer bears the burden of proving his or her entitlement to a deduction, and ambiguities are often resolved in favor of the government. Accordingly, taxpayers should carefully review their maintenance and reconditioning expenditures on property used in a trade or business to determine whether such amounts are deductible or capitalizable. Further, they should retain full and adequate records to substantiate all such costs.

Date: 01/16/2020 (PDF)

As a fundamental rule, taxpayers are entitled to take deductions only where specifically authorized by the Internal Revenue Code. Thus, because deductions are a matter of “legislative grace,” courts closely scrutinize taxpayers’ claims and reject those that do not clearly respect the letter of the law. Each taxpayer bears the burden of proving his or her entitlement to a deduction, and ambiguities are often resolved in favor of the government. Accordingly, taxpayers should carefully review their maintenance and reconditioning expenditures on property used in a trade or business to determine whether such amounts are deductible or capitalizable. Further, they should retain full and adequate records to substantiate all such costs.

A business expense deduction is generally allowed for all of the ordinary and necessary expenses paid or incurred by a taxpayer during the tax year in carrying on any trade or business. “Incidental repairs” are deductible business expenses for these purposes. However, expenditures that might be similar to repairs, for example, an expenditure that is for a betterment to the property, restores the unit of property, or adapts the property to a new or different use, must be capitalized or charged to the taxpayer's depreciation reserve rather than deducted. The line between a deductible repair expense and a nondeductible capital expenditure is indistinct; the difference between the two depends upon the factual context surrounding the expenditure. The same outlay that may be treated as a deductible repair in one set of circumstances may be a nondeductible capital expenditure in other situations.

An expenditure is generally deductible as an incidental repair if it is limited to keeping the affected property in its ordinarily efficient operating condition, whereas an amount paid to return a unit of property to its ordinarily efficient operating condition, if the property has deteriorated to a state of disrepair and is no longer functional for its intended use, is a capital expenditure. An expenditure is considered to be a betterment — and thus a capital expenditure — if it ameliorates a material condition or defect that existed before the taxpayer acquired the property (or arose during the production of the property); if it is for a material addition to the property (including a physical enlargement, expansion, extension, or addition of a major component, or a material increase in capacity); or if it is reasonably expected to materially increase the productivity, efficiency, strength, quality, or output of the unit of property.

Repairs incidental to an improvement must be capitalized only if they directly benefit or are incurred by reason of the improvement(s). Expenditures for work performed on depreciable assets that do not qualify as deductible repairs may nonetheless qualify for a bonus depreciation deduction or under the rule that allows you to elect to treat the cost of certain depreciable business assets as a current-year expense. The deductibility of environmental cleanup costs is governed by a special set of detailed rules.

Maintenance expenditures that do not improve the property (i.e., are not paid for a betterment or restoration of the property and do not adapt the property to a new or different use) generally may be deducted. Thus, taxpayers can deduct the costs of various expenditures that alleviate damage or deterioration, so long as the property is not improved. However, taxpayers cannot deduct indirect expenditures (e.g., otherwise deductible repairs) that directly benefit or are incurred by reason of an improvement.

A taxpayer ordinarily can deduct as a repair regularly recurring routine maintenance expenditures that a taxpayer expects to perform to keep the unit of property in its ordinarily efficient operating condition. When such activities happen regularly, an abnormally large expenditure resulting from the same cause is still deductible. On the other hand, a taxpayer must capitalize the cost to replace a major component or a substantial structural part of the unit of property.

There are a host of other factors or considerations that are relevant to the determination of whether a particular expenditure is deductible as a repair:

• Any properly-performed repair adds some value to the property repaired, but that does not necessarily mean its cost cannot be deducted.
• A common rule of thumb is that the cost of property having a useful life greater than one year must be capitalized. However, the test of deductibility considers whether the expenditure simply kept the property in, or restored it to, an efficient operating condition.
• The size of the expenditure does not control whether it is a deductible repair. Taxpayers have been permitted to deduct expenditures of significant magnitude in comparison to the value of the asset being repaired. Courts have also permitted taxpayers to deduct expenditures that were large in absolute terms if the criteria for a repair expense were satisfied. In addition, expenditures for repairs will not be disallowed merely because they significantly exceed the taxpayer's average annual repair expenditures. On the other hand, a taxpayer cannot deduct his cost to replace an asset on the ground that repairing the asset would be roughly comparable in cost.
• Case law suggests that extensive repairs to an asset shortly after its acquisition have materially altered the asset and are not deductible. Regulations state that taxpayers must capitalize expenditures that ameliorate a material condition or defect that existed before the taxpayer's acquisition of the unit of property. Thus, taxpayers should carefully consider the deductibility of repair and restoration expenditures incurred shortly after the acquisition of an asset.
• Taxpayers cannot deduct involuntary expenditures caused by regulatory requirements or some other governmental action if the expenditures do not fit the criteria for a repair deduction.
• Taxpayers can deduct the cost of materials and labor to conduct repairs, but a self-employed taxpayer may not deduct the value of his own labor to perform repairs.

Special rules apply to repair expenses that are incurred due to a casualty and to leased property. If a taxpayer consistently capitalizes a particular type of expenditure or treats it as a repair, any change to that treatment is generally a change in accounting method that may require IRS permission. Some changes are made by an election and are not considered a change in method of accounting.

Many of the rules in this area are complex and also may be affected by other tax laws. For this reason, the facts of your situation should be carefully reviewed.

This article contains general information only.  It is not tax advice and it should not be used as a basis for any business or tax decision. You should consult with a qualified professional before taking any action that may affect your business or you personally

Tax reform legislation widely known as the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) was signed into law on December 22, 2017. The TCJA brought forth the most sweeping overhaul of the U.S. tax code in over 30 years. However, widespread efforts to implement the TCJA amidst ongoing tax-related global developments continue to this day. Now, two years following its enactment, Treasury, the IRS, and the tax community remain steadfast in working toward understanding and communicating congressional intent under the new law.

Tax reform legislation widely known as the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) was signed into law on December 22, 2017. The TCJA brought forth the most sweeping overhaul of the U.S. tax code in over 30 years. However, widespread efforts to implement the TCJA amidst ongoing tax-related global developments continue to this day. Now, two years following its enactment, Treasury, the IRS, and the tax community remain steadfast in working toward understanding and communicating congressional intent under the new law.

The Tax Council Policy Institute (TCPI), a nonprofit, non-partisan public policy research and educational organization, will devote its 21st Annual Tax Policy & Practice Symposium to reviewing the current state of U.S. tax law and how it may continue to evolve, when it presents "Hindsight is 2020: What the TCJA and Global Developments Tell us About the Future of Tax" (February 13-14, 2020).

Wolters Kluwer Tax & Accounting sat down recently with two principal organizers of this year’s TCPI Symposium to preview some of the issues that will be discussed. Lynda K. Walker, Esq., is executive director and general counsel of TCPI. John Gimigliano is principal-in-charge of legislative and regulatory services in the Washington National Tax practice of KPMG LLP and former senior tax counsel for the House Ways and Means Committee. KPMG is program manager for the 2020 TCPI Symposium.

Wolters Kluwer: As the name of this year’s symposium reflects, hindsight is 20/20. Are there any particular policy choices made two years ago under the TCJA that standout now as being either well-matched or less than ideal for the functionality of the current U.S. tax system as it relates to domestic as well as multinational business?

Lynda K. Walker: Tax law is constantly evolving, and it seems now more rapidly than ever. Congress and the business community worked for years to advance some of the concepts in the TCJA, particularly the necessity of lower rates for global competitiveness. Enactment of the major overhaul of the business tax system within that legislation was met with much enthusiasm, but it is not the end of the challenge. Promulgation of regulations—an ongoing process—as well as implementation of those rules and the administration of them are major areas of focus for tax executives and will be covered extensively at our upcoming conference. We have designed this symposium’s program to examine how well the tax system is working to meet the goals that Congress was looking to achieve given the passage of time and the practical application of the law. The experts speaking at the symposium are from various fields and bring varying perspectives. We hope to provide our attendees with the gamut of expert thought on the issues of current interest. The program also strives to bring some new understanding to both external and internal pressures on our tax system(s) in the U.S. and globally, not only currently but prospectively.

John Gimigliano: In some ways it is almost too early to know, being only one complete tax filing season in, but that is part of what we are trying to explore by bringing together the experts at the symposium. Although the TCJA was a partisan piece of legislation and there were people that claimed it did or did not do certain things, hopefully we can now put that aside and evaluate what the law does and does not do, and maybe we now have enough experience with it to make those determinations.

Wolters Kluwer: As you mentioned, internal and external pressures on the federal tax system will be examined during the symposium. What are some examples of internal and external forces that affect tax policy generally?

John Gimigliano: You can look at budgetary and political pressures as key internal forces that affect all tax policy. As I said, the TCJA was a Republican bill, and Democrats have made it pretty clear that they have issues with not only how it was enacted but also the substance of the bill. We saw these internal, political pressures manifest especially because we had an election since the enactment of the TCJA, and the House has gone from Republican to Democratic-controlled. That is not to suggest cause and effect, but it does change the potential for changes to the system that was enacted in December of 2017. And, of course there is another big election looming that could change that political calculus again. As for external pressures, the most notable one is the work being done at the Organisation for Economic Co-operation and Development (OECD) to address the digital economy and the opportunity to change international tax rules pretty dramatically in a way that was not envisioned when the TCJA was negotiated, drafted, and enacted. Additionally, there are external trade pressures at work on the tax system. There has always been a fine line between tax and trade policy, and if we have dramatic changes in trade policy, it could certainly trickle over to the tax side.

Lynda K. Walker: Currently, we are seeing a recognition of the correlation between tax and trade policy that is vastly different from a few years ago. Among our peers in the tax policy community, we now talk about tax and trade as related in a way that seems to have more common acceptance than in the past. There is a convergence of these other global issues on tax policy in a very distinguishable way that is a big potential external pressure.

Wolters Kluwer: Can you touch upon the importance of businesses staying informed of the direction the OECD will go with regard to reforms to international tax standards?

Lynda K. Walker: It is really important that businesses pay very close attention to what is going on in the OECD, the European Union (EU), and other economic blocks around the world, perhaps now more than ever. During the time we were debating tax reform in this country, other countries began to move in their efforts to broaden their tax bases. We were occupied with tax reform, and their tax proposals and efforts were moving forward. Moreover, tax executives need certainty—and the whole debate and movement toward multilateral agreements from bilateral and unilateral jurisdictional action could be a forbearer to another regime in global taxation. It is important that taxpayers be part of the dialogue and that business has a seat at the table with government as matters that could have a sweeping impact on where and how business is conducted are discussed and determined.

Wolters Kluwer: As TCPI materials noted, the symposium is expected to highlight the "real world" effects of the TCJA and how it has changed thinking about global investment. What might a preview of this discussion include?

John Gimigliano: Now stepping away from the theoretical of enactment and all the things the TCJA may or may not do, it is important to examine what it means now to be a tax professional. With two years of experience with the TCJA, what does it really do, and how does it change the decisions that tax directors have to make as to whether, when, or where to buy equipment or to develop intellectual property? Those are the kind of questions we are hoping to address with this real world application of our experience with the TCJA.

Wolters Kluwer: Generally, have the regulations promulgated since passage of the TCJA succeeded in clarifying complex provisions of the statute?

Lynda K. Walker: The TCJA is so broad and impacts so much of the tax code, it really does seem like we are relying heavily on regulations, which we always do in the tax world, but we still need a lot more explanation on some of the TCJA provisions. I am sure it has been a challenge for the IRS, and we are very happy that we will have Michael J. Desmond, IRS chief counsel, with us for this symposium to provide some insight into how the IRS has proceeded and plans to continue to move forward with guidance.

John Gimigliano: This is the challenge of being in the executive branch and getting a piece of legislation handed to you and trying to make it work. As a former tax writer, it is often easier to write these provisions in the abstract, but it is so much more challenging in various ways to make sure that it works for taxpayers and that it is administrable by the IRS. You do not want to put the IRS in a position to fail with a provision that ultimately is impossible to administer. These are the challenges that the IRS has, and so far, by all accounts, both Treasury and the IRS have done a pretty good job. But there’s still so much left to do.

Wolters Kluwer: As for any particular provisions, especially those with final regulations, that may still carry uncertainty for taxpayers and practitioners, what might generally be the way to approach the conundrum?

John Gimigliano: I could point to many of the TCJA regulations that are finalized and still say that there are unanswered questions and that people are going to have to make judgment calls. That has always been the case with tax; there are always judgment calls to be made. There is no statute and no regulation that can ever anticipate every fact pattern. So, people will do their best to analyze the rules and examples provided but will ultimately have to make judgment calls.

Wolters Kluwer: How should U.S. businesses prepare for potential changes in tax policy after the elections?

Lynda K. Walker: Businesses should stay engaged in the process with policy makers and groups like TCPI. Tax executives should engage in the discussion, and never think tax law is static. Taxpayers should be prepared for government to revisit the tax code as fiscal and economic needs change, and be prepared to navigate those waters as they shift.

Wolters Kluwer: Can the current corporate tax rate really be considered "permanent" just because it was enacted as such under the TCJA, or is it a relatively impermanent feature of the tax code just like others, largely dependent upon which Party has the White House and majority in Congress?

Lynda K. Walker: It is definitely fair to say that there will be pressure put on the rate as well as the tax code in general, because both Parties have objectives that require money. I do not know that anyone believes anything in the tax code is absolutely written in stone. That is part of the challenge for business in that they need some level of certainty to make long-term business and investment decisions, and to have major changes on an ongoing basis does not provide that certainty.

John Gimigliano: Permanence is an illusion; nothing is permanent. And even temporary policy is somewhat misleading. Take for example the R&D tax credit that was finally made permanent after being considered temporary tax policy for over 30 years. These are all relative terms.

Wolters Kluwer: What are you hoping the symposium accomplishes?

Lynda K. Walker: We hope that this program accomplishes our mission, which is to bring about a stronger and better understanding of federal tax policies and how they impact business and the economy as a whole. We hope this brings some careful study to the forefront through active evaluation and open discussion so that people leave more engaged and perhaps more aware. In our programs, our goal is always to have as inclusive a dialogue as possible by engaging all the critical stakeholders, including government, business, and academia. We work diligently to elevate the discourse on issues where we all might not have exactly the same frame of reference but hopefully the same goal, which is a thriving economy where business can operate under fair and transparent tax laws.

John Gimigliano: I hope we can advance taxpayers’ and practitioners’ understanding of the TCJA. We have all had so many questions since its enactment in late 2017. Now with a little bit of time, hopefully by gathering these experts together and in keeping with TCPI’s mission, it will advance everyone’s understanding of the law—where it is working, where it is not, and what changes are likely to come.

For more information on the 2020 TCPI Symposium, go to https://www.tcpi.org/event/21st-annual-tax-policy-and-practice-symposium/.

On February 11, the White House released President Donald Trump’s fiscal year (FY) 2021 budget proposal, which outlines his administration’s priorities for extending certain tax cuts and increasing IRS funding. Treasury Secretary Steven Mnuchin testified before the Senate Finance Committee (SFC) on February 12 regarding the FY 2021 budget proposal.

On February 11, the White House released President Donald Trump’s fiscal year (FY) 2021 budget proposal, which outlines his administration’s priorities for extending certain tax cuts and increasing IRS funding. Treasury Secretary Steven Mnuchin testified before the Senate Finance Committee (SFC) on February 12 regarding the FY 2021 budget proposal.

Extension of TCJA’s Individual Tax Cuts
Trump’s FY 2021 budget proposal indicates that tax cuts for individuals and passthrough entities under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), which are set to expire at the end of 2025, would be extended. This extension is estimated to cost $1.4 trillion over 10 years, and is reportedly being used as a "placeholder" in the budget for Trump’s forthcoming "Tax Cuts 2.0" plan.

Infrastructure
Trump’s budget proposal also calls for a $1 trillion infrastructure package, although funding details remain scarce at this time. In January, House Democrats unveiled their infrastructure proposal, which also lacked funding details.

IRS Funding
Additionally, Trump’s budget proposes $12 billion in base funding for the IRS "to modernize the taxpayer experience and ensure that the IRS can fulfill its core tax filing season responsibilities." The budget proposal would boost IRS funding from currently enacted levels of $11.5 billion.

Further, the budget would provide $300 million to continue the IRS’s modernization efforts. Specifically, the budget proposal states that IRS funding would help to:

• digitize more IRS communications to taxpayers, so they can respond quickly and accurately to IRS questions;
• create a call-back function for certain IRS telephone lines, so taxpayers do not need to wait on hold to speak with an IRS representative; and
• make it easier for taxpayers to make and schedule payments online.

Hill Reaction
"The Trump Economy stands firm on the proven pro-growth pillars of tax cuts, deregulation, energy independence, and better trade deals," the budget proposal states. However, Democratic lawmakers, while highlighting criticisms of the TCJA, are all but promising Trump’s budget request will not become law.

"Repealing incentives to reduce carbon emissions will hinder our fight against climate change and deter the kind of innovation our planet needs. And extending misguided tax cuts for the richest Americans will only deepen the deficit and further concentrate wealth at the top," House Ways and Means Committee Chairman Richard Neal, D-Mass., said in a statement after the budget proposal was released.

"It [Trump’s budget proposal] doubles down on the failed 2017 GOP tax law, extending expiring provisions and adding $1.5 trillion more to debt over the last six years of the budget window. Most of this extension’s tax breaks go to the richest one-fifth of households," House Budget Committee Democrats said in a committee report during the week of February 10.

However, it is worth noting that Trump’s budget proposal is merely an annual starting point for budget negotiations as Congress has the "power of the purse." Additionally, many of Trump’s requests, particularly those that include extending TCJA tax cuts, would have little chance of successfully clearing the currently Democratic-controlled House.

SFC Hearing; Wyden Bill
Secretary Mnuchin spent much of the SFC hearing praising and defending the TCJA and Treasury’s implementation of the GOP law. "Tax cuts, regulatory reform, and better trade deals are improving the lives of hardworking Americans," Mnuchin told lawmakers. "Unemployment remains historically low at 3.6 percent and is at or near all-time lows for African Americans, Hispanic Americans, and veterans. The unemployment rate for women recently reached its lowest point in nearly 70 years," he added.

Likewise, SFC Chairman Chuck Grassley, R-Iowa praised the TCJA and pointed to the same statistics mentioned by Mnuchin as evidence of its success. "Statistics like these show the tax reform is a success. The Treasury Department’s work to implement the new tax law has been an important part of that success," Grassley said.

However, SFC ranking member Ron Wyden, D-Ore., did not mince words when criticizing Mnuchin’s leadership of Treasury, the TCJA, and related regulations. "It sure looks like corporate special interests are going to make off with new loopholes worth $100 billion in addition to their outlandish share of the original $2 trillion Trump tax law," Wyden said during his opening statement. "When people say the tax code is rigged and the Trump administration has made it worse, what I’ve described is a textbook case of what they are talking about."

In that vein, Wyden introduced a bill on February 12 which would block Treasury’s "exception to the new tax on foreign earnings that allows multinationals to essentially choose the lowest available tax rate," as noted in Wyden’s press release. During the hearing, Wyden accused Treasury of creating a new "corporate tax loophole." Generally, Wyden’s bill would amend the tax code to clarify that high-taxed amounts are excluded from tested income for purposes of determining global intangible low-taxed income (GILTI) only if such amounts would be foreign base company income or insurance income.

Recently, Democrats have been criticizing Treasury for proposing related GILTI regulations based on corporate interests, but Mnuchin vehemently denied that claim. "Our job is to implement the legislation, not to make the legislation," he told lawmakers during the hearing. "Our job has been to implement that part of the tax code consistent with the intent and as prescribed by the law and that is what we have done."

Energy Tax Policy
Meanwhile, on the other side of the Capitol, in a February 11 letter to Senator Grassley, nearly 30 Democratic senators called for prompt committee action on energy tax policy. "Despite numerous opportunities, including in the recent tax extenders package, the Finance Committee has failed to take action on the dozens of energy tax proposals pending before it," the senators wrote in the letter led by Wyden. "Energy tax incentives have played a key part in shaping U.S. energy policy for more than 100 years, and members have shown clear interest in re-examining that ongoing role."

House Committee on Transportation & Infrastructure, "Moving Forward Framework"; House Ways and Means Committee, January 29 hearing witnesses’ testimony

House Committee on Transportation & Infrastructure, "Moving Forward Framework"; House Ways and Means Committee, January 29 hearing witnesses’ testimony

House Democrats on January 29 unveiled their framework for a $760 billion infrastructure plan. Meanwhile, the House Ways and Means Committee held a hearing the same day to examine proposals for funding infrastructure and various "tools" within the Tax Code to encourage investment.

Democratic Infrastructure Framework
Notably, House Democrats’ infrastructure framework, which also contains proposals related to climate change, is considered on Capitol Hill as an opening bid. It is not legislative text, and it does not include any specificities on how to fund infrastructure.

"I think it is really important that we not volunteer a revenue stream until the administration reaches an agreement with us," House Ways and Means Committee Chairman Richard Neal, D-Mass., said in a January 29 news conference. President Donald Trump and Treasury Secretary Steven Mnuchin have both expressed a readiness to move forward on infrastructure.

Ways and Means Infrastructure Hearing
Among some of the funding proposals presented during the January 29 hearing, Neal emphasized his preference for tax-preferred bonds. "Tax-preferred bonds are one of our most powerful tools. When we invest in infrastructure, it results in a significant economic multiplier," Neal said in his opening statement at the hearing. To that end, some witnesses also testified in support of reinstating a program known as Build American Bonds (BABs) on a permanent basis to help finance infrastructure. Neal likewise expressed his support for reinstating BABs.

Additionally, some Democratic lawmakers have discussed raising taxes to help fund infrastructure, namely the federal gas excise tax. Although the move would be met with resistance by lawmakers on both sides of the aisle, Republicans are particularly vocal in their opposition. The last gas tax increase occurred in 1993.

"Workers who are driving used cars shouldn’t be paying higher taxes at the pump so that the wealthy can claim a tax credit for their $75,000 electric vehicles," ranking member Kevin Brady, R-Tex., said during the hearing. "Both will drive on roads and bridges but only the blue-collar worker will pay any taxes to maintain them."

Looking Ahead
Although infrastructure is indeed a priority among congressional tax writers and the Trump administration, the Democratic framework is largely seen as a campaign-related proposal ahead of the 2020 elections, quite similar to Republicans’ talk of "Tax Cuts 2.0." While lawmakers on both sides of the aisle and the U.S. Capitol are certainly eager to address these tax-related issues, it remains to be seen if requisite bipartisan agreement will be reached during an election year and a shortened legislative calendar.

House Democratic and Republican tax writers debated the effects of tax reform’s corporate income tax cut during a February 11 hearing convened by Democrats. Democratic lawmakers have consistently called for an increase in the corporate tax rate since it was lowered from 35 percent to 21 percent in 2017 by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

House Democratic and Republican tax writers debated the effects of tax reform’s corporate income tax cut during a February 11 hearing convened by Democrats. Democratic lawmakers have consistently called for an increase in the corporate tax rate since it was lowered from 35 percent to 21 percent in 2017 by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

During the House Ways and Means Committee hearing, Democrats largely criticized low federal income tax receipts from corporations following the TCJA’s corporate tax rate cut, while Republicans focused on highlighting the resulting economic growth and global competitiveness.

Corporate Tax Revenue
House Ways and Means Committee Chairman Richard Neal, D-Mass., opened the hearing by criticizing corporate tax revenues for being at their lowest level in history. "Some large corporations pay zero year after year. It is therefore not surprising that we collect less corporate tax revenue than all but one of the other OECD nations," Neal said during opening statements.

Similarly, Jason Furman, an economic policy professor in the Harvard Kennedy School and Department of Economics at Harvard University, told lawmakers during the hearing that the low levels of corporate tax revenue are a major reason why overall federal revenue is also low. Additionally, Furman told lawmakers that there is no evidence that the TCJA has made a "substantial contribution to investment or longer-term economic growth."

Inversions
However, Douglas Holtz-Eakin, president of the American Action Forum, testified that corporate tax receipts were falling before the TCJA ever took effect. He credited the TCJA’s corporate tax cut for essentially ceasing corporate inversions. A corporate inversion, in very general terms, is a process in which U.S.-based companies relocate operations outside of the country to reduce their tax burden.

"After years of having five to six prominent companies annually depart the United States, inversions have simply stopped," Holtz-Eakin testified. "Multinationals are bringing operations back to the United States, and many acquisitions of U.S. businesses now are made by U.S. firms, rather than foreign buyers," he added.

Further, Holtz-Eakin issued a reminder that "everyone bears the burden" of corporate income taxes. "Corporations are not walled off from the broader economy, and neither are the taxes imposed on corporate income. Taxes on corporations fall on stockholders, employees, and consumers alike."

JCT
The Joint Committee on Taxation (JCT), Congress’s nonpartisan scorekeeper, detailed in its February 10 report several contributing variables in understanding the corporate income tax equation and its relation to federal revenue. Generally, a corporation’s income tax liability is determined by applying a 21-percent rate to its taxable income.

As the JCT notes in its report, prior to the TCJA, the corporate income tax involved a four-step graduated tax rate schedule, with a top corporate tax rate of 35 percent on taxable income in excess of $10 million. The corporate income tax also included "an alternative minimum tax (AMT) that was payable (in addition to all other tax liabilities) to the extent that it exceeded the corporation’s regular income tax liability." However, the TCJA eliminated the graduated corporate rate structure and repealed the corporate AMT, effective in 2018.

More Hearings Expected
While this particular hearing convened by Democrats was generally seen on Capitol Hill to serve more of a messaging purpose rather than legislative purpose, more TCJA-related hearings are expected this year. "We’re going to be doing a series of hearings on the [GOP] tax bill," Neal told the press after the hearing. "People frequently pay a lot of attention to the spending side, and we are saying that there is also a revenue question here."

The IRS will allow a farmer that is exempt from the uniform capitalization (UNICAP) rules by reason of having average annual gross receipts of $25 million or less to revoke a prior election out of the UNICAP rules made under Code Sec. 263A(d)(3) with respect to pre-productive plant expenditures. The guidance also explains how a farmer may make an election out under Code Sec. 263A(d)(3) in a tax year in which the farmer is no longer exempt from the UNICAP rules as a qualifying small business taxpayer with $25 million or less in average annual gross receipts.

The IRS will allow a farmer that is exempt from the uniform capitalization (UNICAP) rules by reason of having average annual gross receipts of $25 million or less to revoke a prior election out of the UNICAP rules made under Code Sec. 263A(d)(3) with respect to pre-productive plant expenditures. The guidance also explains how a farmer may make an election out under Code Sec. 263A(d)(3) in a tax year in which the farmer is no longer exempt from the UNICAP rules as a qualifying small business taxpayer with $25 million or less in average annual gross receipts.

Revocation of the prior election out is beneficial because a farmer that makes the election must depreciate farm property placed in service during any tax year the election is in effect using the MACRS alternative depreciation system (ADS). ADS requires use of the straight-line method over depreciation periods that are generally longer than those that apply under the MACRS general depreciation system (GDS) if the election out is not made ( Code Sec. 263A(e)(2)). If the election out is revoked, a qualifying small business farmer remains exempt from the UNICAP rules under the $25 million gross receipts test but is no longer required to use ADS on existing or newly acquired property by reason of the prior election out.

In addition, a rule that treats all plants produced by the farmer as section 1245 property, and requires ordinary income recapture to the extent of deductions otherwise required to be capitalized, no longer applies to new plantings after revocation of the election out is made ( Code Sec. 263A(e)(1)).

Eligible Farmers
The election out may be revoked by a farmer that:

• is exempt from the UNICAP rules by reason of the $25 million average gross receipts test for qualifying small business taxpayers (as described in Code Sec. 448(c) and provided by Code Sec. 263A(i), as added by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), effective for tax years beginning after 2017);
• previously made the election out of UNICAP under Code Sec. 263A(d)(3); and
• wants to apply the $25 million gross receipts exemption for small business taxpayers in the same tax year that it revokes the Code Sec. 263A(d)(3) election out.

Revocation Procedure
An eligible small business farmer receives IRS consent to revoke a prior election out by continuing not to capitalize costs under the UNICAP rules on its original tax return (including extensions) for the tax year of the revocation of the election out, continuing to treat plantings in prior tax years as section 1245 property, and changing the depreciation method of farm property from ADS to GDS as explained below.

Special rule for 2018 tax year. A small business farmer that already filed a timely 2018 return may revoke the election out in the 2018 tax year by filing an amended 2018 return (an administrative adjustment request in the case of certain partnerships) before filing a 2019 return. Alternatively, Form 3115, Application for Change in Accounting Method, may be filed with a timely income tax return for the first, second, or third tax year following the 2018 tax year.

Changing From ADS to GDS
A farmer revoking the election out may cease using ADS to depreciate its existing farming property beginning in the year the election out is revoked, and ADS will not apply to farm property placed in service in the revocation year or thereafter. The switch from ADS to GDS is made using the MACRS change in use rules ( Reg. §1.168(i)-4(d)) and, therefore, the GDS method applies prospectively on the remaining basis of the farm property. The change in use rules, however, allow a farmer to elect to continue to depreciate its existing property using ADS. Property switched from ADS to GDS is not eligible for bonus depreciation. A farmer may make an ADS election for classes of newly acquired property under the usual ADS election rules.

A farmer revoking the election out has adopted an impermissible accounting method if it continues to use ADS in the revocation year and the following tax year (unless the election to continue using ADS was made under the change in use rules). In this case, a farmer must file Form 3115 and compute a section 481 adjustment as if the switch from ADS to GDS had been made in the revocation year. Similarly, a farmer that depreciates newly acquired property using ADS in the revocation year and the following year has adopted an impermissible method that must be corrected by filing Form 3115 unless a valid ADS election was made.

Losing Exemption Under Gross Receipts Test
The guidance allows a small business farmer to make a Code Sec. 263A(d)(3) election out of the UNICAP rules in the first tax year the farmer no longer qualifies for exemption under the $25 million average gross receipts test. The election out is made on the original tax return (including extensions) using the currently prescribed election Code Sec. 263A(d)(3) procedures, and by continuing not to capitalize costs under the UNICAP rules.

The electing farmer must use ADS to depreciate property placed in service in the election out year and subsequent years. Bonus depreciation may not be claimed on this property. An election out is not valid if ADS is not used to depreciate this property. ADS does not apply to property placed in service during tax years prior to the election out year.

Effective Date
The guidance is generally effective on February 21, 2020. Transition guidance is provided for taxpayers that filed a Form 3115 on or before February 21, 2020, to obtain consent to revoke a Code Sec. 263A(d)(3) election.

Rev. Proc. 2019-43, I.R.B. 2019-48, 1107, which lists the automatic accounting method changes, is modified to included certain accounting method changes described in the guidance.

Taxpayers claiming the low-income housing credit should apply the "average income" minimum set aside test by reference to the "very low-income" limits calculated by the U.S. Department of Housing and Urban Development (HUD) for purposes of determining eligibility under the HUD Section 8 program. HUD determinations for very low-income housing families are currently used to calculate the low-income housing credit income limits under the alternate "20-50" and "40-60" minimum set-aside tests.

Taxpayers claiming the low-income housing credit should apply the "average income" minimum set aside test by reference to the "very low-income" limits calculated by the U.S. Department of Housing and Urban Development (HUD) for purposes of determining eligibility under the HUD Section 8 program. HUD determinations for very low-income housing families are currently used to calculate the low-income housing credit income limits under the alternate "20-50" and "40-60" minimum set-aside tests.

Rev. Rul. 89-24, 1994-2 C.B. 5, as modified and superseded in part by Rev. Rul. 94-57, 1994-2 C.B. 5, is amplified.

Average Income Test
A taxpayer claiming the low-income housing credit under Code Sec. 42 must elect to satisfy one of three minimum-set aside tests:

• the "20-50" test, under which at least 20 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 50 percent or less of the area median gross income (AMGI);
• the "40-60" test, under which at least 40 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 60 percent or less of AMGI; or
• the "average income" test under Code Sec. 42(g)(1)(C), which was added by the Consolidated Appropriations Act of 2018 ( P.L. 115-141).

The average income test is satisfied if 40 percent or more of the residential units in the project (25 percent or more in the case of a project located in a high cost housing area) are both rent-restricted and occupied by tenants whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit. The imputed income limitation for any unit must be 20, 30, 40, 50, 60, 70 or 80 percent of AMGI. The average of the designated imputed income limitations may not exceed 60 percent of AMGI.

Application of HUD Calculation
HUD uses three different principal income level calculation categories:

• "low-income," which is limited at 80 percent of AMGI;
• "very low-income," which is limited at 50 percent of AMGI; and
• "extremely low-income," which is limited at the higher of 30 percent of AMGI or the “Federal Poverty Level.”

Under the IRS guidance, HUD’s "very low-income" calculation, as adjusted for family size and consistent with the methods provided in Rev. Rul. 89-24, is used as the basis for determining the full range of percentage-based income limits under the new average-income set-aside test.

Specifically, the income attributable to a family in a unit may not exceed an applicable percentage of the HUD income limit for a very low income family of the same size in accordance with the following schedule for the percentage-based imputed income limit chosen for the unit within the 20 through 80 percent range:

• 20 percent limit: 40 percent or less of the income limit for a very low-income family of the same size;
• 30 percent limit: 60 percent or less of the income limit for a very low-income family of the same size;
• 40 percent limit: 80 percent or less of the income limit for a very low-income family of the same size;
• 50 percent limit: 100 percent or less of the income limit for a very low-income family of the same size;
• 60 percent limit: 120 percent or less of the income limit for a very low-income family of the same size;
• 70 percent limit: 140 percent or less of the income limit for a very low-income family of the same size;
• 80 percent limit: 160 percent or less of the income limit for a very low-income family of the same size.

A list of income limits released by HUD may be relied upon until 45 days after HUD releases a new list of income limits, or HUD’s effective date for the list expires.

Prospective Application
Special relief is provided to a taxpayer who receives a low-income housing credit allocation prior to February 18, 2020. The taxpayer must have unambiguously indicated in its application that it will elect the average-income set aside test, and also specified a dollar amount as an expected designated imputed income limitation for a unit that is higher than allowed by the new guidance. If the dollar amount is reasonable it may be relied upon for the entire compliance period of the building, and is also used to determine whether the tenant initially meets the income limitation for the unit.

Final regulations increase a vehicle’s maximum value for eligibility to use the fleet-average valuation rule or the vehicle cents-per-mile valuation rule. The regulations provide transition rules for certain employers. The final regulations are effective on February 5, 2020, the date of publication in the Federal Register.

TCJA Increased Maximum Vehicle Values
Before the Tax Cuts and Job Act (TCJA) ( P.L. 115-97), the maximum base fair market value of a vehicle for use of the fleet-average valuation rule was $16,500, as adjusted annually for inflation (in 2017: $21,100 for a passenger automobile, and $23,300 for a truck or van). The pre-TCJA maximum base fair market value of a vehicle for use of the vehicle cents-per-mile valuation rule was $12,800, as adjusted annually for inflation (in 2017: $15,900 for a passenger automobile, and $17,800 for a truck or van). The TCJA increased these amounts to $50,000, adjusted for inflation.

To implement the changes, the IRS issued Notice 2019-8, I.R.B. 2019-3, 354, to provide interim guidance for 2018 on new procedures for calculating the price inflation adjustments to the maximum vehicle values for use with the fleet-average valuation rule in Reg. §1.61-21(d) and the vehicle cents-per-mile valuation rule in Reg. §1.61-21(e) using amended Code Sec. 280F(d)(7). In Notice 2019-34. I.R.B. 2019-22, 1257, the IRS provided (among other things) that the inflation-adjusted maximum value of an employer-provided vehicle (including cars, vans, and trucks) first made available to employees for personal use in calendar year 2019 for which the vehicle cents-per-mile valuation rule or the fleet-average valuation rule may be used is $50,400. This guidance also provided information about the manner in which the Treasury Department and the IRS intended to publish the maximum vehicle value in the future.

In August 2019, a notice of proposed rulemaking was published that was consistent with Notice 2019-8 and Notice 2019-34 and reflected changes made by TCJA to the depreciation limitations in Code Sec. 280F. The final regulations update the fleet-average and vehicle cents-per-mile valuation rules to conform to the changes made by the TCJA.

Trucks and Vans Not Separately Valued
Before the TCJA, inflation adjustments were determined using the Consumer Price Index (CPI), which contained both a new car and a new truck component. Accordingly, separate inflation adjustments were released for cars using the car component of the CPI, and for trucks and vans using the truck component of the CPI.

Under the TCJA, the price inflation amount for automobiles (including trucks and vans) is calculated using both the CPI automobile component and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) automobile component. There is no separate C-CPI-U component for trucks and vans. As a result, the IRS will publish only one maximum value of a vehicle for use with the fleet-average and vehicle cents-per-mile valuation rules.

Transition Rules
Consistent with Notice 2019-34 and the proposed regulations, the final regulations provide several transition rules.

For the Fleet-Average Valuation Rule: If an employer did not qualify to use the fleet-average valuation rule prior to January 1, 2018, because the automobile’s fair market value exceeded the inflation-adjusted maximum value requirement for the year the automobile was first made available to the employee for personal use, the employer may adopt the fleet-average valuation rule for 2018 or 2019, provided the fair market value of the automobile does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

For the Vehicle Cents-Per-Mile Valuation Rule: An employer that did not qualify to adopt the vehicle cents-per-mile valuation rule for a vehicle first made available to an employee for personal use before calendar year 2018, may first adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year for the vehicle if:

• the employer did not qualify to adopt the vehicle cents-per-mile valuation rule because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the vehicle was first used by the employee for personal use; and
• the vehicle’s fair market value does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

Similarly, if the commuting valuation rule ( Reg. §1.61-21(f)) was utilized when the vehicle was first used by an employee for personal use, the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year if:

• the employer did not qualify to switch to the vehicle cents-per-mile valuation rule on the first day on which the commuting valuation rule was not used because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the commuting valuation rule was first not used; and
• the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

An employer that adopts the vehicle cents-per-mile valuation rule must continue to use the rule for all subsequent years in which the vehicle qualifies for use of the rule. However, the employer may use the commuting valuation rule for the vehicle for any year during which use of the vehicle qualifies for the commuting valuation rule.

The IRS has provided guidance on qualifying for the Earned Income Tax Credit (EITC). The EITC is a refundable tax credit that is intended to be a financial boost for families with low to moderate incomes.

The IRS has provided guidance on qualifying for the Earned Income Tax Credit (EITC). The EITC is a refundable tax credit that is intended to be a financial boost for families with low to moderate incomes.

Due to changes in marital, parental or financial status, millions of workers may qualify for EITC for the first time this year. The IRS urges individuals who (1) work for someone else or have their own businesses or farm, and (2) earned $55,952 or less in 2019, to see if they qualify by using the "EITC Assistant" on the IRS’s website ( https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/use-the-eitc-assistant).

Taxpayers must file a Form 1040, U.S. Individual Income Tax Return, and attach a completed Schedule EIC, Earned Income Credit Qualifying Child Information, to the tax return for a qualifying child, in order to claim EITC. A taxpayer must have a valid Social Security number for themselves, their spouses if they are filing a joint return, and each qualifying child before they file their return.

The IRS expects most EITC-related refunds to be available in taxpayers’ bank accounts or on debit cards by the first week of March, if they choose direct deposit and there are no other issues with their tax return.

Eligibility for EITC
In order to qualify, the worker must have earned income an adjusted gross income with certain limits and meet certain basic rules. The worker also must meet the rules for those without a qualifying child, or must have a child who meets all the qualifying child rules. Only one person can use a particular child to claim the EITC, if that child meets the rules to be a qualifying child for more than one person. Under a special rule, those who receive combat pay may choose to count it as taxable income for the purposes of EITC; this may or may not increase the amount of EITC.

Credit Limits for 2019
For tax year 2019, those who qualify for EITC can get a credit up to:

• $529 with no qualifying children,
• $3,526 with one qualifying child,
• $5,828 with two qualifying children, and
• $6,557 with three or more qualifying children.

Free Tax Help
Since EITC is complex and many special rules apply, the IRS encourages workers to do their taxes using the IRS Free File program, by choosing a trusted tax professional, or at a local free tax preparation site. The IRS also reminds taxpayers that they are always be responsible for the accuracy of their own tax return, even if someone else may have prepared it, because filing a tax return with an error on the EITC claim could have lasting impacts.

The IRS has proposed regulations with guidance for employers on withholding federal income tax from employee’s wages.

The IRS has proposed regulations with guidance for employers on withholding federal income tax from employee’s wages. The proposed regulations:

• implement recent changes made to Code Secs. 3401 and 3402 by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
• reflect the redesigned 2020 Form W-4, Employee’s Withholding Certificate, and the related wage withholding tables and computational procedures published in IRS Pub. 15-T, Federal Income Tax Withholding Methods.

TCJA Changes
The TCJA made many Code amendments affecting income tax withholding on wages. Among other things, the TCJA:

• repealed the rule that, for purposes collecting income tax at source on wages, the "number of withholding exemptions claimed" meant the number of withholding exemptions claimed in a withholding exemption certificate in effect, except that if no such certificate was in effect, the number of withholding exemptions claimed was considered zero;
• permanently modified the wage withholding rules and replaced "withholding exemptions" with a "withholding allowance" prorated to the payroll period, to reflect the reductions in the personal exemption amount to zero due to the temporarily repeal of the personal and dependency exemption deduction for tax years 2018–2025;
• changed the list of factors on which the withholding allowance is based, and entitled an employee to take into account the number of individuals for which the employee expects to take an income tax credit for other dependents, instead of the number of individuals for whom the employee reasonably expects to claim an personal and dependency exemption deduction;
• changed an employee’s entitlement to take into account the standard deduction from an amount generally equal to one withholding exemption to the standard deduction allowable to the employee (one-half of the standard deduction for a married employee whose spouse is an employee receiving wages subject to withholding);
• added a provision that the employee’s withholding allowance also takes into account whether the employee has withholding allowance certificates in effect for more than one employer;
• added the Code Sec. 199A qualified business income deduction to the list of deductions that an employee may take into account in determining the additional withholding allowance that the employee is entitled to claim on Form W-4;
• struck references to payments made under certain divorce or separation instruments; and
• changed the rules for withholding from periodic payments under Code Sec. 3405(a) when no withholding allowance certificate has been furnished.

IRS Guidance
After the TCJA was enacted, the IRS issued guidance for 2018 and 2019 to implement the changes (e.g., Notice 2018-14, I.R.B. 2018-7, 353; Notice 2018-92, I.R.B. 2018-51, 1038; Notice 2020-3, I.R.B. 2020-3, I.R.B. 2020–3, 330). The IRS also released a draft 2019 Form W-4 and instructions, which made significant changes intended to improve the accuracy of income tax withholding and to make the withholding system more transparent for employees. In response to comments received, Treasury and the IRS postponed implementing the redesigned form until 2020. The final redesigned 2020 Form W-4 was released on December 4, 2019, and was then rereleased on December 31, 2019, to reflect the amendment to the medical expense deduction threshold for 2020 made by the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94).

In 2019, the IRS also released drafts of IRS Pub. 15-T, which provided percentage method tables, wage bracket withholding tables, and other computational procedures for employers to use to compute withholding for the 2020 calendar year. IRS Pub. 15-T was finalized and released on December 24, 2019. Withholding tables previously published in IRS Pub. 15, (Circular E), Employer’s Tax Guide, IRS Pub. 15-A, Employer’s Supplemental Tax Guide, and IRS Pub. 51, Agricultural Employer’s Tax Guide, are now published in IRS Pub. 15-T. The IRS also discontinued publishing several other withholding tables in 2020.

Proposed Regulations
The proposed regulations incorporate the TCJA changes to Code Secs. 3401 and 3402, and provide flexible and administrable rules for wage withholding that work with both the 2020 Form W-4 and the related tables and computational procedures described in IRS Pub. 15-T, as well as Forms W-4 and related tables and computational procedures provided in 2019 and earlier years. The proposed regulations are generally compatible with the income tax withholding system in effect for 2019, as well as the system in effect for 2020, and may be relied on by employers for withholding until final regulations are published.

W-4 Issues
An employee is not required to furnish a new Form W-4 solely because of the form’s redesign, regardless of when the employee’s Form W-4 currently in effect was furnished. Similarly, an employer must generally continue to compute the amount of tax to be withheld from an employee’s wages based on a valid Form W-4 furnished by the employee regardless of when the employee furnished the Form W-4.

The 2020 IRS Pub. 15-T provides guidance on how employers will withhold income tax using Forms W-4 furnished and in effect on or before December 31, 2019. An employer can ask all employees who were first paid wages before 2020 to furnish a 2020 Form W-4, but if it does, the employer should explain that:

• employees are not required to furnish a new Form W-4; and
• if the employee does not furnish a 2020 Form W-4, the tax to be withheld from the employee’s wages will continue to be based on the last valid Form W-4 previously furnished.

Similar to the current regulations, the proposed regulations generally provide that Forms W-4 that took effect under prior law generally remain in effect until another Form W-4 is furnished. There are special rules regarding when a Form W-4 furnished by an employee subject to a "lock-in letter" stops being effective.

Periodic Payments
The proposed regulations do not address withholding under Code Sec. 3405(a) on periodic payments from pensions, annuities, or certain other deferred income. Instead, Notice 2020-3 describes the withholding rules for the 2020 calendar year.

Proposed Applicability Date
The proposed regulations are generally proposed to apply on the date that a Treasury Decision adopting them as final regulations is published in the Federal Register. Taxpayers may rely on the rules set forth in the notice of proposed rulemaking until that date. However, Proposed Reg. §31.3402(f)(2)-1(g) is proposed to apply on February 13, 2020 (i.e., the date the notice of proposed rulemaking was published in the Federal Register), Proposed Reg. §31.3402(f)(5)-1(a)(3) is proposed to apply on March 16, 2020 (i.e., 30 days after the date the notice of proposed rulemaking was published in the Federal Register), and a proposed removal of Reg. §31.3402(h)(4)-1(b) relating to the combined income tax withholding and employee FICA tax withholding tables is proposed to apply on and after January 1, 2020. Except for the removal of Reg. §31.3402(h)(4)-1(b), taxpayers may choose to apply the rules on or after January 1, 2020.

Comments and Requests for Hearing
Before the proposed regulations are adopted as final regulations, the IRS will consider any electronic and written comments that are submitted timely to the IRS. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available at http://www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of its date, time, and place will be published in the Federal Register.

Electronic submissions are made via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-132741-17) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking portal, comments cannot be edited or withdrawn. The Treasury Department and the IRS will publish for public availability any comment received to their public docket, whether submitted electronically or in hard copy. Send hard copy submissions to: CC:PA:LPD:PR (REG-132741-17), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.

All comments and requests for a public hearing must be received by April 13, 2020.

The IRS has issued final regulations that amend the rules relating to hardship distributions from Code Sec. 401(k) plans. The final regulations are substantially similar to the proposed regulations. Further, plans that complied with the proposed regulations satisfy the final regulations as well. The regulations are effective on September 23, 2019.

The IRS has issued final regulations that amend the rules relating to hardship distributions from Code Sec. 401(k) plans. The final regulations are substantially similar to the proposed regulations. Further, plans that complied with the proposed regulations satisfy the final regulations as well. The regulations are effective on September 23, 2019.

The final regulations:

• reflect statutory changes affecting Code Sec. 401(k) plans, including changes made by the Bipartisan Budget Act of 2018 ( P.L. 115-123); and
• affect participants in, beneficiaries of, employers maintaining, and administrators of plans that include cash or deferred arrangements or provide for employee or matching contributions.

Deemed Immediate and Heavy Financial Need
The final regulations modify the safe harbor list of expenses for which distributions are deemed to be made on account of an immediate and heavy financial need. The final regulations:

• add "primary beneficiary under the plan" as an individual for whom qualifying medical, educational, and funeral expenses may be incurred;
• modify the expense listed in existing Reg. §1.401(k)-1(d)(3)(iii)(B)(6) to provide that the limitations in Code Sec. 165(h)(5) do not apply for this purpose; and
• add to the list a new type of expense, relating to expenses incurred as a result of certain disasters.

Distribution Necessary to Satisfy Financial Need
The final regulations modify the rules for determining whether a distribution is necessary to satisfy an immediate and heavy financial need, by:

• eliminating any requirement that an employee be prohibited from making elective contributions and employee contributions after receipt of a hardship distribution; and
• eliminating any requirement to take plan loans prior to obtaining a hardship distribution.

In particular, the final regulations, like the proposed regulations, eliminate the safe harbor in existing Reg. §1.401(k)-1(d)(3)(iv)(E), under which a distribution is deemed necessary to satisfy the financial need only if elective contributions and employee contributions are suspended for at least six months after a hardship distribution is made and, if available, nontaxable plan loans are taken before the hardship distribution is made.

Expanded Sources for Hardship Distributions
The final regulations modify existing Reg. §1.401(k)-1(d)(3) to permit hardship distributions from Code Sec. 401(k) plans of elective contributions, qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), and earnings on these amounts, regardless of when contributed or earned.

Section 403(b) Plans
A hardship distribution of Code Sec. 403(b) elective deferrals is subject to the rules and restrictions set forth in Reg. §1.401(k)-1(d)(3). Accordingly, the preamble to the proposed regulations had stated that the new rules relating to a hardship distribution of elective contributions from a Code Sec. 401(k) plan generally apply to Code Sec. 403(b) plans. Because this requirement is retained in the final regulations, at Reg. §1.401(k)-1(d)(3)(iii)(B), it applies to Code Sec. 403(b) plans.

Applicability Dates
The changes to the hardship distribution rules made by the Bipartisan Budget Act of 2018 are effective for plan years beginning after December 31, 2018.

Plan Amendments
The Treasury Department and IRS expect that plan sponsors will need to amend their plans’ hardship distribution provisions to reflect the final regulations, and any such amendment must be effective for distributions beginning no later than January 1, 2020. The deadline for amending a disqualifying provision is set forth in Rev. Proc. 2016-37, I.R.B. 2016-29,136.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

Reasonable compensation is generally defined as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. This broad definition is supplemented, for purposes of determining whether compensation is deductible as an ordinary and necessary expense, by a number of more specific factors expressed in varying forms by the IRS, the Tax Court and the Circuit Courts of Appeal, and generally relating to the type and extent of services provided, the financial concerns of the company, and the nature of the relationship between the employee and the employer.

Why IRS Is Interested

A chief concern behind the IRS's keen interest in what a company calls "compensation" is the possibility that what is being labeled compensation is in fact a constructive dividend. If employees with ownership interests are being paid excessive amounts by the company, the IRS may challenge compensation deductions on the grounds that what is being called deductible compensation is, in fact, a nondeductible dividend.

Another area of concern for the IRS is the payment of personal expenses of an employee that are disguised as businesses expenses. There, the business is trying to obtain a business expense deduction without the offsetting tax paid by the employee in recognizing income. In such cases, a business and its owners can end up with a triple loss after an IRS audit: taxable income to the individual, no deduction to the business and a tax penalty due from both parties.

Factors Examined

The factors most often examined by the IRS in deciding whether payments are reasonable compensation for services or are, instead, disguised dividend payments, include:

1. The salary history of the individual employee
2. Compensation paid by comparable employers to comparable employees
3. The salary history of other employees of the company
4. Special employee expertise or efforts
5. Year-end payments
6. Independent inactive investor analysis
7. Deferred compensation plan contributions
8. Independence of the board of directors
9. Viewpoint of a hypothetical investor contemplating purchase of the company as to whether such potential investor would be willing to pay the compensation.

Failure to pass the reasonable compensation test will result in the company's loss of all or part of its deduction. Analysis and examination of a company's compensation deductions in light of the relevant listed factors can provide the company with the assurance that the compensation it pays will be treated as reasonable -- and may in the process prevent the loss of its deductions.

Note: In the case of publicly held corporations, a separate $1 million dollar per person cap is also placed on deductible compensation paid to the CEO and each of the four other highest-paid officers identified for SEC purposes. (Certain types of compensation, including performance-based compensation approved by outside directors, are not included in the $1 million limitation.)

The S Corp Enigma

The opposite side of the reasonable compensation coin is present in the case of some S corporations. By characterizing compensation payments as dividends, the owners of these corporations seek to reduce employment taxes due on amounts paid to them by their companies. In these cases, the IRS attempts to recharacterize dividends as salary if the amounts were, in fact, paid to the shareholders for services rendered to the corporation.

Caution. In the course of performing the compensation-dividend analysis, watch out for contingent compensation arrangements and for compensation that is proportional to stock ownership. While not always indicators that payments are distributions of dividends instead of compensation for services, their presence does suggest the possibility. Compensation plans should not be keyed to ownership interests. Contingent and incentive arrangements are also scrutinized by the IRS. The courts have frequently ruled that a shareholder has a built-in interest in seeing that the company is successful and rewarding him for increasing the value of his own property is inappropriate. Similar to the reasonable compensation test, however, this rule is not hard and fast. Accordingly, the rules followed in each jurisdiction will control there.

Conclusions

Determining whether a shareholder-employee's compensation is reasonable depends upon many variables, such as the contributions that employee makes to your business, the compensation levels within your industry, and whether an independent investor in your company would accept the employee's compensation as reasonable.

Please call our office for a more customized analysis of how your particular compensation package fits into the various rules and guidelines. Further examination of your practices not only may help your business better sustain its compensation deductions; it may also help you take advantage of other compensation arrangements and opportunities.

'Tax risk management" is a fairly recent term first used by large accounting firms to underscore to businesses the opportunities and pitfalls inherent within the particular tax positions taken by a business at any point in time. The collapse of Enron and WorldCom, and Congress's response through Sarbanes/Oxley legislation, have elevated corporate tax departments from what were once sleepy backroom operations to key participants in corporate bottom-line performance. Tax reserves and other tax forecasts now take a more prominent role in SEC-required disclosure and their resulting impact on shareholder value. Corporate boards and top executives are now held directly responsible for tax-related mistakes.

In tandem with tighter legislative rules, the corporate tax world itself has become more complicated. From state and local tax considerations and a growing federal tax code to aggressive audit positions by the IRS on tax-shelter type transactions to the growing body of international tax rules that a global business must follow, the tax world for many businesses has become considerably more dangerous. Like a juggler trying to keep too many balls in the air at once, businesses are feeling more pressure on the tax side of their operations. The greater the number of balls (or tax risk situations) in the air, the greater the need is for preventive management of them.

Tax risk management, however, is no longer confined to large public companies listed on a major stock exchange. The "trickle down" of tax problems from public corporations to private businesses, run as corporations, partnerships or LLCs, to small businesses is evident. Lenders, take-over prospects, and co-owners are all acutely concerned with the financial health of a business. Tax considerations now play an increasingly vital role in determining whether any particular business can receive a clean bill of health. Past positions taken on open-year tax returns, the likelihood of the success of any ongoing tax strategy, stepped up IRS audits, changing tax accounting rules and the growing complexity of the tax code itself, not to mention state and local tax law considerations and the increasingly large penalties that taxing authorities are free to assess if a tax position turns out to be incorrect, make tax risk management essential for the smaller business as well.

How much tax risk is your business carrying? The first step to finding a solution to a problem is determining the extent of the problem. Do you know how many "dropped balls" on the tax-side of your business it would take to bankrupt your operations or set them back several years? If you have neglected this side of managing your business, or if you want some reassurance that you are prepared for "worst case" tax scenarios, please feel free to give this office a call.

For partnerships and entities taxed like partnerships (e.g., limited liability companies), each partner must compute the basis of his/her partnership interest separately from the basis of each asset owned by the partnership. Because the basis of this interest is critical to determining the tax consequences resulting from any number of transactions (e.g., distributions, sale of your interest, etc..), if your business is taxed as a partnership, it is important that you understand the concept of tax basis as well as how to keep track of that basis for tax purposes.

For partnerships and entities taxed like partnerships (e.g., limited liability companies), each partner must compute the basis of his/her partnership interest separately from the basis of each asset owned by the partnership. Because the basis of this interest is critical to determining the tax consequences resulting from any number of transactions (e.g., distributions, sale of your interest, etc..), if your business is taxed as a partnership, it is important that you understand the concept of tax basis as well as how to keep track of that basis for tax purposes.

Note: The term "partnership interest" generally refers to an interest in any type of entity taxed as a partnership. The term "partnership" usually means any entity that is taxed as a partnership, and the term "partner" refers to any owner of an entity taxed as a partnership.

The initial basis in your partnership interest depends on how you acquired your interest. The basis of a partnership interest that you obtained in exchange for a contribution of cash or property to the partnership is equal to the amount of money you invested plus the adjusted basis of any property that you contributed. If you purchased your partnership interest, your initial basis will be the amount of cash you paid plus the fair market value of any property that you provided as part of the purchase price.

Generally, if you receive your partnership interest as a gift, your basis will be the same basis that the donor had in the partnership interest before he or she gave it to you. On the other hand, if you inherit your partnership interest, your initial basis in the partnership interest generally will be the fair market value of the partnership interest on the date of the partner's death.

Each year, various adjustments must be made to the tax basis in your partnership interest to reflect certain partnership transactions that have occurred during the year. The basis in your partnership interest is increased to reflect your proportional share of partnership income (both taxable and tax-exempt income). This increase protects you as a partner from being taxed again when (1) the partnership distributes cash to you or (2) when you dispose of your partnership interest. The basis in your partnership interest also increases if you make additional contributions of cash or other property to the partnership.

The basis in your partnership interest is likewise decreased each year to reflect your share as a partner of any partnership losses and your share of any nondeductible expenses. This adjustment is made to prevent you from obtaining a tax benefit when the partnership makes a distribution to you or when you dispose of your partnership interest. Your basis in the partnership also must be decreased by any actual or deemed distributions you received from the partnership. However, the basis in your partnership interest may never be reduced below zero.

Adjustments to a partner's basis also must be made to reflect any increases or decreases in a partner's share of the partnership's liabilities

It is important that a partnership keep proper records of all transactions that occur during the year and take the time to make the basis adjustments using these basis computation rules as close in time to the occurrence of the transaction as possible.

The general guidelines detailed above will give you a good foundation of knowledge for computing the basis of your partnership interest. For more information about how to track your basis in your partnership interest, please contact the office.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

Like-kind exchanges: The basics

The tax law permits you to exchange property that you use in your business or property that you hold for investment purposes with the same type of property held by another business or investor. These transactions are referred to as "like-kind" exchanges and, if done properly, can save your business from paying the taxes that normally would be due in the year of sale of the appreciated property.

Instead of an immediate tax on any appreciation in the year of sale, a like-kind exchange allows the appreciated value of the property you're transferring to be rolled into the working asset that you'll be receiving in the exchange. Mixed cash and property sales, multi-party exchanges, and time-delayed exchanges are all possible under this tax break.

What property qualifies?

In order to qualify as a tax-free like-kind exchange, the following conditions must be met:

• The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
• The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
• Most securities and instruments of indebtedness or interest are not eligible. The property must not be stocks, bonds, notes, chooses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, you can have a nontaxable exchange of corporate stocks in certain circumstances.
• There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property is a trade of like property.

Examples:

Like property:

• An apartment house for a store building
• A panel truck for a pickup truck

Not like property:

• A piece of machinery for a store building
• Real estate in the U.S. for real estate outside the U.S.

• The property being received must be identified by a specified date. The property to be received must be identified within 45 days after the date you transfer the property given up in trade.
• The property being received must be received by a specified date.The property to be received must be received by the earlier of:
  1. The 180th day after the date on which you transfer the property given up in trade, or
  2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

Dealing with "boot" received

If you successfully make a straight asset-for-asset exchange, as discussed earlier, you will not pay any immediate tax with respect to the transaction. The property you acquire gets the same tax "basis" (your cost for tax purposes) as the property you gave up. In some circumstances, when you are attempting to make a like-kind exchange, the properties are not always going to be of precisely the same value. Many times, cash or other property is included in the deal. This cash or other property is referred to as "boot." If boot is present in an exchange, you will be required to recognize some of your taxable gain, but only up to the amount of boot you receive in the transaction.

Example:

XYZ Office Supply Co. exchanges its business real estate with a basis of $200,000 and valued at $240,000 for the ABC Restaurant's business real estate valued at $220,000. ABC also gives XYZ $35,000 in cash. XYZ receives property with a total value of $255,000 for an asset with a basis of $200,000. XYZ's gain on the exchange is $55,000, but it only has to report $35,000 on its tax return - the amount of cash or "boot" XYZ received. Note: If no cash changed hands, XYZ would not report any gain or loss on its tax return.

Using like-kind exchanges in your business

There are several different ways that like-kind exchanges can be used in your business and there are, likewise, a number of different ways these exchanges can be structured. Here are a couple of examples:

Multi-party exchanges. If you know another business owner or investor that has a piece of property that you would like to acquire, and he or she only wants to dispose of the property in a like-kind exchange, you can still make a deal even if you do not own a suitable property to exchange. The tax rules permit you to enter into a contract with another business owner that provides that you are going to receive the property that he or she has available in exchange for a property to be identified in the future. This type of multi-party transaction can also be arranged through a qualified intermediary with unknown third (or even fourth) parties.

Multiple property exchanges. Under the like-kind exchange rules, you are not limited in the number of properties that can be involved in an exchange. However, the recognized gain and basis of property is computed differently for multiple property exchanges than for single property-for-property exchanges.

Trade-ins. You could also structure a business to business trade-in of machinery, equipment, or vehicles as a like-kind exchange.

There are many ways that you can advantageously use the like-kind exchange rules when considering disposing of appreciated business assets. However, since the rules are complicated and careful planning is critical, please contact the office for assistance with structuring this type of transaction.

Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.

Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.

An LLC is a legal entity existing separately from its owners that has certain characteristics of both a corporation (limited liability) and a partnership (pass-through taxation). An LLC is created when articles of organization (or the equivalent under each state rules) are filed with the proper state authority, and all fees are paid. An operating agreement detailing the terms agreed to by the members usually accompanies the articles of organization.

Choosing the LLC as a Business Entity

Choosing the form of business entity for a new company is one of the first decisions that a new business owner will have to make. Here's how LLCs compare to other forms of entities:

C Corporation: Both C corporations and LLCs share the favorable limited liability feature and lack of restrictions on number of shareholders. Unlike LLCs, C corporations are subject to double taxation for federal tax purposes - once at the corporate level and the again at the shareholder level. C corporations do not have the ability to make special allocations amongst the shareholders like LLCs.

S Corporation: Both S corporations and LLCs permit pass-through taxation. However, unlike an S corporation, an LLC is not limited to the number or kind of members it can have, potentially giving it greater access to capital. LLCs are also not restricted to a single class of stock, resulting in greater flexibility in the allocation of gains, losses, deductions and credits. And for estate planning purposes, LLCs are a much more flexible tool than S corporations

Partnership: Partnerships, like LLCs, are "pass-through" entities that avoid double taxation. The greatest difference between a partnership and an LLC is that members of LLCs can participate in management without being subject to personal liability, unlike general partners in a partnership.

Sole Proprietorship: Companies that operate as sole proprietors report their income and expenses on Schedule C of Form 1040. Unlike LLCs, sole proprietors' personal liability is unlimited and ownership is limited to one owner. And while generally all of the earnings of a sole proprietorship are subject to self-employment taxes, some LLC members may avoid self-employment taxes under certain circumstances

Tax Consequences of Conversion to an LLC

In most cases, changing your company's form of business to an LLC will be a tax-free transaction. However, there are a few cases where careful consideration of the tax consequences should be analyzed prior to conversion. Here are some general guidelines regarding the tax effects of converting an existing entity to an LLC:

C Corporation to an LLC: Unfortunately, this transaction most likely will be considered a liquidation of the corporation and the formation of a new LLC for federal tax purposes. This type of conversion can result in major tax consequences for the corporation as well as the shareholders and should be considered very carefully.

S Corporation to an LLC: If the corporation was never a C corporation, or wasn't a C corporation within the last 10 years, in most cases, this conversion should be tax-free at the corporate level. However, the tax consequences of such a conversion may be different for the S corporation's shareholders. Since the S corporation is a flow-through entity, and has only one level of tax at the shareholder level, any gain incurred at the corporate level passes through to the shareholders. If, at the time of conversion, the fair market value of the S corporation's assets exceeds their tax basis, the corporation's shareholders may be liable for individual income taxes. Thus, any gain incurred at the corporate level from the appreciation of assets passes through to the S corporation's shareholders when the S corporation transfers assets to the LLC.

Partnership to LLC: This conversion should be tax-free and the new LLC would be treated as a continuation of the partnership.

Sole proprietorship to an LLC: This conversion is another example of a tax-free conversion to an LLC.

While considering the potential tax consequences of conversion is important, keep in mind how your change in entity will also affect the non-tax elements of your business operations. How will a conversion to an LLC effect existing agreements with suppliers, creditors, and financial institutions?

Taxation of LLCs and "Check-the-Box" Regulations

Before federal "check-the-box" regulations were enacted at the end of 1996, it wasn't easy for LLCs to be classified as a partnership for tax purposes. However, the "check-the-box" regulations eliminated many of the difficulties of obtaining partnership tax treatment for an LLC. Under the check-the-box rules, most LLCs with two or more members would receive partnership status, thus avoiding taxation at the entity level as an "association taxed as a corporation."

If an LLC has more than 2 members, it will automatically be classified as a partnership for federal tax purposes. If the LLC has only one member, it will automatically be classified as a sole proprietor and would report all income and expenses on Form 1040, Schedule C. LLCs wishing to change the automatic classification must file Form 8832, Entity Classification Election.

Keep in mind that state tax laws related to LLCs may differ from federal tax laws and should be addressed when considering the LLC as the form of business entity for your business.

Since the information provided is general in nature and may not apply to your specific circumstances, please contact the office for more information or further clarification.