The Senate has approved a bipartisan IRS reform bill, which now heads to President Trump’s desk. Trump is expected to sign the bill into law.

The Senate has approved a bipartisan IRS reform bill, which now heads to President Trump’s desk. Trump is expected to sign the bill into law.

The reworked Taxpayer First Act ( HR 3151) cleared the Senate on the evening of June 13. The revamped measure had been approved unanimously in the House on June 10.

"After years of good-faith, bipartisan work, our IRS reforms are finally going to become law," House Ways and Means Committee Chairman Richard Neal, D-Mass., and ranking member Kevin Brady, R-Tex., said in a joint statement. "In this historic legislation, we focused on putting taxpayers first."

Likewise, Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, praised the passage of the bipartisan, bicameral IRS reform bill. "It’s a big first step toward strengthening taxpayer protections and turning the IRS into the customer service organization it ought to be," Grassley said in a statement. "I look forward to President Trump signing it into law so the IRS can begin implementing long overdue reforms that will put taxpayers first," he added.

Reworked Bill

The reworked IRS reform bill, originally introduced in the last Congress, was revised earlier in June after the House passed a prior version in April. However, the original House-approved Taxpayer First bill (HR 1957) was deemed doomed in the Senate by May because of recent controversy surrounding the IRS’s Free File program. Thus, the provision codifying the Free File program was stripped from the original bill; the measure was reintroduced as HR 3151. It then quickly cleared each chamber.

Service Improvements

Generally, the Taxpayer First Act aims to reform the IRS for the first time in 20 years to better meet the needs of taxpayers. It requires the IRS to develop a comprehensive customer service strategy, as well as a plan to redesign its structure, modernize its technology, and enhance its cyber security. In addition, the new law will:

• waive the application fee for an offer in compromise (OIC) by a low-income taxpayer;

• clarify information available about low-income taxpayer clinics (LITCs);

• codify the Volunteer Income Tax Assistance (VITA) Program;

• require notice regarding the closure of taxpayer assistance centers (TACs);

• improve the IRS whistleblower program; and

• modify the private debt collection program.

Identity Protection

The legislation includes a number of provisions to help protect taxpayers from tax ID theft and improve taxpayer interaction with the IRS should they become a victim. For example, the IRS must provide a single point of contact for victims of identity theft, notification of suspected identity theft, and guidelines for stolen identity refund fraud cases.

The IRS is required to expand its current program that allows victims of tax ID theft to obtain a personalized PIN. Any individual must be allowed to request an identity protection personal identification number (IP PIN) to confirm a taxpayer’s identity on tax returns.

Electronic Filing

The IRS reform bill directly impacts taxpayers and other persons by reducing the threshold for filing electronically from 250 or more returns during the year. The threshold is 100 or more returns for 2021, and 10 or more return after 2021. The IRS can waive the e-file requirement for tax return preparers in areas with limited internet access.

E-filing requirements are also extended to all tax-exempt organizations that file returns or statements, regardless of amount of assets, gross receipts, or number of returns to be filed. In addition, the IRS is directed to develop an internet portal to allow taxpayers to file series Form 1099, similar to the portal used to file series Form W-2 with the Social Security Administration.

Other Electronic Services

To help increase the use of electronic services, the IRS must publish within six months uniform standards for accepting electronic signatures on requests for disclosure of taxpayer information (Forms 2848, 4506-T, and 8821). It must also limit the redisclosure of return information by a designee to only those expressly consented to by the taxpayer.

The new law increases the penalty for improper disclosure or use of information by return preparers. It also puts new limits on access to returns and return information by non-IRS employees.

Overall, the IRS must develop procedures to authenticate users of its suite of electronic services, to prevent tax refund fraud. Included in these services, the IRS must develop an automated version of its Income Verification Express Service (IVES) for third-parties.

Planning Note: The legislation also allows the IRS to accept credit and debit card payments for the payment of taxes directly, as opposed to through a third party. In addition, the IRS must establish procedures for taxpayers to report misdirected deposits of refunds.

Other Changes

Additional changes made by the Taxpayer First Act include:

• clarifying procedures for equitable relief from joint liability;

• establish new safeguards on the seizure of funds believed to be structured to avoid the $10,000 financial reporting requirement; and

• modify procedures for the issuance of summons and notice of third party contacts by the IRS.

To help pay for these changes, the minimum penalty for failure to file returns is increased after 2019 to the lesser of $330 (indexed for inflation) or 100 percent of the amount required to be shown on the return.

Taxpayers may rely on two new pieces of IRS guidance for applying the Code Sec. 199A deduction to cooperatives and their patrons:

Taxpayers may rely on two new pieces of IRS guidance for applying the Code Sec. 199A deduction to cooperatives and their patrons:

• Proposed regulations provide detailed rules for coop patrons and specified cooperatives to calculate the deduction.

• A proposed revenue procedure provides three methods for specified cooperatives to calculate W-2 wages.

199A Deduction for Cooperatives and Patrons

The 199A deduction, also known as the pass-through deduction or the QBI deduction, generally allows individuals, estates and trusts to deduct up to 20 percent of their qualified business income (QBI) from sole proprietorships and pass-through entities. Since most coops are C corporations, they cannot claim the deduction. However, their members may receive patronage dividends that are included in QBI.

Despite these general rules, certain agricultural or horticultural coops, known as "specified cooperatives," can claim their own version of the a deduction under Code Sec. 199A(g). A specified coop can also pass through any portion of this deduction by making qualified payments to its patrons. The patrons must reduce their own QBI accordingly.

For specified coops, the 199A(g) deduction retains many of the rules that governed the Code Sec. 199 domestic production activities deduction before it was repealed at the end of 2017. For example, the 199A(g) deduction is based on the specified coop’s domestic production gross receipts (DPGR) and qualified production activities income (QPAI), rather than its QBI.

Sec. 199A Deduction for Coop Patrons in General

Under the proposed regulations, any coop patron’s QBI may include patronage dividends and an exempt coop’s non-patronage dividends that:

• are related to the patron’s trade or business,

• are qualified items of income, gain, deduction or loss at the coop level,

• are not from a specified service trade or business (SSTB), and

• are properly reported to the patron.

The proposed regulations provide detailed rules for how coops must report the required information to their patrons. However, the coop does not report any W-2 wages or unadjusted basis in qualified property immediately after acquisition (UBIA). The W-2/UBIA limit that can reduce QBI for higher-income taxpayers is calculated only at the patron level.

Sec. 199A(g) Deduction for Specified Cooperatives

Code Sec. 199A(g) allows specified coops to claim a 199A deduction and pass through any portion of it by making qualified payments to its members. However, as mentioned above, a specified coop’s deduction is largely based on the pre-2018 domestic production activities deduction (DPAD). This means that the 199A(g) deduction for specified coops is effectively separate from the general Code Sec. 199A(a) deduction for other taxpayers.

Since specified coop patrons might be able to claim both the general 199A(a) deduction and the passed-through portion of the coop’s 199A(a) deduction, they must reduce their 199A(a)deduction by nine percent of QBI (or if less, 50 percent of W-2 wages) that is allocable to the qualified payments from the specified coop.

The proposed regulations offer a safe harbor that patrons can use to calculate this reduction. The patron allocates aggregate business expenses and W-2 wages between qualified payments and other gross receipts by ratably apportioning them based on the ratio of qualified payments to total gross receipts in QBI.

The proposed regulations also define several terms that are relevant to the 199A(g) deduction for specified coops, including:

• Patron,

• Specified cooperative,

• Agricultural or horticultural products (though the IRS is also considering broader definitions), and

• In whole or significant part.

Sec. 199A(g) Deduction and DPAD

The proposed regulations also provide four steps to determine the amount of a specified coop’s 199A(g) deduction. A specified coop that is not tax-exempt must:

• separate patronage and non-patronage gross receipts and related deductions;

• identify patronage gross receipts that qualify as DPGR,

• use the patronage DPGR from step (3) to calculate QPAI, and

• calculate the 199A(g) deduction, which is generally nine percent of the lesser of QPAI from step (4), or taxable income

These last three steps are virtually identical to the pre-2018 DPAD rules.

A tax-exempt specified coop calculates two separate 199A(g) deductions: one based on gross receipts and related deductions from patronage sources, and one based on those items from non-patronage sources.

The proposed regulations also apply DPAD-types rules to:

• determine the coop’s DPGR,

• reduce a specified coop’s 199A(g) deduction to reflect oil-related QPAI, and

• pass through the deduction to patrons.

In addition, the proposed regulations provide special rules for partnerships and expanded affiliated groups (EAGs).

Specified Coops and W-2 Wages

Although the proposed regulations treat the 199A(g) deduction as largely independent from the general 199A(a) deduction, both deductions generally use the same rules for W-2 wages. However, under the proposed regulations, W-2 wages for the 199A(g) deduction cannot include wages paid with respect to employment in Puerto Rico.

As mentioned above, a wages/UBIA limit may reduce the 199A deduction for higher-income taxpayers. A proposed revenue procedure provides three methods for calculating W-2 wages for purposes of the 199A(g) deduction:

• unmodified Box method

• modified Box 1 method

• tracking wages method.

These methods are largely identical to the methods provided in Rev. Proc. 2019-11, but are intended to better reflect changes that may be made in the underlying Form W-2, Wage and Tax Statement.

Effective Dates for 199A Proposed Regulations and Revenue Procedure

The regulations are proposed to apply to tax years beginning after the date they are published as final. However, taxpayers may apply them in their entirely before that date.

The notice of the proposed revenue procedure is effective on June 18, 2019. Specified cooperatives may rely on the proposed procedure before it is published in its final form.

IRS Invites Comments on Proposed Rules for Sec. 199A

The IRS requests comments on the proposed regulations and the proposed revenue procedure. In particular, the IRS invites comments on the following elements:

• A coop’s reporting of W-2 wages and UBIA,

• The safe harbor for coop patrons,

• Definitions,

• A specified coop’s separation of patronage and non-patronage income,

• DPGR treatment of minor assembly and contract work, and

• W-2 wages and Puerto Rico.

Comments are due by August 19, 2019. They may be mailed or hand-delivered to the IRS, or submitted electronically via the Federal eRulemaking Portal at www.regulations.gov. Comments on the proposed regs should reference "IRS REG-118425-18" and comments on the proposed revenue procedure should reference "Notice 2019-27".

The IRS has issued final regulations that require taxpayers to reduce the amount any charitable contribution deduction by the amount of any state and local tax (SALT) credit they receive or expect to receive in return. The rules are aimed at preventing taxpayers from getting around the SALT deduction limits. A safe harbor has also been provided to certain individuals to treat any disallowed charitable contribution deduction under this rule as a deductible payment of taxes under Code Sec. 164. The final regulations and the safe harbor apply to charitable contribution payments made after August 27, 2018.

The IRS has issued final regulations that require taxpayers to reduce the amount any charitable contribution deduction by the amount of any state and local tax (SALT) credit they receive or expect to receive in return. The rules are aimed at preventing taxpayers from getting around the SALT deduction limits. A safe harbor has also been provided to certain individuals to treat any disallowed charitable contribution deduction under this rule as a deductible payment of taxes under Code Sec. 164. The final regulations and the safe harbor apply to charitable contribution payments made after August 27, 2018.

SALT Limit

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

Return Benefit

The final regulations generally adopt the rule in proposal regulations ( NPRM REG-112176-18) that the receipt of a SALT credit for a charitable contribution is the receipt of a return benefit (quid pro quo benefit). If a taxpayer makes a payment or transfers property to Code Sec. 170(c) entity, he or she must reduce any charitable contribution deduction for federal income tax purposes if he or she receives or expects to receive a SALT credit in return. A taxpayer is generally is not required to reduce the charitable deduction on account of its receipt of state or local tax deductions. However, the taxpayer must reduce its charitable deduction if it receives or expects to receive state or local tax deductions in excess of the taxpayer’s payment or the fair market value of property transferred.

De Minimis Exception

The final regulations retain the de minimis exception that a taxpayer’s charitable deduction is not reduced if the SALT credits received as a return benefit do not exceed 15 percent of the taxpayer’s charitable payment. The 15-percent exception applies only if the sum of the taxpayer SALT credit received or excepted to receive does not exceed 15 percent of the taxpayer’s payment or of the fair market value of the property transferred.

Safe Harbor

The IRS has also issued Notice 2019-12 providing a safe harbor for certain individuals if any portion of a charitable contribution deduction disallowed due to the receipt of a SALT credit. Under the safe harbor, any disallowed portion of the charitable deduction may be treated as the payment of SALT taxes for the purposes of deducting taxes under Code Sec. 164.

Eligible taxpayers can use the safe harbor to determine their SALT deduction on their tax-year 2018 return. Those who have already filed may be able to claim a greater SALT deduction by filing an amended return if they have not already claimed the $10,000 maximum amount ($5,000 if married filing separately).

Final regulations address the global intangible low-taxed income (GILTI) provisions of Code Sec. 951A. The final regulations retain the basic approach and structure of the proposed regulations published on October 10, 2018. The final regulations address open questions and comments received on the proposed regulations.

Final regulations address the global intangible low-taxed income (GILTI) provisions of Code Sec. 951A. The final regulations retain the basic approach and structure of the proposed regulations published on October 10, 2018. The final regulations address open questions and comments received on the proposed regulations.

Final regulations on the foreign tax credit also adopt proposed regulations published December 7, 2018. These rules were issued to ensure that the applicability dates coincide with the applicability dates of the Code sections to which they relate. The final foreign tax credit regulations also retain the basic structure and approach of the proposed regulations.

Also, a number of provisions were substantially revised.

Domestic Partnerships

The final regulations treat a domestic partnership as an entity for purposes of determining whether a U.S. person is a U.S. shareholder and whether a foreign corporation is a controlled foreign corporation (CFC). But the final rules treat a domestic partnership as an aggregate for purposes of determining whether and to what extent a partner of a domestic partnership has a GILTI inclusion.

Transfers During Qualified Period

The final regulations allow taxpayers to make an election that eliminates disqualified basis in property, by reducing a commensurate amount of adjusted basis in the property for all purposes of the Code.

Specified Tangible Property

A CFC may elect to use its non-ADS depreciation method for property acquired before enactment of the GILTI rules. A special rule requires depreciation of the salvage value: the portion of the basis in the property that would not be fully depreciated under the non-ADS depreciation method.

Anti-Abuse Rule

Under a "per se" rule in the proposed regulations, property was deemed to be held for the principal purpose of reducing a GILTI inclusion if held by the CFC for less than a 12-month period. The final regulations convert the per se rule to a rebuttable presumption. Under a second presumption, property held for more than 36 months is not subject to the rule. A safe harbor applies for certain transfers.

Foreign Tax Credit

The foreign tax credit proposed regulations contained a rule for determining the adjusted basis of the stock of the foreign corporation for purposes of allocating expenses to stock of certain foreign corporations. The final regulations provide that a taxpayer should not have an adjusted basis below zero in stock of a foreign corporation. A taxpayer’s adjusted basis may be reduced below zero as a result of an adjustment for earnings and profits deficits, as long as the adjustment for earnings and profits increased the adjusted basis of the foreign corporation above zero.

Applicability of Final Regs

The final GILTI regulations generally apply to tax years of foreign corporations beginning after December 31, 2017, and to tax years of U.S. shareholders in which or with which such tax years of foreign corporations end.

Proposed Regulations

The Treasury Department and the IRS also issued proposed regulations on the treatment of domestic partnerships for determining amounts included in their partners' gross incomes under Code Sec. 951 with respect to CFCs owned by the partnership, and the GILTI treatment of gross income that is subject to a high rate of foreign tax under Code Sec. 951A.

The proposed regulations would affect U.S. persons that own stock of foreign corporations through domestic partnerships and U.S. shareholders of foreign corporations. The Treasury Department and the IRS request timely comments on all aspects of the proposed rules. A public hearing will be scheduled if requested in writing by any person that timely submits written comments.

Aggregate Treatment Adopted

To be consistent with the treatment of domestic partnerships under Code Sec. 951A, Treasury and the IRS determined that a domestic partnership should also generally be treated as an aggregate of its partners in determining stock owned under Code Sec. 958(a) for Code Sec. 951 purposes.

Expansion to Exclude Other High-Taxed Income

Treasury and the IRS also determined that the GILTI high tax exclusion should be expanded (on an elective basis) to include certain high-taxed income even if that income would not otherwise be foreign base company income (FBCI) or insurance income. Further, taxpayers should be allowed to elect to apply the Code Sec. 954(b)(4) exception (the "GILTI high tax exclusion") for certain classes of income that are subject to high foreign taxes.

Newly issued temporary regulations limit the application of the Code Sec. 245A participation dividends received deduction (the participation DRD) and the Code Sec. 954(c)(6) exception in certain situations that present an opportunity for tax avoidance. The temporary regulations also provide related information reporting rules under Code Sec. 6038.

Newly issued temporary regulations limit the application of the Code Sec. 245A participation dividends received deduction (the participation DRD) and the Code Sec. 954(c)(6) exception in certain situations that present an opportunity for tax avoidance. The temporary regulations also provide related information reporting rules under Code Sec. 6038.

Participation Exemption Regime

The transition to the participation exemption system introduced by the Tax Cuts and Jobs Act, P.L. 115-97 (the Act) is effected through several interlocking provisions – Code Secs. 245A, 951A, and 965. All three provisions have different effective dates so there are periods in which some but not all of them apply. The participation exemption system operates alongside the subpart F regime.

Code Sec. 245A generally allows a domestic corporation a 100-percent dividends received deduction (a participation DRD) for the foreign-source portion of a dividend received after December 31, 2017, from a specified 10 percent-owned foreign corporation (an SFC). Generally, only earnings that are not taxed under the subpart F or the global intangible low-taxed income (GILTI) regime can, upon distribution, give rise to a dividend eligible for the participation DRD. Distribution of earnings and profits that is taxed under the subpart F or GILTI regime is a distribution of previously taxed earnings and profits (PTEP) that is not treated as a dividend and cannot qualify for the participation DRD. The participation DRD applies to distributions made after December 31, 2017.

The participation DRD does not apply to untaxed earnings of U.S. shareholders as of December 31, 2017. Instead, such earnings are subject to a transition tax under Code Sec. 965. For fiscal year CFCs, there is a gap period during which certain of their earnings may escape taxation.

Code Sec. 951A (the GILTI regime) taxes a U.S. shareholder on its global intangible low-taxed income, or GILTI, with respect to its CFCs at a reduced rate. The GILTI regime applies in the first tax year of a CFC beginning after December 31, 2017.

Code Sec. 954 generally provides that a dividend received by a CFC is included in the CFC’s foreign personal holding company income (FPHCI). Under Code Sec. 954(c)(6), however, a dividend received by a CFC from a related CFC is not included in the CFC’s FPHCI if certain requirements are satisfied (the section 954(c)(6) exception).

Scope of the Temporary Regulations

The temporary regulations limit the availability of the participation DRD and the section 954(c)(6) exception in specific and narrow cases where the deduction or exception, respectively, effectively eliminates subpart F income or GILTI from the U.S. tax system. Specifically, the temporary regulations address transactions that have the effect of avoiding tax under Code Sec. 965, 951A, or 951by inappropriately converting income that should have been subject to U.S. tax into nontaxed income. The temporary regulations also include information reporting rules under Code Sec. 6038 to facilitate administration of certain rules in the temporary regulations. The temporary regulations do not include general rules relating to dividends eligible for the participation DRD since those rules will be included in separate guidance.

Overview of the Temporary Regulations

Code Secs. 245A, 951A, and 965 generally act to tax foreign source income equivalently across taxpayers and sources so long as a U.S. shareholder owns the same amount of stock of a calendar year CFC throughout the CFC’s entire tax year. However, deviations from this condition potentially allow taxpayers to avoid tax by claiming a participation DRD in situations where otherwise identical income would be subject to U.S. tax. The following two situations may present such an opportunity for tax avoidance: (1) a U.S. corporation is the shareholder of a fiscal year CFC during 2018, or (2) a CFC pays a dividend and experiences a direct or indirect change in ownership during a tax year. The temporary regulations limit the application of the participation DRD in these situations.

With respect to the first situation, described above, as a result of a gap in the effective dates of these related international tax provisions, the difference between calendar year and fiscal year CFCs is significant and presents the potential for substantial tax avoidance when utilized to artificially generate earnings and profits in non-ordinary course transactions between related parties.

The temporary regulations refer to the portion of a dividend attributable to earnings and profits arising from such a transaction during this period as an "extraordinary disposition amount." An extraordinary disposition amount consists of certain earnings and profits resulting from transactions between related parties during the disqualified period. Although the period during which extraordinary dispositions may have occurred has passed, the regulations will potentially apply to any distributions of the associated earnings and profits after 2017.

In the second situation, described above, the participation DRD could facilitate the avoidance of the subpart F and GILTI regimes by allowing a U.S. shareholder to transfer, before the end of a CFC’s tax year, stock of the CFC to a new shareholder who will not be taxed on the CFC’s subpart F income or tested income.

The earnings and profits representing the portion of a dividend of a CFC attributable to subpart F income or tested income that, absent a transfer of the CFC stock pursuant to an extraordinary reduction, would have been subject to the subpart F or GILTI regimes are referred to as an "extraordinary reduction amount" in the temporary regulations. An extraordinary reduction amount consists of certain earnings and profits generated during a CFC’s tax year beginning after 2017 in which a domestic corporate U.S. shareholder reduces its ownership of the CFC by certain threshold amounts (e.g., a decrease in ownership of more than 10 percent). For this purpose, "certain earnings and profits" refers to income generally subject to inclusion under the subpart F or GILTI regimes.

Results similar to the ones described in the context of extraordinary disposition amounts and extraordinary reduction amounts can be achieved using the exemption from subpart F income under Code Sec. 954(c)(6) and lower-tier CFC dividends to upper-tier CFCs. Thus, the temporary regulations limit the application of the section 954(c)(6) exception in order to prevent similar results in circumstances in which a lower-tier CFC pays a dividend to another CFC, instead of directly to a U.S. shareholder.

Operation of the Temporary Rules

The temporary regulations do not permit the participation DRD for the portions of dividends made by CFCs that are attributable to ineligible amounts, which comprise extraordinary reduction amounts and 50 percent of any extraordinary disposition amounts.

To accomplish this, the temporary regulations disallow a deduction for transactions that have the effect of avoiding tax under Code Sec. 965, 951A, or 951. The extraordinary disposition rules accomplish this by denying the participation DRD for a narrowly and objectively defined class of earnings and profits generated by transactions undertaken in the disqualified period in circumstances that raise abuse concerns.

The extraordinary reduction rules accomplish this by denying the participation DRD for certain earnings distributed in the same year as reductions in ownership of CFC stock by a controlling Code Sec. 245A shareholder. The temporary regulations contain similar rules with respect to the section 954(c)(6) exception.

Information Reporting under Code Sec. 6038

Ineligible amounts, tiered extraordinary disposition amounts, and tiered extraordinary reduction amounts must be reported on the appropriate information reporting form in accordance with Code Sec. 6038. A transition rule mandates that taxpayers report the required information on the first return filed following the issuance of revised forms, instructions, or other guidance with respect to reporting such information. The transition rule also requires a corporation to report the information with respect to a predecessor corporation.

Applicability Dates

The rules in the temporary regulations relating to eligibility of distributions for the participation DRD apply to distributions occurring after December 31, 2017. The rules in the temporary regulations relating to the eligibility of dividends for the section 954(c)(6) exception also apply to distributions occurring after December 31, 2017, subject to a transition rule.

Final regulations reduce the Code Sec. 956 amount for certain domestic corporations that own stock in controlled foreign corporations (CFCs). The regulations are intended to ensure that Code Sec. 956 is applied consistently with the participation exemption system under Code Sec. 245A.

Final regulations reduce the Code Sec. 956 amount for certain domestic corporations that own stock in controlled foreign corporations (CFCs). The regulations are intended to ensure that Code Sec. 956 is applied consistently with the participation exemption system under Code Sec. 245A.

Subpart F Rules

Under the subpart F rules, U.S. shareholders of a CFC are currently taxed on their pro rata shares of the CFC’s subpart F income without regard to whether the income is distributed to the shareholders ( Code Sec. 951(a)). Subpart F income generally includes passive income and other income that is readily movable from one taxing jurisdiction to another ( Code Sec. 952). A U.S. shareholder is a U.S. person (e.g., individual citizen, domestic corporation, etc.) that owns or is treated as owning 10 percent or more of the voting power or value of a foreign corporation ( Code Sec. 951(b)).

The U.S. shareholders of a CFC are taxed on their pro rata share of the CFC’s earnings that are invested in U.S. property during the tax year and not distributed or otherwise taxed (the "section 956 amount"). U.S. shareholders are effectively taxed on foreign source earnings brought back into the United States, on the theory that the returned earnings are substantially the same as a dividend. This rule is intended to create symmetry by taxing effective repatriations of earnings in the same manner as actual repatriations of earnings are taxed.

Participation DRD

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) added Code Sec. 245A, which allows a 100-percent participation exemption deduction—a participation dividends-received deduction (DRD)—for the foreign-source portion of dividends received from a specified 10-percent owned foreign corporation by a domestic corporation that is a U.S. shareholder of the foreign corporation. A specified 10-percent owned foreign corporation is any foreign corporation (other than certain passive foreign investment companies) in which a domestic corporation is a U.S. shareholder.

However, a domestic corporation cannot claim a participation DRD for a dividend on any share of the foreign corporation’s stock:

• that the domestic corporation holds for 365 days or less during the 731-day period that begins on the date that is 365 days before the date when the share becomes ex-dividend with respect to the dividend; or

• to the extent the domestic corporation is obligated to make related payments on positions in substantially similar or related property ( Code Sec. 246(c)).

Under the TCJA, a Code Sec. 956 inclusion is not eligible for the DRD because it is not a dividend.

Tax Treatment Symmetry

The participation exemption system has made the current broad application of Code Sec. 956 to corporate U.S. shareholders inconsistent with the Code section’s purposes and the scope of the transactions it is meant to address. In response, the regulations:

• exclude corporate U.S. shareholders from the application of Code Sec. 956 to the extent necessary to maintain symmetry between the taxation of actual repatriations and the taxation of effective repatriations, so that neither an actual dividend to a corporate U.S. shareholder nor the shareholder’s Code Sec. 956 amount will result in additional U.S. tax; and

• reduce the Code Sec. 956 amount otherwise determined regarding a U.S. shareholder for a CFC’s tax year ( "tentative Section 956 amount") to the extent that the shareholder would be allowed a participation DRD had the shareholder received a distribution from the CFC equal to the tentative Code Sec. 956 amount (the "hypothetical distribution").

The regulations include an ordering rule to address the previously taxed earnings and profits (PTEP) rules in Code Sec. 959. Under the ordering rule, the hypothetical distribution is treated as:

• first attributable to earnings and profits (E&P) described in Code Sec. 959(c)(2) (amounts attributable to subpart F inclusions); and

• then attributable to E&P described in Code Sec. 959(c)(3) (all other E&P).

The regulations also address the tentative section 956 amount with respect to domestic partnerships. The regulations provide that the tentative section 956 amount with respect to a domestic partnership is reduced to the extent that one or more of the domestic corporate partners would be entitled to a participation DRD if:

• the partnership received the amount as a distribution; and

• the remaining amount of the inclusion under Code Sec. 956 is allocated to the partners in the same proportion as net income would result to partners upon a hypothetical distribution.

Applicability Date

The regulations will apply to tax years of CFCs beginning on or after July 22, 2019, and to tax years of U.S. shareholders in which or with which such tax years of CFCs end.

The regulations may be applied to tax years of CFCs beginning after December 31, 2017, and to tax years of U.S. shareholders in which or with which such tax years of CFCs end, provided the rules are applied consistently by the taxpayer and U.S. related persons.

Final rules allow employers to use health reimbursement arrangements (HRAs) to reimburse employees for the purchase individual insurance coverage, including coverage on an Affordable Care Act Exchange. The rules also allow "excepted benefit HRAs," which would not have to be integrated with any coverage. The rules generally apply for plan years starting on or after January 1, 2020.

Final rules allow employers to use health reimbursement arrangements (HRAs) to reimburse employees for the purchase individual insurance coverage, including coverage on an Affordable Care Act Exchange. The rules also allow "excepted benefit HRAs," which would not have to be integrated with any coverage. The rules generally apply for plan years starting on or after January 1, 2020.

HRA Use Expanded

The final rules expand the use of HRAs by:

• allowing integration of an HRA with individual health insurance coverage and thereby satisfy the Affordable Care Act’s annual dollar limit and preventive care cost sharing requirements;

• creating "excepted benefit HRAs" limited in amount and to the types of coverage for which premiums may be reimbursed;

• providing new premium tax credit eligibility rules for individuals who are offered an HRA integrated with individual health insurance coverage;

• clarifying that individual health insurance coverage, the premiums of which are reimbursed by an HRA or qualified small employer HRA (QSEHRA), does not become part of an ERISA plan when certain conditions are met; and

• adding new special enrollment for the individual market for individuals who gain access to HRAs integrated with individual health insurance coverage or who are provided a QSEHRA.

The final regulations add conditions on individual coverage HRAs intended to prevent a negative impact on the individual market.

Integration With Individual Coverage

Almost any employer can satisfy Affordable Care Act reimbursement requirements by having employees buy their own individual coverage. An employers may integrate an HRA with individual health coverage only if:

• participants and dependents are actually enrolled in individual health insurance coverage (though not coverage that consists solely of excepted benefits) for each month they are covered by the HRA;

• coverage is offered to a class of employees to whom a traditional group health plan is not offered;

• coverage is offered on the same terms in amount and conditions to all employees within each class (though certain variations based on age are allowed);

• an opt out option is provided for individuals who prefer Affordable Care Act Exchange coverage, but would not be eligible for the premium tax credit if enrolled in an employer health plan such as an HRA; and

• substantiation and notice requirements are met.

To guard against adverse selection, the final rules add a minimum class size requirement that will apply to certain classes of employees in certain instances. Classes of employees may include full-time employees; part-time employees; seasonal employees; employees who are included in a unit of employees covered by a collective bargaining agreement in which the plan sponsor participates; employees who have not satisfied a waiting period for coverage; employees who have not attained age 25 prior to the beginning of the plan year; nonresident aliens with no U.S.-based income; employees whose primary site of employment is in the same rating area; and groups combining any of these classes of employee.

Excepted Benefit HRAs

An employer that wants to offer an HRA that is not integrated with non-HRA group coverage, Medicare, TRICARE, or individual health insurance coverage may do so as an excepted benefit. As excepted benefits, these HRAs would not be subject to the employer group plan rules, including the market reforms under the Affordable Care Act. An excepted benefit HRA:

• must not be an integral part of the plan;

• must provide benefits that are limited in amount ($1,800 per year, adjusted for inflation after 2020);

• cannot provide reimbursement for premiums for certain health insurance coverage; and

• must be made available under the same terms to all similarly situated individuals.

Final regulations provide requirements that a person must satisfy to become and remain a certified professional employer organization (CPEO), as well as the CPEO’s federal employment tax liabilities and other obligations.

Final regulations provide requirements that a person must satisfy to become and remain a certified professional employer organization (CPEO), as well as the CPEO’s federal employment tax liabilities and other obligations.

CPEOs

Some employers contract with PEOs to complete and file tax returns, pay and withhold employment taxes on wages paid to employees, or provide other employee benefits. Code Sec. 3511 and Code Sec. 7705 provide certification requirements for PEOs, and codify the employment tax consequences of being CPEO.

For federal employment tax purposes, a CPEO is generally treated as the employer of any individual who is:

• performing services for a customer of the CPEO; and

• covered by a contract between the CPEO and the customer.

Employer treatment applies only to remuneration paid to the covered employee by the CPEO. If an individual covered by a CPEO contract performs services for a customer at a work site that meets certain coverage requirements, only the CPEO is treated as the employer for federal employment tax purposes for remuneration its pays to that work site employee.

A person must apply to the IRS to become a CPEO, and the IRS must certify that the person meets certain requirements. A CPEO must:

• meet tax status and background requirements;

• meet bond, financial review, and quarterly reporting requirements; and

• notify the IRS of any change that materially affects the continuing accuracy of information it has provided to the IRS.

The Treasury Secretary can suspend or revoke CPEO certification if the person does not satisfy certain agreements or applicable requirements.

Final Regs

The final regulations adopt and amend proposed regulations published in 2016 ( NPRM REG-127561-15), and reflect and address certain interim guidance ( Rev. Proc. 2016-33, 2016-25 I.R.B. 1034; Notice 2016-49, 2016-34 I.R.B. 265; Rev. Proc. 2017-14, 2017-3 I.R.B. 426). In finalizing the regulations, the IRS reviewed and analyzed a variety of issues affecting CPEOs, including:

• maintaining a separate annual FICA tax and FUTA tax wage base and withholding threshold for each customer for which a covered employee performs services during a calendar year;

• the treatment of tax credits, including the addition of the employer credit for paid family and medical leave and certain employee retention credits to the list of specified credits that apply to the CPEO customer and not the CPEO;

• the treatment of self-employed individuals under the CPEO rules;

• CPEO reporting to the IRS, such as reporting the commencement or termination of CPEO contracts and service agreements;

• the meaning of key terms such as "responsible individuals" (certain owners, officers, and other persons of the CPEO), "work site," and "work site employee";

• the CPEO application process, including when an applicant may reapply for certification;

• CPEO "suitability" requirements, including domestic disregarded entity and sole proprietorship certification, fingerprint cards and background checks, and the waiver of confidentiality and privilege;

• working capital requirements, including a limited exception to the positive working capital requirement;

• bond requirements, including a provision that the IRS Commissioner may provide exceptions to the rule that a CPEO must meet the bond requirements without posting collateral; and

• maintaining employee records.

Applicability

The final regulations are effective on May 28, 2019.

Taxpayers will experience a short delay to the start of the 2014 filing season, but passage of the Bipartisan Budget Act of 2013 averted the possibility of an IRS shutdown in January. The budget agreement, however, did not include any tax provisions, and tax reform must find a new vehicle to move forward in Congress. Meanwhile, the IRS starts 2014 with a new leader, who promised to restore public trust in the agency after a troubled 2013.

2014 filing season

To end the October government shutdown, Congress passed a stop-gap funding bill to keep the IRS and other federal agencies open through mid-January 2014. Many tax professional groups warned that a government shutdown in January, even for a few days, would result in significant delays in tax return processing and refunds. The Bipartisan Budget Act of 2013 authorizes funding for the federal government for two years.

The start of the 2014 filing season, however, will be slightly delayed because of the October shutdown. The IRS needs additional time to reprogram its return processing systems. The original start date of the 2014 filing season was January 21, 2014. In December, the IRS announced that the 2014 filing season will start on January 31. The IRS will not process any returns (electronic or paper) before January 31, 2014.

Most business filers can begin filing 2013 returns on January 13, the IRS reported. These include filers of Forms 1120, U.S. Corporation Income Tax Return; 1120S, U.S. Income Tax Return for an S Corporation; and 1065, U.S. Return of Partnership Income. However, the January 13 start date does not apply to business owners that report their incomes on Form 1040. They must wait until January 31.

Tax legislation

Many tax reform proposals were introduced in Congress in 2013 but lawmakers deferred action until 2014. The leaders of the House and Senate tax writing committees have both said they want to move tax reform legislation in 2014 but the extent of any reform—and overall enthusiasm in Congress for reform—is unclear. Some lawmakers want a complete overhaul of the Tax Code (the last major tax reform was in 1986); others want to a more piece-meal approach. Lawmakers are also divided over whether reform should be revenue neutral or if reform should raise new revenues.

There had been some expectation that the budget agreement would include tax provisions, especially the so-called tax extenders. These are popular but temporary incentives, such as the higher education tuition deduction, state and local sales tax deduction, transit benefits parity, teacher’s classroom expense deduction, research tax credit, and more. The budget agreement negotiators decided not to include the extenders, which have now expired. Congress is likely to extend the incentives retroactive to January 1, 2014. If you have any questions about the status of an extender, please contact our office.

Looking ahead, President Obama is expected in his State of the Union Address in January and FY 2015 budget proposals to again call for a reduction in the corporate tax rate in exchange for eliminating some business tax incentives. The President made the same proposal last year but it failed to gain traction in Congress. The President is also likely to urge Congress to renew tax incentives that encourage employers to hire military veterans and individuals from economically-disadvantaged groups, consolidate some taxpayer penalties, extend enhanced small business expensing (and possibly bonus depreciation) and more. Our office will share details of the President’s proposals as they are released.

New IRS Commissioner

In May—after news broke of the IRS selecting applications from conservative groups for tax-exempt status for extra scrutiny—President Obama appointed Daniel Werfel to serve as Acting Commissioner. The President instructed Werfel to launch a top-down review of the agency. Since May, several senior IRS executives resigned or retired and Werfel appointed new top managers. Werfel also instituted cost-saving measures, such as eliminating employee conferences, curbing employee travel and not paying bonuses. Werfel, however, was never intended to serve permanently at the IRS and President Obama nominated John Koskinen to be Commissioner. The Senate approved Koskinen’s nomination in December.

Koskinen comes to the IRS after serving as the non-executive chair of Freddie Mac from 2008 to 2011. Previously, Koskinen was deputy mayor ofWashington,D.C.and also was a senior manager at the Office of Management and Budget (OMB). At his confirmation hearing, Senate Finance Committee (SFC) Chair Max Baucus, D-Montana, called Koskinen “the type of leader we need at the IRS.” SFC Ranking Member Orrin Hatch, R-Utah, reminded Koskinen that he has a “difficult job ahead” and “it is vital that the IRS maintain its credibility with taxpayers.” Koskinen told lawmakers that “trust is the most important asset the IRS has.”

Please contact our office if you have any questions about the filing season, tax legislation or IRS leadership changes.

Many higher-income taxpayers will be in for a big surprise when they finally tally up their 2013 tax bill before April 15th. The higher amount of taxes that may be owed will be the result of the combination of several factors, the cumulative effect of which will be significant for many. These factors include a higher income tax rate, a higher capital gains rate, a new net investment income tax, and a new Medicare surcharge on earned income, as well as a significantly reduced benefit from personal exemptions and itemized deductions for those in the higher income tax brackets.

Higher top income tax rate

The American Taxpayer Relief Act of 2012 made permanent for 2013 and beyond the lower Bush-era income tax rates for all, except for taxpayers with taxable income above $400,000 ($450,000 for married taxpayers filing jointly, $425,000 for heads of households). Income above these levels has now been taxed at a 39.6 percent rate rather than at the top 35 percent rate since January 1, 2013. Those amounts are adjusted for inflation after 2013 (for 2014, those threshold levels are $432,200, $457,600, and $406,750, respectively. Taxpayers with $150,000 of income above the threshold amounts, for example, must pay an additional $6,900 in tax in 2013 because of the additional tax rate of 4.6 percent).

Capital gains and dividends

The American Taxpayer Relief Act also raised the top rate for long-term capital gains and dividends to 20 percent, up from the Bush-era maximum 15 percent rate—again, applicable to all net long-term capital gains from transactions made on or after January 1, 2013. That top rate will apply to the extent that a taxpayer's income exceeds the thresholds set for the 39.6 percent rate ($400,000 for single filers; $450,000 for joint filers and $425,000 for heads of households). Especially applicable to those investors who have been riding the recent stock market rally, a jump in the rate from 15 percent to 20 percent represents a 33.33 percent tax increase.

Medicare Taxes

Set into motion on January 1, 2013 by the Affordable Care Act of 2010, higher-income taxpayers have been required to pay an additional 3.8 percent on net investment income as well as a 0.9 percent Additional Medicare Tax on earned income.

In both cases, the income threshold levels for being subject to these new taxes are considerably lower than the 39.6 percent bracket and 20 percent capital gain rates. The threshold amount is $200,000 in the case of a single individual, head of household (with qualifying person) and qualifying widow(er) with dependent child. The threshold amount is $250,000 in the case of a married couple filing jointly and $125,000 in the case of a married couple filing separately. For the 3.8 percent net investment income tax, the threshold is adjusted gross income (modified for certain foreign-based income). For the 0.9 percent  Additional Medicare Tax, the threshold is measured against compensation earned for the year (including self-employment income):

Net investment income tax. The 3.8 percent tax not only covers capital gains and dividends, but also passive-type income flowing from real estate, investments in businesses, and the like. The rules are complex, and many taxpayers will struggle with the extent to which income on their 2013 tax returns will be subject to the new net investment income tax. For income subject to this tax, the effective rate will increase to 23.8 percent on net capital gain and dividends and 43.4 percent on short-term capital gain and all other passive-type income.

Additional Medicare Tax. For tax years beginning after December 31, 2012, the 0.9 percent Additional Medicare Tax applies to employee compensation and self-employment income above the threshold amounts noted above. Covered wages for purposes of the Additional Medicare Tax include not only regular salary or payments for services rendered to someone self-employed, but also tips, commissions that are part of compensation, bonuses, reimbursements under nonaccountable plans, back pay awards, gifts by employers to employees and more.

An employer's withholding obligation for the Additional Medicare Tax applies only to the extent the employee's wages are in excess of $200,000 in a calendar year. For some dual-income couples with combined earned income above the $250,000 threshold but with no one earning more than $200,000, they may find themselves under withheld and subject to an estimated tax penalty as a result. Couples should remember that to prevent a reoccurrence in the future, an employee may request additional income tax withholding, which will be applied against all taxes shown on the individual's return, including any liability for the Additional Medical Tax.

Itemized Deductions Limitation

The American Taxpayer Relief Act officially the “Pease” limitation on itemized deductions. The new thresholds, first applied in 2013, are $300,000 for married couples and surviving spouses; $275,000 for heads of households; $250,000 for unmarried taxpayers; and $150,000 for married taxpayers filing separately.

The Pease limitation reduces the total amount of a higher-income taxpayer's otherwise allowable itemized deductions by three percent of the amount by which the taxpayer's adjusted gross income exceeds this applicable threshold. The amount of itemized deductions may be reduced up to 80 percent under this formula. Certain items, such as medical expenses, investment interest, and casualty, theft or wagering losses, are excluded.

Personal Exemption Phaseout

The American Taxpayer Relief Act also revived the personal exemption phaseout rules, at the same levels of adjusted gross income revived for the Pease limitation. Under the phaseout, the total amount of exemptions that may be claimed by a taxpayer is reduced by two percent for each $2,500, or portion thereof (two percent for each $1,250 for married couples filing separate returns) by which the taxpayer's adjusted gross income exceeds the applicable threshold level. At the full phase out level, therefore, a family with four personal exemptions in 2013 will lose $15,600 in exemptions, creating $6,178 in additional tax at the 39.6 percent bracket.

Federal Estate and Gift Taxes

One bright spot for higher-income taxpayers is the change that took place starting in 2013 directly applicable to estate planning strategies. The American Taxpayer Relief Act permanently provided for a maximum federal estate tax rate of 40 percent with an annual inflation-adjusted $5 million exclusion for estates of decedents dying after December 31, 2012. Couples can combine exclusions and effectively exempt $10 million from estate tax (for 2013, the inflation-adjusted level is $10.5 million, rising to $10.68 million in 2014).

If you would like a further assessment of how the new, “higher-income taxes” will impact what you owe for 2013 this coming April 15, or if you would like to start now to implement a plan to minimize these taxes in 2014, please do not hesitate to contact this office. 

Good recordkeeping is essential for individuals and businesses before, during, and after the upcoming tax filing season.

Good recordkeeping is essential for individuals and businesses before, during, and after the upcoming tax filing season.

First, the law actually requires taxpayers to retain certain records for a specified number of years, for example tax returns or employment tax records (for employers).

Second, good recordkeeping is essential for taxpayers while preparing their tax returns. The Tax Code frequently requires taxpayers to substantiate their income and claims for deductions and credits by providing records of various profits, expenses and transactions.

Third, if a taxpayer is ever audited by the IRS, good recordkeeping can facilitate what could be a long and invasive process, and it can often mean the difference between a no change and a hefty adjustment.

Finally, business taxpayers should maintain good records that will enable them to track the trajectory of their success over the years.

Here you will find a sample list of various types of records it would be wise to retain for tax and other purposes (not an exhaustive list; see this office for further customization to your particular situation):

Individuals

Filing status:

Marriage licenses or divorce decrees – Among other things, such records are important for determining filing status.

Determining/Substantiating income:

State and federal income tax returns – Tax records should be retained for at least three years, the length of the statute of limitations for audits and amending returns. However, in cases where the IRS determines a substantial understatement of tax or fraud, the statute of limitations is longer or can remain open indefinitely.

Paystubs, Forms W-2 and 1099, Pension Statements, Social Security Statements – These statements are essential for taxpayers determining their earned income on their tax returns. Taxpayers should also cross reference their wage and income reports with their final pay stubs to verify that their employer has reported the correct amount of income to the IRS.

Tip diary or other daily tip record – Taxpayers that receive some of their income from tips should keep a daily record of their tip income. Under the best circumstances, taxpayers would have already accurately reported their tip income to their employers, who would then report that amount to the IRS. However, mistakes can occur, and good recordkeeping can eliminate confusion when tax season arrives.

Military records – Some members of the military are exempt from state and/or federal tax; combat pay is exempt from taxation, as are veteran’s benefits. (In many cases, a record of military service is necessary to obtain veteran’s benefits in the first place.)

Copies of real estate purchase documents – Up to $500,000 of gain from the sale of a personal residence may be excludable from income (generally up to $250,000 if you are single). But if you own a home that sold for an amount that produces a greater amount of gain, or if you own real estate that is not used as your personal residence, you will need these records to prove your tax basis in your home; the greater your basis, the lower the amount of gain that must be recognized.

Individual Retirement Account (IRA) records – Funds contributed to Roth IRAs and traditional IRAs and the earnings thereon receive different tax treatments upon distribution, depending in part on when the distribution was made, what amount of the contributions were tax deferred when made, and other factors that make good recordkeeping desirable.

Investment purchase confirmation records – Long-term capital gains receive more favorable tax treatment than short-term capital gains. In addition, basis (generally the cost of certain investments when purchased) can be subtracted from gain from any sale. For these reasons, taxpayers should keep records of their investment purchase confirmations.

Substantiating deductions:

Acknowledgments of charitable donations – Cash contributions to charity cannot be deducted without a bank record, receipt, or other means. Charitable contributions of $250 or more must be substantiated by a contemporaneous written acknowledgment from the qualified organization that also meets the IRS requirements.

Cash payments of alimony – Payments of alimony may be deductible from the gross income of the paying spouse . . . if the spouse can substantiate the payments and certain other criteria are met.

Medical records – Disabled taxpayers under the age of 65 should keep a written statement from a qualified physician certifying they were totally disabled on the date of retirement.

Records of medical expenses – Certain unreimbursed medical expenses in excess of 10 percent of adjusted gross income may be deductible. Caution: a pending tax-reform proposal may change the deductibility of these expenses.

Mortgage statements and mortgage insurance – Mortgage interest and real estate taxes have generally deductible for taxpayers who itemize rather than claim the standard deduction. Caution: a pending tax-reform proposal may change the deductibility of these expenses.

Receipts for any improvements to real estate – Part or all of the expense of certain energy efficient real estate improvements can qualify taxpayers for one or more tax credits.

Keeping so many records can be tedious, but come tax-filing season it can result in large tax savings. And in the case of an audit, evidence of good recordkeeping can get you off to a good start with the IRS examiner handling the case, can save time, and can also save money. For more information on recordkeeping for individuals, please contact our offices.

Businesses

Taxpayers are required by law to keep permanent books of account or records that sufficiently substantiate the amount of gross income, deductions, credits and other amounts reported and claimed on any their tax returns and information returns.

Although, neither the Tax Code nor its regulations specify exactly what kinds of records satisfy the record-keeping requirements, here are a few suggestions:

State and federal income tax returns – These and any supporting documents should be kept for at least the period of limitations for each return. As with individual taxpayers, the limitations period for business tax returns may be extended in the event of a substantial understatement or fraud.

Employment taxes – The Tax Code requires employers to keep all records of employment taxes for at least four years after filing for the 4th quarter for the year. Generally these records would include wage payments and other payroll-related records, the amount of employment taxes withheld, reported tip income, identification information for employees and other payees; employees’ dates of employment; income tax withholding allowance certificates (Forms W-4, for example), fringe benefit payments, and more.

Business income – These would go toward substantiating income, and could include cash register tapes, bank deposit slips, a cash receipts journal, annual financial statements, Forms 1099, and more.

Inventory costs – Businesses should keep records of inventory purchases. For example, if an electronics company purchases a certain number of widgets for resale or a manufacturer purchases a certain number of ball bearings for use in the production of industrial equipment that it manufactures and sells. The costs of these goods, parts, or other materials can be deducted from sales income to significantly reduce tax liability.

Business expenses – Ordinary and necessary expenses for carrying on business, such as the cost of rental office space, are also generally deductible from business income. Such expenses can be substantiated through bank statements, canceled checks, credit card receipts or other such records. The cost of making certain improvements to a business, such as through buying equipment or renovating property, can also be deductible.

Electronic back-up

Paper records can take up a great deal of storage space, and they are also vulnerable to destruction in fires, floods, earthquakes, or other natural phenomena. Because records are required to substantiate most income, deductions, property values and more—even when they no longer exist—taxpayers (and especially business taxpayers) should digitize their records on an electronic storage system and keep a back-up copy in a secure location.

Business taxation can be extremely complicated, and the requirements for recordkeeping vary greatly depending on the size of the business, the form of organization chosen, and the type of industry in which the business operates. For more details on your specific situation, please call our offices.

Tax season is scheduled to begin shortly and, as in past years, there are some possible glitches to be mindful of. Already, the IRS has alerted taxpayers that the start of filing season will be delayed. Late tax legislation, although unlikely, could result in a further delay. Some new requirements under the Patient Protection and Affordable Care Act have been waived for 2014, but others have not. The IRS also is facing the prospect of another government shutdown in January.

Tax season is scheduled to begin shortly and, as in past years, there are some possible glitches to be mindful of. Already, the IRS has alerted taxpayers that the start of filing season will be delayed. Late tax legislation, although unlikely, could result in a further delay. Some new requirements under the Patient Protection and Affordable Care Act have been waived for 2014, but others have not. The IRS also is facing the prospect of another government shutdown in January.

Filing season

In recent years, the IRS has had to delay the start of the filing season to reprogram its return processing systems for changes in the tax laws. The 2014 filing season will also be delayed but not, as of today, because of new tax laws. The IRS operated with minimal staffing during the 16-day government shutdown in October and fell behind in its scheduled maintenance and programming of its return processing systems because employees were furloughed. At this time, the IRS expects the 2014 filing season to be delayed for possibly two weeks.

Before the shutdown, the IRS had anticipated opening the 2014 filing season on January 21, 2014. With a one- to two-week delay, the IRS would start accepting and processing returns no earlier than January 28, 2014 and no later than February 4, 2014. Individuals who file early in anticipation of receiving a refund will likely see their refunds delayed. The IRS is expected to make a final determination on the start date of the 2014 filing season in mid-December. Our office will keep you posted of developments.

Taxpayers are also waiting on some important final forms for the 2014 filing season, including Form 8960, Net Investment Income Tax. The Affordable Care Act created the new 3.8 tax on qualified net investment income, effective January 1, 2013. Additionally, the IRS has indicated that more guidance will be available for married same-sex couples. Since publication of the IRS's initial guidance, questions have surfaced concerning employee benefits, return filing and other issues affecting married same-sex couples and domestic partners (whom the IRS does not treat as married). Late-year guidance on either the 3.8 percent net investment income tax or same-sex tax issues may require last-minute changes in year-end tax strategies.

Another shutdown possible

The IRS is currently operating under a stop-gap funding measure, which ended the government shutdown in October. Funding under the stop-gap measure is scheduled to lapse after January 15, 2014. A House-Senate budget conference committee is attempting to reconcile competing fiscal year (FY) 2014 budget bills. So far, lawmakers appear to have made little progress.

A mid-January shutdown could further delay the start of the filing season. In a November 18 letter to IRS Acting Commissioner Daniel Werfel, the American Institute of Certified Public Accountants (AICPA) expressed concern that another government shutdown would result in a huge strain on taxpayers and tax professionals trying to timely file and report their income taxes by April 15. "The IRS keeping more essential positions working during January would help make the already delayed filing season operate as smoothly as possible," the AICPA told Werfel. The AICPA also recommended that the Taxpayer Advocate Service, which closed during the October shutdown, remain open in the event of another lapse in appropriations.

Tax legislation

Although many tax bills have been introduced in Congress, 2013 is likely to end without lawmakers tackling comprehensive tax reform. The House Ways and Means Committee and the Senate Finance Committee have both prepared discussion drafts on tax reform, covering a host of tax issues. One possible reason for the lack of movement of tax reform appears to be lukewarm interest, at best, from the House and Senate leaders. This could change in 2014 but it is too early to make any predictions.

One path for tax reform could be the House-Senate budget conference committee. However, as mentioned, the committee has not yet produced any concrete proposals. Several lawmakers have recommended that the committee strike a deal to lower corporate tax rates in exchange for businesses giving up unspecified tax breaks. Many Republicans want to keep scheduled across-the-board spending cuts in place for 2014 and beyond; many Democrats want to replace the spending cuts with new revenue raisers. The conference committee has a mid-December deadline to reach an agreement.

A package of so-called tax extenders-popular but temporary tax incentives-could move before year-end but more likely will be taken up by Congress early next year. Unlike last year, the expiring incentives do not affect 2013 returns filed in 2014. Eligible taxpayers will be able to claim the state and local sales tax deduction, the higher education tuition deduction, the teachers' classroom expense deduction, home energy tax breaks, and many others on their 2013 returns. If you have any questions about the expiring incentives, please contact our office.

Affordable Care Act

Starting January 1, 2014, the Affordable Care Act requires individuals to carry minimum essential health insurance (unless they are exempt) or make a shared responsibility payment. Tax credits and cost-sharing also kick-in next year. At this time, it appears unlikely that the Obama administration will delay the individual mandate. The employer mandate, however, is delayed. Employer reporting (and reporting by some insurers) will not apply until 2015, but is optional for 2014. Generally, employer reporting applies to employers with at least 50 full-time employees on business days during the preceding calendar year.

November was dominated by news of technical troubles for the online Affordable Care Act Marketplaces and the cancellation of some individual insurance policies that did not meet new standards. The White House has made getting the online Marketplaces running at 100 percent a priority and also gave states the option of allowing individuals to re-enroll in coverage that would otherwise be terminated. The fix is temporary and individuals will need to find alternative coverage for 2015 and beyond. Small businesses also may have received cancellation notices and should be exploring alternative coverage.

If you have any questions about year-end tax developments, please contact our office.

Shortly after resuming operations post-government shutdown, the IRS told taxpayers that the start of the 2014 filing season will be delayed by one to two weeks. The delay will largely impact taxpayers who want to file their 2013 returns early in the filing season. At the same time, the White House clarified on social media that no penalty under the Affordable Care Act's (ACA) individual mandate would be imposed during the enrollment period for obtaining coverage through an ACA Marketplace.

Shortly after resuming operations post-government shutdown, the IRS told taxpayers that the start of the 2014 filing season will be delayed by one to two weeks. The delay will largely impact taxpayers who want to file their 2013 returns early in the filing season. At the same time, the White House clarified on social media that no penalty under the Affordable Care Act's (ACA) individual mandate would be imposed during the enrollment period for obtaining coverage through an ACA Marketplace.

IRS shutdown

On October 1, many IRS employees in Washington, D.C. and nationwide were furloughed after Congress failed to approve funding for the government's fiscal year (FY 2014). During the shutdown, only 10 percent of the IRS' approximately 90,000 employees remained on the job, most engaged in criminal investigations and infrastructure support. Employees on furlough, including revenue agents assigned to exams and hearing officers assigned to collection due process cases, were expressly prohibited from doing any work, including checking email and voice messages.

Employees return to work

The IRS reopened on October 17. The previous day, Congress had passed legislation to fund the government through mid-January 2014. The IRS immediately cautioned taxpayers to expect longer wait times and limited service as it would take time for employees to resume work and process backlogged inventory. Upon their return to work, IRS employees began reviewing email, voice messages and their files as well as completing administrative tasks to reopen operations. The IRS reported that it received 400,000 pieces of correspondence during the furlough period in addition to nearly one million items already being processed before the shutdown.

Returns and refunds

The 16-day furlough overlapped with the October 15 deadline for taxpayers on extension to file 2012 returns. The IRS reported that during the shutdown it continued as many automated processes as possible, including accepting returns and processing payments. The Free File system also was open during the furlough period. However, refunds were not issued while the IRS was closed. Refunds are now being processed. If you have any questions about a refund or payment, please contact our office.

Filing season

The start of the 2014 filing season will be delayed approximately one to two weeks so the IRS can program and test tax processing systems following the 16-day federal government closure. The IRS had anticipated opening the 2014 filing season on January 21. With a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than January 28, 2014 and no later than February 4, 2014. The IRS reported it will make a final determination on the start of the 2014 filing season in mid-December.

The IRS explained that the government shutdown took place during the peak period for preparing its return processing systems for the 2014 filing season. The IRS must program, test and deploy more than 50 systems to handle processing of nearly 150 million tax returns.

"Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right," Acting Commissioner Daniel Werfel said in a statement. "The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation's taxpayers. We want the public and tax professionals to know about the delay well in advance so they can prepare for a later start of the filing season."

Affordable Care Act

Beginning January 1, 2014, the Affordable Care Act generally requires individuals - unless exempt - to carry health insurance or make a shared responsibility payment (also known as a penalty). Individuals exempt from the payment include individuals covered by most employer-sponsored health plans, Medicare, Medicaid, and other government programs. The penalty is $95 in 2014 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).

The Obama administration launched individual Marketplaces (formerly known as Exchanges) on October 1 in all 50 states and the District of Columbia. The enrollment period for coverage for 2014 began on October 1 and is scheduled to end March 31, 2014, which is after the January 1 effective date of the individual mandate. In late October, the Obama administration clarified on social media that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.

Because of technical problems, some applications on HealthCare.gov have not been running at 100 percent, the U.S. Department of Health and Human Services (HHS) reported. Individuals can, however, enroll and obtain insurance at in-person assistance centers. Marketplace customer call centers are also open, HHS explained.

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

SHOP

The Affordable Care Act created two vehicles to deliver health insurance: Marketplaces for individuals and the SHOP for small businesses. Marketplaces launched as scheduled on October 1 in every state and the District of Columbia. Qualified individuals can enroll in a Marketplace to obtain health insurance. Coverage through a Marketplace will begin January 1, 2014.

The October 1 start of SHOP, however, was delayed. Small employers may start the application process on October 1, 2013 but all functions of SHOP will not be available until November, the U.S. Department of Health and Human Services (HHS) reported. If employers and employees enroll by December 15, 2013, coverage will begin January 1, 2014, HHS explained.

SHOP is closely related to the Code Sec. 45R small employer health insurance tax credit. This tax credit is designed to help small employers offset the cost of providing health insurance to their employees. After 2013, small employers must participate in SHOP to take advantage of the Code Sec. 45R tax credit. For tax years beginning during or after 2014, the maximum Code Sec. 45R credit for an eligible small employer (other than a tax-exempt employer) is 50 percent of the employer's premium payments made on behalf of its employees under a qualifying arrangement for QHPs offered through a SHOP Marketplace. The maximum credit for tax-exempt employers for those years is 35 percent. Maximum and minimum credits are based upon the level of employee wages. If you have any questions about SHOP and the Code Sec. 45R credit, please contact our office.

Code Sec. 36B tax credit

Effective January 1, 2014, qualified individuals may be eligible for the Code Sec. 36B premium assistance tax credit to help pay for health coverage through a Marketplace. The credit is linked to household income in relation to the federal poverty line (FPL). Generally, taxpayers whose household income for the year is between 100 percent and 400 percent of the federal poverty line for their family size may be eligible for the credit.

When taxpayers apply for coverage in a Marketplace, the Marketplace will estimate the amount of the Code Sec. 36B credit that the taxpayer may be able to claim for the tax year. Based upon the estimate made by the Marketplace, the individual can decide if he or she wants to have all, some, or none of the estimated credit paid in advance directly to the insurance company to be applied to monthly premiums. Taxpayers who do not opt for advance payment may claim the credit when they file their federal income tax return for the year.

The October 16 agreement to reopen the federal government directed HHS to certify to Congress that Marketplaces verify eligibility for the Code Sec. 36B credit. HHS must submit a report to Congress by January 1, 2014 on the procedures for verifying eligibility for the credit and follow-up with a report by July 1, 2014 on the effectiveness of its income verification procedures.

Employer mandate

The Affordable Care Act generally requires an applicable large employer to make an assessable payment (a penalty) if the employer fails to offer minimum essential health coverage and a number of other requirements are not met. The employer mandate was scheduled to take effect January 1, 2014. However, the Obama administration delayed it for an additional year, to 2015.

In October, the House Small Business Committee heard testimony on the definition of full-time employee status for purposes of the employer mandate. An applicable large employer for purposes of the employer mandate is an employer that employs at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. A full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.

Employers testifying before the GOP-chaired committee urged an increase in the 30-hour threshold. "Many small businesses simply cannot afford to provide coverage to employees who average 30 hours per week," the owner of a supermarket told the committee. "Business owners will have to make tough choices and many part-time employees will face reduced hours," he added. "Many franchise businesses are being turned upside down by the new costs, complexities and requirements of the law," another business owner told the committee.

Legislation (HR 2575) has been introduced in the House to repeal the 30-hour threshold for classification as a full-time equivalent employee for purposes of the employer mandate and to replace it with 40 hours. The bill has been referred to the House Ways and Means Committee.

HealthCare.gov

As has been widely reported, the individuals seeking to enroll in Marketplace coverage through HealthCare.gov experienced some online problems in October. The U.S. Department of Health and Human Services (HHS) has undertaken a comprehensive review of HealthCare.gov. In the meantime, HHS reminded individuals that in-person assistance centers are open as are customer call centers.

Enrollment

The Affordable Care Act generally requires individuals to carry health insurance after 2013 or make a shared responsibility payment (also known as a penalty). For 2014, the penalty is $95 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).

Open enrollment in the Affordable Care Act's Marketplaces began October 1, 2013 and runs through March 31, 2014. The enrollment period overlaps with the January 1, 2014 requirement to carry health insurance or make a shared responsibility payment. On social media, the Obama administration clarified that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.

If you have any questions about these developments or the Affordable Care Act in general, please contact our office.