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The IRS has issued proposed and temporary regulations under Code Sec. 530A, regarding general requirements for Trump accounts, the establishment of an initial account, including automatic enrollment by the Secretary of the Treasury, and qualified general contributions. Proposed regulations issued in March 2026 (NPRM REG-117270-25) that provided guidance on establishing Trump accounts, but did not establish automatic enrollment due to time constraints in resolving legal and administrative issues, are withdrawn. The temporary regulations apply to tax years beginning on or after January 1, 2026, and expire on September 30, 2029.

The IRS has issued proposed and temporary regulations under Code Sec. 530A, regarding general requirements for Trump accounts, the establishment of an initial account, including automatic enrollment by the Secretary of the Treasury, and qualified general contributions. Proposed regulations issued in March 2026 (NPRM REG-117270-25) that provided guidance on establishing Trump accounts, but did not establish automatic enrollment due to time constraints in resolving legal and administrative issues, are withdrawn. The temporary regulations apply to tax years beginning on or after January 1, 2026, and expire on September 30, 2029.

General Requirements and Establishment of an Account

A Trump account is either (1) an initial Trump account, created or organized by the Treasury Secretary for an eligible individual or (2) a rollover Trump account, which is an account created during the growth period and funded by a qualified rollover contribution from the account beneficiary's existing Trump account. The written governing instrument of a Trump account must generally meet the rules of Code Sec. 408(a)(1) through (6) and Code Sec. 530A(b)(1)(C)(i) through (iii). Any person approved by the IRS as of December 31, 2025, to be a nonbank trustee of an IRA would have automatic approval to act as a trustee of a Trump account. The written instrument must clearly identify the account as a Trump account at the time of creation.

The Secretary may make an election to establish an auto account for a qualifying individual. Another person may elect to establish a Trump account for an eligible individual by filing Form 4547 or via the electronic application or webpage made available by the Secretary. A person may claim an auto account pursuant to Temp. Reg. §1.530A-1T(d)(1)(iv) by establishing a claimed initial Trump account and having the funds in the auto account transferred to the claimed initial Trump account. On or about October 1, 2026, the Secretary shall establish an auto account for each person whom the Secretary has determined to meet the requirements of Temp. Reg. §1.530-A-1T(b)(2) to be an eligible individual, and from whom no prior election has been made. Periodic elections to establish accounts for eligible individuals will be made after that date.

Administration of an auto account is the Secretary's responsibility. During the growth period, an account may only accept qualified general contributions under Code Sec. 530A(f) and a $1,000 pilot program contribution. An auto account's only investment must be its equitable interest in the master group trust, which is a trust established for the exclusive benefit of account beneficiaries of auto accounts for purposes of holding investments of those auto accounts and meets the applicable requirements of Rev. Rul. 81-100, as modified, and is exempt from tax under Code Sec. 408(e).

Qualified General Contributions and Qualified Stock Contributions

Temp. Reg. §1.530A-7T establishes the framework for qualified general contributions to Trump accounts. A qualified general contribution must originate from an eligible donor, be accepted by the Secretary through a Treasury acceptance agreement, be made to beneficiaries within an approved class, and be allocated equally among all beneficiaries in that class. An approved class must include at least 5,000 account beneficiaries and include all account beneficiaries who are still in their growth period, reside in the specified geographic location, and born in one or more years identified in the Treasury acceptance agreement.

The regulations also create rules for qualified stock contributions, allowing eligible donors to contribute certain publicly traded stock issued by domestic corporations directly to Trump accounts. Such stock is generally subject to a minimum holding period ending on the earlier of five years after contribution or the beneficiary’s growth period ending.

Contributions made to qualifying Code Sec. 501(c)(3) organizations to fund general funding contributions are deductible under applicable charitable deduction rules, and gifts to eligible donor organizations are treated as qualifying charitable transfers. A Code Sec. 501(c)(3) organization furthers its exempt purposes by making a qualifying general funding contribution, whether directly or through a donor-advised fund. In addition, such contributions are treated as expenditures for charitable purposes and generally are not considered grants or distributions to individuals for purposes of the private foundation and donor-advised fund expenditure responsibility rules.

T.D. 10056

CC-00226466-26

The IRS has released the 2026-2027 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

• 1. the special transportation industry meal and incidental expenses (M&IE) rates,
• 2. the rate for the incidental expenses only deduction,
• 3. and the rates and list of high-cost localities for purposes of the high-low substantiation method.

The IRS has released the 2026-2027 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

• 1. the special transportation industry meal and incidental expenses (M&IE) rates,
• 2. the rate for the incidental expenses only deduction,
• 3. and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates

The special M&IE rates for taxpayers in the transportation industry are:

• $80 for any locality of travel in the continental United States (CONUS), and
• $86 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate

The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method

For purposes of the high-low substantiation method, the 2026-2027 special per diem rates are:

• $329 for travel to any high-cost locality, and
• $230 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $86 for travel to any high-cost locality, and
• $74 for travel to any other locality within CONUS

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $86 for travel to any high-cost locality, and
• $74 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

Notice 2025-54, I.R.B. 2025-41, 479 is superseded.

Notice 2026-60

For 2027, the Social Security wage cap will be $192,300, and Social Security and Supplemental Security Income (SSI) benefits will increase by 3.6 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2027, the Social Security wage cap will be $192,300, and Social Security and Supplemental Security Income (SSI) benefits will increase by 3.6 percent. These changes reflect cost-of-living adjustments to account for inflation.

Wage Cap for Social Security Tax

The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2027, the wage base is $192,300. Thus, OASDI tax applies only to the taxpayer’s first $192,300 in wages or net earnings from self-employment. Taxpayers do not pay OASDI tax on earnings that exceed $192,300.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2027

For workers who earn $192,300 or more in 2027:

• an employee will pay a total of $11,922.60 in social security tax ($192,300 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $23,845.20 in social security tax ($192,300 x 12.4 percent).

Additional Medicare Tax

Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the Additional Medicare tax.

Benefit Increase for 2027

Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2027 by 3.6 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

Social Security Fact Sheet: 2027 Social Security Changes

SSA Press Release: Social Security Announces 3.6 Percent Benefit Increase for 2027

The IRS established the IRA Compliance Resolution System (ICRS) to permit IRA owners and custodians to correct failures related to individual retirement arrangements by submitting a request to the IRS. Failures eligible for ICRS include required minimum distribution failures and nonspouse beneficiary rollover failures. The revenue procedure will also govern requests for waivers from the 60-day rollover requirement from IRAs as well as qualified employer-sponsored plans. The revenue procedure is effective May 1, 2027.

The IRS established the IRA Compliance Resolution System (ICRS) to permit IRA owners and custodians to correct failures related to individual retirement arrangements by submitting a request to the IRS. Failures eligible for ICRS include required minimum distribution failures and nonspouse beneficiary rollover failures. The revenue procedure will also govern requests for waivers from the 60-day rollover requirement from IRAs as well as qualified employer-sponsored plans. The revenue procedure is effective May 1, 2027.

Self-Correction Not Available

The new system implements provisions of the SECURE 2.0 Act of 2022, P.L. 117-328, requiring expansion of the Employee Plans Compliance Resolution System (EPCRS) for qualified retirement plans to allow IRA custodians to address eligible inadvertent failures involving IRAs. The new ICRS consists of the IRA Voluntary Correction Program (IVCP), although additional correction programs may be introduced later. Self-correction of IRA failures is not currently available under ICRS. Instead, the IRA custodian or owner must make a submission to the IRS using the provided procedures and pay a fee on the Pay.gov website.

60-Day Rollover Waiver Requests

The procedure also establishes a process for requesting waivers of the 60-day rollover requirement under Code Secs. 402 and 408 through ICRS. During 2027, eligible applicants may request waivers through either ICRS or the existing private letter ruling process. Beginning in 2028, the IRS anticipates that such requests will be permitted only under ICRS.

Waiver requests may involve eligible rollover distributions from IRAs, qualified retirement plans, annuity plans, tax-sheltered annuities and governmental deferred compensation plans. Automatic waivers and waiver relief under previous guidance remains available.

Rev. Proc. 2026-33

The IRS updated the Employee Plans Compliance Resolution System (EPCRS), its comprehensive system of corrections programs for employer-sponsored qualified retirement plans. The updates reflect significant changes to EPCRS made by the SECURE 2.0 Act (P.L. 117-328) and subsequent guidance. Former procedures under Rev. Proc. 2021-30 are modified and superseded. The revised procedures are effective October 22, 2026.

The IRS updated the Employee Plans Compliance Resolution System (EPCRS), its comprehensive system of corrections programs for employer-sponsored qualified retirement plans. The updates reflect significant changes to EPCRS made by the SECURE 2.0 Act (P.L. 117-328) and subsequent guidance. Former procedures under Rev. Proc. 2021-30 are modified and superseded. The revised procedures are effective October 22, 2026.

The bulk of the changes in the revised procedures reflect the SECURE 2.0 Act’s expansion of EPCRS’s Self Correction Program component to permit self-correction of eligible inadvertent failures, including plan loan failures. Other changes made by SECURE 2.0 and incorporated into the revised EPCRS include safe harbor corrections under Code Sec. 414(cc) and the recovery of retirement plan overpayments under Code Sec. 414(aa).

Other changes made in the revised revenue procedure include:

• References to the availability of a separate compliance resolution system for IRA failures.
• Updates reflecting changes to the determination letter and opinion letter programs.
• Revisions to correction methods for SEPs and SIMPLE IRA plans.
• Revisions to procedures for locating lost participants.
• Revisions to the correction principle for failure to obtain spousal consent.
• Changes to the Voluntary Correction Program (VCP) and the Audit Closing Agreement Program (Audit CAP), such as revised procedures for a group submission under VCP.

Rev. Proc. 2026-34

The IRS has issued final regulations under Code Sec. 6311 implementing changes made by the Taxpayer First Act. The regulations permit the IRS to pay fees under contracts for processing tax payments by credit or debit card, provided the fees are fully recouped from taxpayers making those payments. The regulations remove restrictions on the IRS’s payment of fees under such contracts and on the imposition of reimbursement fees on persons paying taxes by credit or debit card.

The IRS has issued final regulations under Code Sec. 6311 implementing changes made by the Taxpayer First Act. The regulations permit the IRS to pay fees under contracts for processing tax payments by credit or debit card, provided the fees are fully recouped from taxpayers making those payments. The regulations remove restrictions on the IRS’s payment of fees under such contracts and on the imposition of reimbursement fees on persons paying taxes by credit or debit card.

Payment Processing Fees

The regulations authorize the IRS to enter into contracts for receiving tax payments by credit or debit card if the contracts are cost beneficial to the government. Under certain contracts, the IRS may pay fees, charges, or other monetary consideration to payment processors. If the IRS pays fees under these contracts, it must recoup the full amount from taxpayers making payments by credit or debit card. The reimbursement fees are payable at the time of, and in addition to, the tax payment and are limited to the amounts paid by the IRS under the contracts. The IRS must seek to minimize the fees paid under these arrangements.

Under other contracts, the IRS may elect not to pay fees to payment processors. Such arrangements do not prohibit card issuers, financial institutions, or other persons participating in the transactions from imposing their own fees or charges. The IRS may not receive any portion of those fees.

Error Resolution Procedures

Payments of taxes by credit or debit card, including reimbursement fees paid under the regulations, are subject to applicable error-resolution procedures under the Truth in Lending Act, the Electronic Fund Transfer Act, or similar state or local laws. These procedures apply to errors relating to the credit or debit card account but do not apply to disputes, errors, or adjustments concerning the underlying tax liability. Reimbursement fees paid under the regulations are not taxes imposed by the Internal Revenue Code and are not eligible for refund or credit under Code Sec. 6402.

Applicability

The final regulations amend existing regulations under Code Sec. 6311 to implement changes made by the Taxpayer First Act. The rules apply to tax payments and reimbursement fees made on or after the date of publication in the Federal Register.

T.D. 10060

The IRS has issued proposed and temporary regulations providing guidance on the new federal scholarship tax credit under Code Sec. 25F. Beginning after 2026, an individual may claim a nonrefundable federal income tax credit for contributions to certified scholarship granting organizations (SGOs) issuing scholarships to students in K-12 schools. The regulations clarify how the credit is calculated, including the treatment of state tax credits, credit carryforwards, and substantiation requirements. They also establish immediate administrative rules for SGOs and states that opt into the program and identify SGOs.

The IRS has issued proposed and temporary regulations providing guidance on the new federal scholarship tax credit under Code Sec. 25F. Beginning after 2026, an individual may claim a nonrefundable federal income tax credit for contributions to certified scholarship granting organizations (SGOs) issuing scholarships to students in K-12 schools. The regulations clarify how the credit is calculated, including the treatment of state tax credits, credit carryforwards, and substantiation requirements. They also establish immediate administrative rules for SGOs and states that opt into the program and identify SGOs.

Credit Eligibility and Calculation

An individual may claim a credit for qualified cash contributions made directly to eligible SGOs. The annual credit is generally limited to $1,700 per taxpayer or $3,400 for married individuals filing jointly. Contributions made through pass-through entities, including partnerships and S corporations, are not eligible for the credit. The taxpayer must reduce the federal tax credit by the amount of any state tax credit attributable to the same contribution before applying the federal limitation. Unused credit amounts may be carried forward for up to five years.

A taxpayer claiming the credit may not claim a charitable contribution deduction for the same contribution and must satisfy specified substantiation and reporting requirements. This includes use of a unique donor identification number on new Form 8525. The taxpayer donor must designate contributions as eligible for the credit at the time they are made. Once made, the designation is irrevocable.

A taxpayer may contribute to an eligible SGO regardless of their state of residence, allowing them to support qualifying SGOs across participating states.

Scholarship Granting Organizations

To qualify as an SGO, an organization must be recognized as a tax-exempt public charity, maintain separate accounts for qualified contributions and scholarship funds, and devote at least 90 percent of required expenditures to scholarships. SGOs must verify student eligibility, ensure scholarship funds are used solely for qualified elementary and secondary education expenses, and adopt procedures to prevent scholarships from benefiting disqualified persons. The regulations also require SGOs to register with the IRS, furnish acknowledgments to contributors, file annual reports, and maintain records demonstrating compliance with federal requirements.

State Participation

A state may elect to participate the federal scholarship tax program either through an advanced election or through the submission of a state SGO list. A state seeking to participate must annually certify eligible SGOs and provide the IRS with information demonstrating that the organizations satisfy federal requirements. The IRS will maintain and publish a nationwide list of eligible SGOs upon which taxpayers may generally rely when making contributions and claiming credits.

Applicability

Taxpayers, SGOs, and states may rely on the proposed regulations for qualified contributions beginning on or after January 1, 2027. The temporary regulations apply on or after September 1, 2026, and expire on October 1, 2029.

T.D. 10057

Proposed Regulations, NPRM REG-117199-25

IR 2026-117

The Treasury Department and IRS have issued proposed regulations under Code Sec. 1062 governing the election to pay tax attributable to gain from qualified sales or exchanges of qualified farmland property in four annual installments. The proposed regulations define qualified farmland property and qualified farmers, provide rules for making the election, and address pass-through entities and acceleration events.

The Treasury Department and IRS have issued proposed regulations under Code Sec. 1062 governing the election to pay tax attributable to gain from qualified sales or exchanges of qualified farmland property in four annual installments. The proposed regulations define qualified farmland property and qualified farmers, provide rules for making the election, and address pass-through entities and acceleration events.

Qualified Farmland Property

Qualified farmland property generally is U.S. real property that was used by the taxpayer as a farm for farming purposes, or leased to a qualified farmer for farming purposes, during substantially all of the 10 years preceding the sale or exchange. The property also must be subject to a covenant prohibiting nonfarm use for 10 years following the sale or exchange. A copy of the covenant must be attached to the taxpayer's return for the taxable year of the sale or exchange.

The proposed regulations provide that certain periods of nonuse will be disregarded in applying the 10-year farming use requirement. These include periods during which property is removed from production under a government program, pursuant to recognized farming practices, or because of unforeseen events outside the taxpayer's control, provided the property continues to be maintained for farming purposes.

Election and Installment Payments

Taxpayers would make the election by filing Form 1062, Deferral of Tax on Gain from the Sale or Exchange of Qualified Farmland Property to Qualified Farmers, and Schedule A (Form 1062). Once made, the election generally may be revoked only by paying the remaining unpaid applicable net tax liability. Each installment payment equals 25 percent of the taxpayer's applicable net tax liability. The first installment generally must be paid by the return due date, determined without regard to the extensions, for the taxable year of the sale or exchange.

Pass-Through Entities and Acceleration Events

Under the proposed regulations, partners, S corporation shareholders, beneficiaries, and other owners generally may make the election with respect to applicable net tax liability arising from a qualified sale or exchange by a pass-through entity. Pass-through entities must furnish Schedule A information and the covenant to owners and beneficiaries and report each owner's allocable share of gain.

The proposed regulations also provide rules accelerating unpaid installment payments following certain events. Acceleration events include failure to timely pay an installment, the death of an individual taxpayer, and certain liquidations, dispositions of substantially all assets, and other specified events involving corporations, trusts, and estates. The proposed regulations also provide procedures under which an eligible transferee may assume the remaining installment obligations in certain transactions.

The proposed regulations would apply to qualified sales and exchanges occurring in taxable years ending after publication of final regulations in the Federal Register. Taxpayers may rely on the proposed regulations for qualified sales and exchanges occurring in taxable years beginning after July 4, 2025, provided they apply the rules consistently and in their entirety. Treasury and the IRS requested comments on the proposed regulations and requests for a public hearing within 60 days after publication in the Federal Register.

Proposed Regulations, NPRM REG-117095-25

IR 2026-115

As the excitement of understanding what artificial intelligence can do for the tax profession starts to subside, the conversation is beginning to shift to risk management and risk assessment. To that end, the American Institute of CPAs has launched a new initiative – the Council on AI Risk in Tax (CART) – to help tax professionals manage risk.

As the excitement of understanding what artificial intelligence can do for the tax profession starts to subside, the conversation is beginning to shift to risk management and risk assessment. To that end, the American Institute of CPAs has launched a new initiative – the Council on AI Risk in Tax (CART) – to help tax professionals manage risk.

CART was born out of a risk assessment framework recently developed by former IRS Commissioner Daniel Werfel that was published by AICPA after asking representatives of state tax authorities what he could do for them following his departure from the IRS.

“They said, ‘you know Danny, we are seeing so many interesting, exciting demos of AI products that really have paradigm-shifting productivity … but we don’t know what the risks are. We don’t know what questions we should ask ourselves to make sure that, as a tax authority, we are ready to deploy these powerful AI tools responsibly,” Werfel, senior fellow at Johns Hopkins University School of Government & Policy, said in an interview, adding that they also inquired about questions they should be asking vendors about safety features and other risks they should be looking out for.

“I did some immediate research and learned that there wasn’t an AI risk framework or risk register specific to tax,” he added, leading him develop version one of the recently published risk framework.”

From there, he approached AICPA as the place to publish the framework and through those conversations, created CART as a place for tax professionals and state tax administrators to collaborate on AI risk and further refine the framework.

“With AI, it’s obviously new,” Melanie Lauridsen, AICPA vice president of tax policy and advocacy, added. It’s ever evolving. There’s a huge interest. There’s a lot of unknowns, and there’s nothing really out there right now beyond what I have seen what Danny put forward to help guide people in this area.”

The Framework

The published framework states that it is more than a simple list of “relevant risks. The formulation and activation of the list means the organization has learned to:

• Define how risks show up in practice;

• Assign controls;

• Establish indicators; and

• Make course corrections as the environment evolves.

In this way the register is part of a broader risk governance framework to help organizations chart a sensible path forward from strategy to implementation.”

The publication includes distinct frameworks for both tax authorities and tax preparers. For tax authorities, the publication highlights 20 risk areas across four categories:

• Information integrity – The wrong information reaching taxpayers at scale.
• Fairness and legitimacy – Disparate or unfair treatment across groups.
• Security and data – Compromised systems, corrupted data, or the exploitation of sensitive taxpayer information at AI systems aggregate, surface, or make newly accessible to band actors.
• Institutional capacity – Loss of the knowledge and capacity by the institution needed to govern AI responsibility over time.

For tax preparers, there are 15 risk areas across 5 categories:

• Technical – Incorrect or unreliable AI outputs that establish the conditions for downstream errors.
• Practice – Failures of professional judgement, documentation, or oversight.
• Legal and regulatory – Increased exposure to legal liability (e.g., malpractice claims, regulatory sanctions).
• Business – Erosion of client trust and firm relationships.
• Workforce and Strategic – Loss of the expertise and institutional knowledge needed to practice responsibly.

The framework “establishes a notional risk register for tax authorities and presents that side-by-side with a distinct register for tax preparers,” the framework document states. “It also identifies important areas of overlap across the two.”

A Living Framework

Werfel noted that this is not intended to be a one-and-done framework, but rather a living document that he anticipates will be updated on a regular basis.

“I wanted to give myself six months of feedback and iteration,” he said. “I told CART at our kickoA meeting [that] once we issue version two after six months, then I think it’s an annual [update] from there. But in this form, version one to version two, I wanted to put a little bit more accelerated because that’s the highest risk point for it missing something big in the risk register itself.”

Lauridsen add that convening CART regularly and discussing risks and best practices associated with those risks and updating the framework “is the right approach” as opposed to trying to build a firm set of standards for risk assessment and risk management of AI.

“We don’t know what it’ll be in a month, two months, much less six months or a year,” Lauridsen said, noting the fast evolution AI is currently experiencing. “I think it would be a disservice to come forward with a standard right now.”

She continued: “Right now, it’s more best practices. Everybody’s trying to get their minds and arms around it and how to implement it.”

Werfel added that the feedback will be very important when the framework goes through future iterations, as the CART members will be able to report back when the framework works and more importantly, when it “missed the bullseye” by the cross section of accounting, law firms, government associations and AI vendors.

“My hope is that if it’s oA bullseye, we’ll hear about it and update it,” Werfel said.

He did not rule out seeing the framework converted into an industry standard somewhere down the line, but for now, the focus is to just keep this a framework that users can use as a best practices guide to assessing risks of AI tools that states and practitioners are considering for implementation.

In the near term, Werfel said that an idea was floated to CART to make a voluntary pledge to follow the framework that CART produces. It would be completely voluntary, but a pledge to follow it would be “hopefully helpful to rally attention to AI risk.”

By Gregory Twachtman, Washington News Editor

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The IRS released the optional standard mileage rates for 2019. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

The IRS released the optional standard mileage rates for 2019. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,
• medical, and
• charitable purposes.

Some members of the military may also use these rates to compute their moving expense deductions.

2019 Standard Mileage Rates
The standard mileage rates for 2019 are:

• 58 cents per mile for business uses;
• 20 cents per mile for medical uses; and
• 14 cents per mile for charitable uses.

Taxpayers may use these rates, instead of their actual expenses, to calculate their deductions for business, medical or charitable use of their own vehicles.

FAVR Allowance for 2019
For purposes of the fixed and variable rate (FAVR) allowance, the maximum standard automobile cost for vehicles places in service after 2018 is:

• $50,400 for passenger automobiles, and
• $50,400 for trucks and vans.

Employers can use a FAVR allowance to reimburse employees who use their own vehicles for the employer’s business.

2019 Mileage Rate for Moving Expenses
The standard mileage rate for the moving expense deduction is 20 cents per mile. To claim this deduction, the taxpayer must be:

• a member of the Armed Forces of the United States,
• on active military duty, and
• moving under an military order and incident to a permanent change of station.

The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for all other taxpayers until 2026.

Unreimbursed Employee Travel Expenses
For most taxpayers, the Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee travel expenses. However, certain taxpayers may still claim an above-the-line deduction for these expenses. These taxpayers include:

• members of a reserve component of the U.S. Armed Forces,
• state or local government officials paid on a fee basis, and
• performing artists with relatively low incomes.

Notice 2018-3, I.R.B. 2018-2, 285, as modified by Notice 2018-42, I.R.B. 2018-24, 750, is superseded.

Much-anticipated withholding tables for 2018 have been posted by the IRS. While the new withholding tables are designed to work with existing Forms W-4, the agency encouraged taxpayers to use its online withholding calculator to make adjustments if necessary. New Forms W-4, Employee’s Withholding Allowance Certificate, will be released for 2019 withholding; withholding for 2018 will adapt to existing Forms W-4 already submitted by employees. Based upon the specific impact of the new tax law on their situations, some employees may wish to file a revised Form W-4 to supplement revisions to the withholding tables already being made by the IRS.

Much-anticipated withholding tables for 2018 have been posted by the IRS. While the new withholding tables are designed to work with existing Forms W-4, the agency encouraged taxpayers to use its online withholding calculator to make adjustments if necessary. New Forms W-4, Employee’s Withholding Allowance Certificate, will be released for 2019 withholding; withholding for 2018 will adapt to existing Forms W-4 already submitted by employees. Based upon the specific impact of the new tax law on their situations, some employees may wish to file a revised Form W-4 to supplement revisions to the withholding tables already being made by the IRS.

The IRS’s online withholding calculator is being reprogramed for the Tax Cuts and Jobs Act. IRS officials told reporters in Washington, D.C that the updated withholding calculator is expected to be online in February. The guidance also sets the rates at 22 percent for optional flat-rate withholding on supplemental wages below $1 million, at 37 percent on supplemental wages on $1 million and above, and 24 percent for backup withholding.

Background

The amount withheld from an employee's wages is determined in part by the number of withholding exemptions and allowances the employee claims. For each exemption or allowance claimed, an amount equal to one personal exemption, prorated to the payroll period, is subtracted from the total amount of wages paid. This reduced amount, rather than the total wage amount, is subject to withholding.

A withholding table shows employers and payroll service providers how much federal tax to withhold from employee paychecks, given each employee’s wages, marital status and the number of withholding allowances claimed. Employees provide their employers with Form W-4 so employers can withhold the correct amount of federal tax.

The Tax Cuts and Jobs Act overhauls the Tax Code. The new law lowers individual income tax rates, revises the child tax credit, repeals the personal exemption deduction, and makes countless other changes.

Withholding for 2018

For 2018, the amount of one withholding allowance on an annual basis increases to $4,150. The amount of one withholding allowance on an annual basis for 2017 was $4,050.

For 2018, the withholding allowance amounts by payroll period are:

• Weekly: $79.80
• Biweekly: $159.60
• Semimonthly: $172.90
• Monthly: $345.80
• Quarterly: $1,037.50
• Semiannually: $2,075
• Daily or miscellaneous (each day of payroll period): $16

The IRS instructed employers and payroll service providers to start using the new withholding tables as soon as possible, but no later than February 15, 2018. Until employers and payroll service providers implement the revised withholding tables, they should continue to use the 2017 tables, the IRS added.

Form W-4

Taxpayers will not need to complete new Forms W-4 immediately. "The new withholding tables are designed to minimize taxpayer burden as much as possible and will work with Forms W-4 that workers have already filed with their employers to claim withholding allowances," the IRS explained. Further, transition rules temporarily permit employees to claim exemption from withholding for 2018 by using 2017 Form W-4. The deadline to claim exemption from income tax withholding in either case has been extended to February 28, 2018.

In the meantime, taxpayers should check their withholding, the IRS recommended. "Taxpayers who itemize their deductions, couples with multiple jobs or individuals with more than one job are encouraged to review their situation," the IRS explained.

Comment. "The new withholding guidance, developed jointly by Treasury's Office of Tax Policy and the IRS, was constructed to work within the constraints of the existing payroll withholding system in order to deliver the benefits of the tax cuts as soon as possible, to as many Americans as possible, and with as little disruption as possible," Treasury Secretary Steven Mnuchin told reporters in Washington, D.C. "The withholding tables are designed to work with the Forms W-4 that workers have already filed with their employers. This will minimize burden on taxpayers and employers," he predicted.

Comment. Senate Finance Committee ranking member Ron Wyden, D-Oregon, has asked the Government Accountability Office (GAO) to review the new withholding tables and determine if the tables "would result in the systematic underwithholding of federal taxes from employee paychecks." Wyden and other Democrats in Congress have voiced concerns that the White House is "politically interfering with the development of the 2018 withholding tables."

Supplemental wages

An employee may receive, in addition to regular wage payments, supplemental wages. If supplemental wages are paid concurrently (for example, in a single payment) with regular wages, and the employer does not specify the amount of each, the supplemental wages are combined with the regular wages for the pay period for purposes of determining the proper withholding amount. If the supplemental wages are not paid concurrently with regular wages, or if they are paid concurrently but the employer specifies the amount of each, two different methods of calculating the amount of withholding on the supplemental wages are available. If supplemental wages exceed $1 million during the calendar year, the excess is subject to withholding at 37 percent, effective this year, the IRS explained.

Comment. Examples of supplemental wages include bonuses, commissions, overtime pay, wages paid under reimbursement or other expense allowance arrangements, dismissal pay, vacation pay, back pay, and nonqualified deferred compensation. Other types of supplemental wages include payments for unused accumulated leave and separate payments representing sick pay and regular wages.

The Tax Cuts and Jobs Act did not directly change the tax rate on capital gains: they remain at 0, 10, 15 and 20 percent, respectively (with the 25- and 28-percent rates also reserved for the same special situations). However, changes within the new law impact both when the favorable rates are applied and the level to which to may be enjoyed.

The Tax Cuts and Jobs Act did not directly change the tax rate on capital gains: they remain at 0, 10, 15 and 20 percent, respectively (with the 25- and 28-percent rates also reserved for the same special situations). However, changes within the new law impact both when the favorable rates are applied and the level to which to may be enjoyed.

Capital gains rates

The maximum rates on net capital gain and qualified dividends are generally retained after 2017 and are 0 percent, 15 percent, and 20 percent. The breakpoints between the zero- and 15-percent rates ("15-percent breakpoint") and the 15- and 20-percent rates ("20-percent breakpoint") are generally the same amounts as the breakpoints under prior law, except the breakpoints are indexed using the new C-CPI-U factor in tax years beginning after 2018. For 2018:

• the 15-percent breakpoint is $77,200 for joint returns and surviving spouses (one-half of this amount ($38,600) for married taxpayers filing separately), $51,700 for heads of household, $2,600 for estates and trusts, and $38,600 for other unmarried individuals; and
• The 20-percent breakpoint is $479,000 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.

“Zero” rate. In the case of an individual (including an estate or trust) with adjusted net capital gain, to the extent the gain would not result in taxable income exceeding the 15-percent breakpoint, such gain is not taxed.

Comment. The breakpoints are not aligned with the new general income tax rate brackets. For example, alignment for joint filers would have the 15-percent breakpoint at $77,400 rather than $77,200; and, more significantly, 20 percent at $600,000 rather than at $479,000. Instead, they continue the alignment themselves more closely to the prior-law rate brackets.

Comment. As under prior law, unrecaptured section 1250 gain generally is taxed at a maximum rate of 25 percent, and 28-percent rate gain is taxed at a maximum rate of 28 percent. In addition, an individual, estate, or trust also remains subject to the 3.8 percent tax on net investment income (NII tax).

Kiddie tax

Effective for tax years beginning after December 31, 2017, and before January 1, 2026, the "kiddie tax" is simplified by effectively applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child. A child’s "kiddie tax" is no longer affected by the tax situation of his or her parent or the unearned income of any siblings.

Taxable income attributable to net unearned income is taxed according to the brackets applicable to trusts and estates, with respect to both ordinary income and income taxed at preferential rates. For 2018, that means that the 15-percent capital gain rate starts at $2,600 and rising to 20 percent when $12,700 is reached.

Carried interest

Capital gain passed through to fund managers via a partnership profits interest (carried interest) in exchange for investment management services must meet an extended three-year holding period to qualify for long-term capital gain treatment. Under new Code 1061(a), if a taxpayer holds an applicable partnership interest at any time during the tax year, this rule treats carried interest as short-term capital gain—taxed at ordinary income rates— based on a three-year holding period instead of the usual one-year period.

SSBIC rollovers

For sales after 2017, the new law repeals the election to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sale proceeds to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC). Prior to 2018 under former Code Sec. 1044, C corporations and individuals could elect to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sales proceeds within 60 days to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC).

Like-kind exchanges

Like-kind exchanges have often been used to defer taxable gains. Going forward, like-kind exchanges are allowed only for real property after 2017 (Code Sec. 1031(a)(1)). Like-kind exchanges are no longer available for depreciable tangible personal property, and intangible and nondepreciable personal property after 2017. Gain on those assets will no longer be allowed to be deferred.

Code Sec. 199A deduction

The concept of capital gain is intertwined within the new passthrough deduction for partnerships, S corporations and sole proprietorships under Code Sec. 199A in several ways. A noncorporate taxpayer can claim a Code Sec. 199A deduction for a tax year for the sum of—

(1)

the lesser of —

(a) the taxpayer’s "combined qualified business income amount"; or

(b) 20 percent of the excess of the taxpayer’s taxable income over the sum of (i) the taxpayer’s net capital gain under Code Sec. 1(h) and (ii) the taxpayer’s aggregate qualified cooperative dividends; plus

(2)

the lesser of —

(a) 20 percent of the taxpayer’s aggregate qualified cooperative dividends; or

(b) the taxpayer’s taxable income minus the taxpayer’s net capital gain (Code Sec. 199A(a), as added by the 2017 Tax Cuts Act).

Comment. As a result, the Code Sec. 199A deduction cannot be more than the taxpayer’s taxable income reduced by net capital gain for the tax year, making monitoring of capital gains a “must” for some taxpayers.

The Tax Cuts and Jobs Act increases bonus depreciation rate to 100 percent for property acquired and placed in service after September 27, 2017, and before January 1, 2023. The rate phases down thereafter. Used property, films, television shows, and theatrical productions are eligible for bonus depreciation. Property used by rate-regulated utilities, and property of certain motor vehicle, boat, and farm machinery retail and lease businesses that use floor financing indebtedness, is excluded from bonus depreciation.

The Tax Cuts and Jobs Act increases bonus depreciation rate to 100 percent for property acquired and placed in service after September 27, 2017, and before January 1, 2023. The rate phases down thereafter. Used property, films, television shows, and theatrical productions are eligible for bonus depreciation. Property used by rate-regulated utilities, and property of certain motor vehicle, boat, and farm machinery retail and lease businesses that use floor financing indebtedness, are excluded from bonus depreciation.

Timing Details

The 50-percent bonus depreciation rate applicable before the new law took effect has been increased to 100 percent for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The 100-percent allowance continues for five years, after which it is then phased down by 20 percent per calendar year for property placed in service after 2022. In general, the bonus depreciation percentage rates are as follows:

• 100 percent for property placed in service after September 27, 2017, and before January 1, 2023;
• 80 percent for property placed in service after December 31, 2022, and before January 1, 2024;
• 60 percent for property placed in service after December 31, 2023, and before January 1, 2025;
• 40 percent for property placed in service after December 31, 2024, and before January 1, 2026;
• 20 percent for property placed in service after December 31, 2025, and before January 1, 2027;
• 0 percent (bonus expires) for property placed in service after December 31, 2026.

Property acquired before September 28, 2017. Property acquired before September 28, 2017, is subject to the 50-percent rate if placed in service in 2017, a 40-percent rate if placed in service in 2018, and a 30-percent rate if placed in service in 2019. Property acquired before September 28, 2017, and placed in service after 2019 is not eligible for bonus depreciation. However, in the case of longer production property (LPP) and noncommercial aircraft (NCA), each of these placed-in-service dates is extended one year. Thus, a 50 percent rate applies to LPP and NCA acquired before September 28, 2017 and placed in service in 2017 or 2018, a 40 percent rate applies if such property is placed in service in 2019, and a 30 percent rate applies if such property is placed in service in 2020. They continue to apply to property acquired before the September 28, 2017, cut-off date set by Congress.

The IRS has released the 2018 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, medical, moving and charitable purposes. Beginning on January 1, 2018, the standard mileage rates for the use of a car, van, pickup of panel truck will be:

• 54.5 cents per mile for business miles driven (up from 53.5 cents in 2017);
• 18 cents per mile for medical and moving expenses (up from 17 cents in 2017); and
• 14 cents per mile for miles driven for charitable purposes (permanently set by statute at 14 cents).

Comment. A taxpayer may not use the business standard mileage rate after using a depreciation method under Code Sec. 168 or after claiming the Code Sec. 179 deduction for that vehicle. A taxpayer may not use the business rate for more than four vehicles at a time. As a result, business owners have a choice for their vehicles: take the standard mileage rate, or “itemize” each part of the expense (gas, tolls, insurance, etc., and depreciation).

The IRS has released the 2018 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, medical, moving and charitable purposes. Beginning on January 1, 2018, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

• 54.5 cents per mile for business miles driven (up from 53.5 cents in 2017);
• 18 cents per mile for medical and moving expenses (up from 17 cents in 2017); and
• 14 cents per mile for miles driven for charitable purposes (permanently set by statute at 14 cents).

Comment. A taxpayer may not use the business standard mileage rate after using a depreciation method under Code Sec. 168 or after claiming the Code Sec. 179 deduction for that vehicle. A taxpayer may not use the business rate for more than four vehicles at a time. As a result, business owners have a choice for their vehicles: take the standard mileage rate, or “itemize” each part of the expense (gas, tolls, insurance, etc., and depreciation).

New depreciation limits under the Tax Cuts and Jobs Act

The new “Tax Cuts and Jobs Act” recently passed by Congress and signed into law by President Trump raises the cap placed on depreciation write-offs of business-use vehicles. The new caps will be:

• $10,000 for the first year a vehicle is placed in service (up from a current level of $3,160);
• $16,000 for the second year (up from $5,100); $9,600 for the third year (up from $3,050); and
• $5,760 for each subsequent year (up from $1,875) until costs are fully recovered.

For passengers autos eligible for bonus first-year depreciation, that maximum first-year bonus depreciation allowance remains at $8,000 (raising the first-year write-off to $18,000). The new, higher limits only apply to vehicles placed in service after December 31, 2017.

Comment. For vehicles placed in service in 2018, the preceding caps will apply to all types of vehicles. However, the IRS figures inflation adjustments differently for (1) trucks (including SUVs treated as trucks) and vans and (2) regular passenger cars. Thus, beginning in 2019 when these figures are first adjusted for inflation, separate inflation adjusted caps will be provided for (1) trucks (including SUVs) and vans and for (2) regular passenger cars.

Also, the $25,000 section 179 expensing limit on certain heavy SUVs is inflation-adjusted after 2018. The $25,000 limit applies to a sport utility vehicle, a truck with an interior cargo bed length less than six feet, or a van that seats fewer than 10 persons behind the driver’s seat if the vehicle is exempt form the Code Sec. 280F annual depreciation caps because it has a gross vehicle weight rating in excess of 6,000 pounds or is otherwise exempt.

For a discussion of what’s best for your business situation, please contact our offices. 

The start of a New Year presents a time to reflect on the past 12 months and, based on what has gone before, predict what may happen next. Here is a list of the top 10 developments from 2017 that may prove particularly important as we move forward into the New Year:

The start of a New Year presents a time to reflect on the past 12 months and, based on what has gone before, predict what may happen next. Here is a list of the top 10 developments from 2017 that may prove particularly important as we move forward into the New Year:

#1: Tax Cuts and Jobs Act

A sweeping rewrite of the nation’s tax laws passed Congress in late 2017. The Tax Cuts and Jobs Act permanently lowers the corporate tax rate, and temporarily lowers the individual tax rates. Shareholders, partners and sole proprietors are poised to reap unprecedented rate cuts due to new pass-through rules. The Act also temporarily enhances the child tax credit, the medical expense deduction, bonus depreciation, small business expensing, and more. Lawmakers, however, did not repeal the federal estate or the alternative minimum tax (AMT) for individuals, although they did add temporary sweeteners to these provisions. For more details and analysis, see the special Briefing, Tax Cuts and Jobs Act.

#2: Regulatory Resets and Reform

Since taking office, President Trump has issued several Executive Orders (EO) on regulations. EO 13789 directed the Treasury Department to review all significant tax regulations issued since January 1, 2016. In July, the Treasury Department identified eight recent tax regulations for reevaluation. The Treasury Department later withdrew two regs: Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG-163113-02) and Proposed Regulations under Section 103 on Definition of Political Subdivision (REG-129067-15).

#3: Audit Coverage

The IRS’s latest Data Book, released in 2017, showed that the IRS audited 0.7 percent of all individual income tax returns in calendar year (CY) 2015, an all-time low. Approximately two-thirds of those individual audits were correspondence audits and one-third were field audits. The Treasury Inspector General for Tax Administration (TIGTA) later reported that the IRS examined one of every 143 individual income tax returns in fiscal year (FY) 2016. This reflected a 16 percent decline compared to FY 2015, according to TIGTA. The IRS examined one in 17 returns in FY 2016 with more than $1 million in income, which, according to TIGTA, represented a decline of 29 percent compared to FY 2015.

#4: Health Care

After dominating the first half of the 2017 news cycle, Congressional efforts to repeal and replace the Affordable Care Act eventually failed when the Senate Republicans’ "skinny repeal" legislation, the Health Care Freedom Bill, failed during a dramatic past-midnight vote on July 28. However, Republican efforts returned and were partially effective as the Tax Cuts and Jobs Act repealed the individual mandate by making the payment amount $0. In the meantime, however, the 3.8 percent net investment income tax (NII tax), and its “companion” 0.9 percent Additional Medicare Tax on compensation, which were enacted as part of the Affordable care Act, have not yet been repealed.

#5: The Gig or Sharing Economy

The IRS is taking notice of the gig, or sharing, economy. The Service opened a Sharing Economy Tax Center on its website, and is educating agents on relevant examination techniques. Activities in the sharing economy can vary and can range from selling goods online, advertising or other revenue from a website or blog, creating a crowdfunding site, short-term renting out a residence, or driving others for hire. More of these activities have come to the attention of the IRS as new Form 1099-K reporting requirements emerge for online and credit card transactions, as well as the use of Form 1099-MISC by large facilitators for service or goods providers.

#6: Cybersecurity

2017 saw the IRS reporting that it finally is turning the tide against fraudulent claims for refunds. The Service is working closely with software providers and using se IT to more closely monitoring patterns in filed tax returns. Delaying 2017 refunds for taxpayers claiming the earned income tax credit and the additional child tax credit also saw results. But while the situation surrounding refund-fraud is improving, it is far from eliminated, the IRS has emphasized.

#7: Virtual Currency

Bitcoin has become the virtual currency of-choice worldwide in just a short period of time. Bipartisan legislation was introduced in September in Congress to allow consumers to make small purchases with virtual currency (also known as cryptocurrency currency) of up to $600 without needing to satisfy current reporting requirements (the Cryptocurrency Tax Act of 2017). Meanwhile, many stakeholders said that IRS policy needs updating.

#8: Partnership Audit Rules

The new centralized partnership audit regime under the Bipartisan Budget Act of 2015 (BBA) replaces the current TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) procedures beginning for 2018 tax year audits, with an earlier "opt-in" for electing partnerships. These rules dramatically change the way that audit adjustments are imposed on the partnership and its partners. With an estimated one million-plus partners under the U.S. tax system, the importance of the centralized partnership audit regime cannot be underplayed. Partnerships and their partners, if they have not done so, should review partnership agreements to address these new issues.

#9: Bonus Depreciation/Section 179 Expensing

Because of their widespread applicability to businesses, especially those that are capital intensive, the new enhanced write-offs permitted under the new bonus depreciation and section 179 expensing enacted the Tax Cuts and Jobs Act deserves special mention. The new law increases the 50-percent "bonus depreciation" allowance to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft). A 20-percent phase-down schedule would then kick in. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property.

The section 179 dollar limitation is increased to $1 million and the investment limitation is increased to $2.5 million for tax years beginning after 2017. The definition of qualified real property eligible for expensing is redefined to include improvements to the interior of any nonresidential real property (“qualified improvement property”), as well as roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems installed on such property. What’s more, the exclusion from expensing for property used in connecting with lodging facilities, such as residential rental property, is eliminated.

#10: Disaster Relief

President Trump signed the Disaster Tax Relief Act in September. The new law provides targeted and temporary tax relief to victims of Hurricanes Harvey, Irma and Maria. The IRS also postponed certain tax deadlines for affected taxpayers. The IRS response to the various wildfires that have ravaged parts of California has been equally as expansive. And in December, the IRS issued safe harbor methods of calculating casualty and theft loss deductions (Rev. Proc. 2018-8, Rev. Proc. 2018-9).

The Tax Cuts and Jobs Act modifies Section 529 qualified tuition plans to allow the plans to distribute up to $10,000 in tuition expenses incurred during the tax year for designated beneficiaries enrolled at a public, private, or religious elementary or secondary school. Section 529 plans used to only be allowed for college tuition, up to full tuition amounts. That provision for college tuition remains the same.

The Tax Cuts and Jobs Act modifies Section 529 qualified tuition plans to allow the plans to distribute up to $10,000 in tuition expenses incurred during the tax year for designated beneficiaries enrolled at a public, private, or religious elementary or secondary school. Section 529 plans used to only be allowed for college tuition, up to full tuition amounts. That provision for college tuition remains the same.

Although contributions are not tax deductible for federal tax purposes, funds within a Section 529 plan can accumulate tax-free within the plan until they are distributed tax-free to the educational institution for the child-beneficiary. The new $10,000 limitation applies on a per-student, not per-account basis. As a result, if an individual is a designated beneficiary of multiple accounts, a maximum of $10,000 in distributions will be free of income tax, regardless of whether the funds are distributed from multiple accounts. Some state plans provide a limited deduction against state income taxes for contributions to Section 529 plans. They may also provide caps on contributions.

The expansion of Section 529 plans to cover elementary and secondary school education applies to distributions made after December 31, 2017. Since existing Section 529 set up for a child-beneficiary’s college education may now be redirected earlier to primary and secondary tuition, parents, grandparents and other contributors will need to decide how best to manage each child’s combined accounts: whether amounts needed to cover college tuition should accumulate tax-free until those years, or whether they should be used earlier. Generally, if contributions are limited either by a donor’s financial resources or by state caps, use for college tuition will allow a greater amount to accumulate tax-free. If projected accumulated contributions can cover more than college tuition, then using remaining Section 529 balances for secondary and even elementary school may make sense.

These expanded rules are still young, however, with expected IRS regulations and other guidance overlaid onto the basic law under the Tax Cuts and Jobs Act sure to come. But although the tax-free growth benefits of any Section 529 plans have a long-term perspective, giving some thought to how these expanded Section 529 plans might be used in your family situation might start soon. Please contact our offices for further details.

Yes, conversions from regular (traditional) tax-deferred individual retirement accounts (IRAs) to Roth IRAs are still allowed after enactment of the Tax Cuts and Jobs Act. In fact, in some instances, such Roth conversions are more beneficial than they were prior to 2018, since the tax rates on all income, including conversion income, are now lower. However, the special rule that allows a contribution to one type of an IRA to be recharacterized as a contribution to the other type of IRA will no longer apply to a conversion contribution to a Roth IRA after 2017.

Yes, conversions from regular (traditional) tax-deferred individual retirement accounts (IRAs) to Roth IRAs are still allowed after enactment of the Tax Cuts and Jobs Act. In fact, in some instances, such Roth conversions are more beneficial than they were prior to 2018, since the tax rates on all income, including conversion income, are now lower. However, the special rule that allows a contribution to one type of an IRA to be recharacterized as a contribution to the other type of IRA will no longer apply to a conversion contribution to a Roth IRA after 2017.

Note, however, that recharacterization is still permitted with respect to other contributions. For example, an individual may make a contribution for a year to a Roth IRA and, before the due date for the individual’s income tax return for that year, recharacterize it as a contribution to a traditional IRA. The provision is effective for tax years beginning after December 31, 2017.

Comment. Earlier versions of the Tax Cut and Jobs Act enacted by both the House and Senate eliminated recharacterization entirely. The provision was narrowed considerably in the reconciled version to target only conversions to Roth IRAs. So, for example, an individual may still make a contribution for a year to a Roth IRA and, before the due date for the individual’s income tax return for that year, recharacterize it as a contribution to a traditional IRA. In addition, an individual may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA, but the individual is precluded from later unwinding the conversion through a recharacterization.

Life insurance proceeds are received tax-free. However, any interest earned on life insurance proceeds, usually referred to as its cash value, is subject to tax. Special rules apply to transfers of ownership in a life insurance policy, accelerated death benefits, and viatical settlements.

Life insurance proceeds are received tax-free. However, any interest earned on life insurance proceeds, usually referred to as its cash value, is subject to tax. Special rules apply to transfers of ownership in a life insurance policy, accelerated death benefits, and viatical settlements.

An insurance policyholder might purchase one of many different types of life insurance covering the life of the insured. Term insurance covers a certain period of time, most often one year. If the insured does not die during the term of coverage, no policy proceeds are paid and the policy lapses. Other types of policies, including ordinary life insurance, whole life insurance, variable life insurance, and universal life insurance, provide insurance (and, often, an investment component) during the insured's life span.

Regardless of the type of policy, the beneficiary pays no tax on the proceeds when the insured dies. However, sometimes, usually due to a delay in paying the policy proceeds, the life insurance company pays the beneficiary interest in addition to proceeds. Any interest paid by the life insurance company must be included in income. The exclusion from gross income applies only to the policy proceeds.

If a policy owner surrenders a life insurance policy in exchange for its cash value, the amount received is not the result of the insured's death. Therefore, it is not tax-free and is considered ordinary income to the policyholder. Only the amounts paid by the policy owner, which are a return of capital, are not taxed. The remainder is subject to tax.

Traditionally, life insurance was intended to provide financial assistance to the insured's survivors. In some cases, however, terminally or chronically ill policyholders may sell the policy to meet their financial needs prior to death. When a policyholder sells the policy back to the insurance company for a percentage of its face value, the proceeds are called "accelerated death benefits."

The policyholder might also sell the policy to a third party for a lump-sum payment. The proceeds are referred to as a "viatical settlement" and the third party is usually a viatical settlement company. The third party becomes the policyholder and beneficiary.

Accelerated death benefits and viatical settlement payments are not paid on account of the death of the insured. However, they may be excluded from income only if the person is diagnosed with a terminal illness (or a chronic illness, but only to cover long-term care expenses).

Life insurance may also be used for tax planning purposes, either in a personal or business setting. For these and other refinements as applied to the general rules, please contact this office for details.

Holiday gifts made to customers are generally deductible as ordinary and necessary business expenses as long as the taxpayer can demonstrate that such gifts maintain or improve customer goodwill. Such gifts must bear a direct relationship to the taxpayer's business and must be made with a reasonable expectation of a financial return commensurate with the amount of the gift. However, the $25 annual limitation per recipient on deductibility is applicable to holiday gifts, unless a statutory exceptions applies.

Holiday gifts made to customers are generally deductible as ordinary and necessary business expenses as long as the taxpayer can demonstrate that such gifts maintain or improve customer goodwill. Such gifts must bear a direct relationship to the taxpayer's business and must be made with a reasonable expectation of a financial return commensurate with the amount of the gift. However, the $25 annual limitation per recipient on deductibility is applicable to holiday gifts, unless a statutory exceptions applies.

Holiday turkeys and other holiday distributions of nominal value made by an employer to employees to promote goodwill are treated as tax-free gifts to those employees instead of taxable compensation. If the employer gives cash, gift certificates or similar items of readily convertible cash value, however, the value of those gifts is considered additional compensation regardless of the amount.  But if holiday gift certificates given by an employer to its employees are redeemable only for merchandise and were not convertible to cash, they may be considered tax-free gifts.

Employers can give items worth a "nominal amount" without fear that the IRS will tax the employee. Gifts of items worth more, or a gift of any amount of cash, risks the IRS taking the view that the gift belongs in the employee's gross income. What constitutes a nominal amount is not crystal clear, but keeping a gift under $25 is erring on the safe side. It also assures a situation in which the employer can deduct the expense of the gift while not having it taxable to the employee.

The IRS always urges taxpayers to pay their current tax liabilities when due, to avoid interest and penalties. Taxpayers who can’t pay the full amount are urged to pay as much as they can, for the same reason. But some taxpayers cannot pay their full tax liability by the normal April 15 deadline (April 18^th in 2016 because of the intersection of a weekend and a District of Columbia holiday).

The IRS always urges taxpayers to pay their current tax liabilities when due, to avoid interest and penalties. Taxpayers who can’t pay the full amount are urged to pay as much as they can, for the same reason. But some taxpayers cannot pay their full tax liability by the normal April 15 deadline (April 18^th in 2016 because of the intersection of a weekend and a District of Columbia holiday). 

One alternative is to enter into an installment payment agreement with the IRS, where taxpayers agree in writing to make monthly payments to the IRS and to reduce their tax liability to zero over a reasonable period of time. The IRS may also agree to an installment payment arrangement for back taxes. Penalties and interest may continue to accrue, although the IRS may reduce the penalties. While the IRS is authorized to enter into a partial payment installment agreement for a portion of the taxpayer’s liability, the agency has been reluctant to do this.

Form 9465 

Taxpayers who cannot pay the tax liability reported on their current income tax return should submit Form 9465, Installment Agreement Request, to the IRS, to request a monthly installment plan. A taxpayer who owes more than $50,000 should provide Form 433-F, Collection Information Statement, along with the request. Taxpayers can enter into different types of agreements, including:

• A traditional agreement, where they agree to make their monthly payment by check, money order, or credit card;
• A direct debit installment agreement, to make automatic payments from a bank account; or
• A payroll deduction agreement, with payments made by the employer from a paycheck.

The IRS charges a user fee for entering into an agreement: $120 for a traditional agreement; or $52 for a direct debit agreement. Qualifying low-income taxpayers pay a fee of $43, regardless of the type of agreement. If the agreement is restructured (because of a change in the taxpayer’s financial condition, for example), or if the IRS terminates the agreement and then agrees to reinstate it, the IRS will charge a fee of $50.

Different agreements

The IRS’s procedures include different kinds of agreements, depending on the taxpayer’s circumstances:

• Taxpayers can use Form 9465 to apply for a streamlined agreement. The taxpayer must owe $50,000 or less and must pay all their taxes within 72 months or by the expiration of the collection statute of limitations (generally 10 years).
• Instead of using Form 9465, taxpayers can apply for an online payment agreement, provided the taxpayer owes $50,000 or less in taxes, interest and penalties, or provided the taxpayer owns a business and owes $25,000 or less in total. A taxpayer cannot apply online for this agreement if the taxpayer owes more than $50,000.
• Taxpayers who owe $10,000 or less (without interest or penalties) can enter into a guaranteed installment agreement if the taxpayer agrees to pay all taxes within three years. The taxpayer must have filed all returns and paid all taxes due for the past five years, and cannot have entered into an installment agreement in the same period.
• A taxpayer who can make full payment within 120 days should not use Form 9465 but should instead call the IRS phone line to make arrangements. There is no user fee.

In recent years, identity theft has mushroomed and as the filing season starts, tax-related identity theft is especially prevalent. Identity thieves typically file fraudulent returns early in the filing season, before unsuspecting taxpayers file their legitimate returns. Criminals gamble that the IRS will not detect the false return and will issue a fraudulent refund.

In recent years, identity theft has mushroomed and as the filing season starts, tax-related identity theft is especially prevalent. Identity thieves typically file fraudulent returns early in the filing season, before unsuspecting taxpayers file their legitimate returns. Criminals gamble that the IRS will not detect the false return and will issue a fraudulent refund.

Background

Tax-related identity theft occurs when criminals use stolen identification information to file a return claiming a fraudulent refund. According to the U.S. Department of Justice, tax-related identity theft is on the increase and is also becoming more organized. Tax-related identity theft is often perpetrated by criminal enterprises, involving multiple individuals.

In 2015, the IRS held several high-level meetings with state tax authorities and tax preparation software providers. These security summits focused on ways to improve cybersecurity and curb tax-related identity theft. All three sectors have agreed to share more information, where allowed by law, to combat tax-related identity theft. The IRS has made a number of upgrades to its return processing filters and taken other behind-the-scenes measures to flag fraudulent returns.

Identity validation for taxpayers using tax preparation software has been enhanced. These steps are intended to protect taxpayer accounts by creating security questions and device identity recognition, the IRS explained. All these actions for 2016, the IRS has explained, will serve as the baseline for additional improvements for the 2017 filing season.

Steps

The IRS has described the steps taxpayers should take if they suspect their identities have been stolen and a fraudulent return has been filed in their name:

• Taxpayers should contact the IRS and alert the agency that their identity has been stolen.
• Taxpayers should file a paper return if they are unable to e-file (for example, the fraudulent return was e-filed).
• Taxpayers should complete and file Form 14039, Identity Theft Affidavit, with their return.

After the taxpayer’s return and Form 14039 are received for processing by the IRS, the agency’s Identity Theft Victim Assistance (IDTVA) function will handle the case. This special unit will assess the scope of the issues to determine if the case affects one or more tax years as well as determining if there are other victims, who may be unknown to the taxpayer, listed on the fraudulent return. The IRS will mark the taxpayer’s account with an identity theft indicator and the taxpayer will receive an Identity Protection Personal Identification Number (IP PIN). According to the IRS, most tax-related identity theft cases are handled within 120 days but more complex cases may require additional time.

Verification of identity

Sometimes, the IRS may ask a taxpayer to verify his or her identity. This request is done by letter. The IRS explained that most verifications of identity can be done online or by telephoning the agency, but the IRS may request that an individual come in person to a Taxpayer Assistance Center to verify his or her identity.

If you have any questions about tax-related identity theft, please contact our office. If you believe your identity has been stolen or you have received a letter from the IRS asking you to verify your identity, please contact our office immediately. Our office can help you work with the IRS.

Everyone in business must keep records. Among other things, good records will help a business prepare the business tax returns, and will support items reported on tax returns. Taxpayers also must keep their business records available for inspection by the IRS.

Everyone in business must keep records. Among other things, good records will help a business prepare the business tax returns, and will support items reported on tax returns. Taxpayers also must keep their business records available for inspection by the IRS.

In order to claim any deduction, a business owner, like any taxpayer, must prove two things: what expenses were for and that the expense was in fact paid or incurred. Supporting documents may include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. The documents should show the amount paid and the reason for the expense. Businesses must keep their records as long as needed to qualify under the Tax Code. Generally, this means until the period of limitations for auditing the return expires.

Special expenses

There are special recordkeeping requirements and strict documentation rules for certain expenses. These expenses include:

• expenses for travel away from home (including meals and lodging while traveling),
• meal and entertainment expenses,
• business gifts, and
• cars and other means of transportation.

For these expenses, taxpayers must keep receipts and must also substantiate each individual expense as to (1) the amount, (2) time and place, and (3) business purpose. For entertainment and gift expenses, taxpayers must also provide the business relationship of the person(s) being entertained or receiving a gift. For vehicle expenses, taxpayers must keep a mileage log.

Reimbursed Expenses

Businesses that give reimbursements and allowances to their employees for employment-related travel and entertainment expenses must generally treat these amounts as income to the employees. However, there is no income inclusion if: (1) the employee is required to account for the expenses to the employer; (2) the employee does not deduct the expenses; and (3) the total expenses equal the total reimbursements and allowances.

Accounting for expenses means giving the employer documentary evidence and an account book or statement to verify each expense’s amount, time, place and business purpose. An employee is treated as having accounted for expenses if the employer provided a fixed allowance, and the employee verifies the time, place, and business purpose of each expense. A fixed allowance includes the standard mileage rate for cars and the federal per diem rate for travel away from home.

Accountable Plan

A reimbursement arrangement is considered an accountable plan if it meets the following three requirements:

1. It provides advances, allowances or reimbursements for business expenses paid or incurred by an employee;
2. Each business expense must be substantiated to the employer within a reasonable period of time; and
3. The employee must return any excess reimbursement within a reasonable period of time.

If the arrangement is an accountable plan, the reimbursements are excluded from the employee's wages and exempt from employment taxes. Any excess reimbursement that is not returned within a reasonable period is treated as paid under a nonaccountable plan.

A business that has employees must withhold income taxes on payments to each employee. Each employee must first fill out Form W-4, Employee’s Withholding Allowance Certificate, and provide it to the employer. On the form the employee can claim exemptions, such as the personal exemption or an exemption for a spouse or child, and determine the number of withholding allowances for the employee. Based on that information, the employer calculates the employee’s income tax withholding for the year.

A business that has employees must withhold income taxes on payments to each employee. Each employee must first fill out Form W-4, Employee’s Withholding Allowance Certificate, and provide it to the employer. On the form the employee can claim exemptions, such as the personal exemption or an exemption for a spouse or child, and determine the number of withholding allowances for the employee. Based on that information, the employer calculates the employee’s income tax withholding for the year.

The employer next must select a withholding method. The amount of taxes withheld can be determined using the percentage method; the wage bracket method; the alternative formula table method; or any other method that produces substantially the same amount as the wage bracket method. These methods are based upon tables produced by the IRS and available in IRS publication Circular E, Employer’s Tax Guide.

Percentage Method

The employer must select one of eight tables, based on the payroll period used by the employer, such as weekly, monthly, annually, etc. If the employer does not use a payroll period, it should use the daily or miscellaneous table. Each table is divided into two parts: one for single people, and one for married people.

After determining the appropriate table, the employer must determine the amount of wages to use as the base calculation. This amount is determined by subtracting the number of withholding allowances from the employee’s total gross wages for the payroll period. The result is net wages subject to withholding. The result is used in the withholding tables to determine the withholding amount.

Wage Bracket Method

For each employee, the employer again must determine the payroll period, wages paid during the period, withholding exemptions, and marital status. The wage bracket tables calculate the income tax to deduct and withhold by using gross wages, with no deduction for an exemption amount. This method is supposed to produce similar results to the percentage method.

The wage bracket method cannot be used if the payroll period is quarterly, semiannual, or annual, because there are no tables for these periods.

Other methods

The third method—alternative formula tables—is for employers using computerized accounting systems. The fourth method is allowed if it produces substantially similar results to the wage bracket method. The IRS provides a table for determining whether a result is substantially similar.

Other Employment Taxes

Employers must also determine FICA (Federal Insurance Contributions Act [Social Security]) and Federal Unemployment Tax Act (FUTA) taxes.

FICA consists of two taxes: the old-age, survivors and disability insurance (OASDI) tax, equal to 6.2 percent on both the employer and employee; and the hospital insurance (HI) tax, equal to 1.45 percent on both the employer and the employee. FICA taxes thus have a combined rate of 7.65 percent. The OASDI tax is subject to a wage limit, set at $118,500 for 2015 and 2016, but subject to increase. Wages above that limit are exempt from the OASDI tax. However, there is no limit on the HI tax; all wages are taxed 1.45 percent. The IRS provides tables to determine FICA taxes.

If the employee has wages in excess of $200,000, the employer must also withhold the Additional 0.9 percent Medicare tax from all wages above that threshold.

FUTA tax is 6 percent of all wages paid during the calendar year, up to a $7,000 wage limit. These amounts are owed by the employer and are not deducted from the employee’s wages. The employer can claim a credit for contributions to state unemployment insurance funds. The maximum credit is 90 percent of the 6 percent rate, or 5.4 percent.

An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.

An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.

"Check-the-Box" Election

An LLC with more than one member can elect tax status as:

• Partnership
• Corporation
• S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

An LLC with only one member can elect tax status as:

• Disregarded entity
• Corporation
• S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

The IRS will assign the following classifications if no entity election is filed for an LLC (the default rules):

• any business entity that is not a corporation is classified as a partnership
• any entity that is wholly-owned by a single person will be disregarded as an entity separate from its owner (taxed as a sole proprietorship).

Typically, an LLC with more than one member will elect to be taxed as a partnership, whereas a single-member LLC will elect to be disregarded and taxed as a sole proprietorship.

If you have any questions relating to LLCs, their benefits, drawbacks, or their treatment under the Tax Code, please contact our offices.

When starting a business or changing an existing one there are several types of business entities to choose from, each of which offers its own advantages and disadvantages. Depending on the size of your business, one form may be more suitable than another. For example, a software firm consisting of one principal founder and several part time contractors and employees would be more suited to a sole proprietorship than a corporate or partnership form. But where there are multiple business members, the decision can become more complicated. One form of business that has become increasingly popular is called a limited liability company, or LLC.

When starting a business or changing an existing one there are several types of business entities to choose from, each of which offers its own advantages and disadvantages. Depending on the size of your business, one form may be more suitable than another. For example, a software firm consisting of one principal founder and several part time contractors and employees would be more suited to a sole proprietorship than a corporate or partnership form. But where there are multiple business members, the decision can become more complicated. One form of business that has become increasingly popular is called a limited liability company, or LLC.

The LLC combines several favorable characteristics of a traditional partnership, in which all members are entitled to participate in the management and operation of the business, with those of a corporation, in which the owners, directors, and shareholders are generally shielded from liability for the corporation's debts. The means that in an LLC, just as in a corporation, the personal assets of the business owners' would generally be protected if the business failed, lost a lawsuit, or faced some other catastrophe. Members are only liable to the extent of their capital contribution to the business. In addition, members can fully participate in the management of the business without endangering their limited liability status.

When filing season begins, the profits (or losses) from the LLC pass through to its members, who pay tax on any income when filing their individual returns. In other words, income from the LLC is taxed at the individual tax rates. Income from corporations, on the other hand is taxed twice, once at the corporate entity level and again when distributed to shareholders. Because of this, more tax savings often results if a business formed as an LLC rather than a corporation.

Taxpayers should note, however, that Congress recently increased the top marginal individual income tax rate to 39.6 percent, has placed a .09 percent additional Medicare tax on wages over $200,000 (single taxpayers), and has imposed a 3.8 percent net investment income tax on higher-income taxpayers. At the same time, there is strong talk among members of both political parties of lowering the corporate rate from the current 35 percent to something around 28 or 25 percent to make the United States more competitive with foreign nations. If this happens, many highly profitable LLC businesses may need to rethink their situation and consider switching to a corporate form.

Forming an LLC involves many requirements, but the benefits can be substantial. Please call our offices if you have any questions.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS cites that over three million taxpayers in recent tax years have claimed deductions for business use of a home, which normally requires the taxpayer to fill out the 43-line Form 8829. Under the new procedure, a significantly simplified form is used. The new method is expected to reduce paperwork and recordkeeping for small businesses by an estimated 1.6 million hours annually, according to the IRS. The new optional deduction is limited to $1,500 per year, based on $5 per square foot for up to 300 square feet.

The simplified method is not effective for 2012 tax year returns being filed during the current 2013 filing season, but it will become effective for 2013 tax year returns filed in 2014. Taxpayers may want to investigate now whether they could benefit from the election for the 2013 tax year. Acting IRS Commissioner Steven Miller advised upon announcement of the safe harbor that "The IRS … encourages people to look at this option as they consider tax planning in 2013."  A final decision on the election need not be made until 2014, when 2013 returns are filed.

Basic home office deduction rule

Under Code 280A, which governs the home office deduction rules on the simplified method election, a taxpayer may deduct expenses that are allocable to a portion of the dwelling unit that is exclusively used on a regular basis. This generally means usage as:

• The taxpayer's principal place of business for any trade or business
• A place to meet with the taxpayer's patients, clients, or customers in the normal course of the taxpayer's trade or business, or
• In the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer's trade or business.

The new simplified method does not remove the requirement to keep records that prove exclusive use, on a regular basis, for one of the three designated uses listed above. It does help, however, in other ways.

Simplified safe harbor

Using the new simplified safe harbor method, a taxpayer determines the amount of deductible expenses for qualified business use of the home for the tax year by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the portion of a home used in a qualified business use of the home, but not to exceed 300 square feet. The prescribed rate is $5.00 per square foot.

Taxpayers who itemize their returns and use the safe harbor method may also deduct, to the extent allowed by the Tax Code and regs, any expense related to the home that is deductible without regard to whether there is a qualified business use of the home for that tax year, the IRS explained. As a result, they will be able to claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A of Form 1040. These deductions do not need to be allocated between personal and business use, as is required under the regular method.

Depreciation

Taxpayers using the safe harbor cannot deduct any depreciation for the portion of the home that is used in a qualified business use of the home for that tax year. For many taxpayers, depreciation is the largest component of the home office deduction under the regular method that must be sacrificed if the new safe harbor method is used.  Depending upon the value of your home and the space devoted to an office at home, using the regular method may prove to be the far better choice than electing the simplified method.

Election

Taxpayers may elect from tax year to tax year whether to use the safe harbor method or actual expense method. Once made, an election for the tax year is irrevocable.  The IRS has provided rules for calculating the depreciation deduction if a taxpayer uses the safe harbor for one year and actual expenses for a subsequent year. The deduction of expenses that are not related to the home, such as wages and supplies, is unaffected and those deductions are still available to those using the new method.

Limitations

The IRS set various limits on the safe harbor, including:

• Taxpayers with more than one qualified business use of the same home for a tax year and who elect the safe harbor must use the safe harbor for each qualified business use of the home.
• Taxpayers with qualified business uses of more than one home for a tax year may use the safe harbor for only one home for that tax year.
• A taxpayer who has a qualified business use of a home and a rental use of the same home cannot use the safe harbor for the rental use.

If you are currently claiming a home office deduction, or if you have considered taking the deduction in the past but were discouraged by all of the paperwork and calculations required, you should consider whether the new, simplified safe harbor method is right for you. Please feel free to contact this office for further details.