The IRS announced broad-based penalty relief for taxpayers affected by the COVID-19 pandemic. The relief applies to failure to file penalties and certain international information return (IIR) penalties with respect to tax returns for tax years (TY) 2019 and TY 2020, filed on or before September 30, 2022.

The IRS announced broad-based penalty relief for taxpayers affected by the COVID-19 pandemic. The relief applies to failure to file penalties and certain international information return (IIR) penalties with respect to tax returns for tax years (TY) 2019 and TY 2020, filed on or before September 30, 2022. Relief is also provided to banks, employers and other businesses from certain information return penalties with respect to TY 2019 returns filed on or before August 1, 2020, and with respect to TY 2020 returns that were filed on or before August 1, 2021.

The relief will also help the IRS focus resources on processing backlogged tax returns and tax correspondence.

In response to the COVID-19 pandemic, the IRS issued a series of notices and other guidance to provide relief to affected taxpayers, including:

• postponing the due date for certain Federal income tax payments ( Notice 2020-17, I.R.B. 2020-15, 590);
• expanded relief postponing the due date for filing Federal income tax returns originally due April 15, 2020, to July 15, 2020, among other things ( Notice 2020-18, I.R.B. 2020-15, 590); and
• postponing the due date for filing Federal income tax returns in the Form 1040 series and making certain Federal income tax payments that were originally due on April 15, 2021, due on May 17, 2021 ( Notice 2021-21, I.R.B. 2021-15, 986.

Waiver and Abatement of Certain Penalties

The IRS will not impose penalties with respect to specifically identified tax returns for TY 2019 and TY 2020, filed on or before September 30, 2022. The relief will be automatically applied-taxpayers do not have to request relief.

The IRS will not impose additions to tax under Code Sec. 6651(a)(1) for failure to file the following income tax returns:

• Form 1040, U.S. Individual Income Tax Return, and others in the series;
• Form 1041, U.S. Income Tax Return for Estates and Trusts, and others in the series;
• Form 1120, U.S. Corporation Income Tax Return, and others in the series;
• Form 1066, U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return; and
• Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as Private Foundation and Form 990-T, Exempt Organization Business income Tax Return (and Proxy Tax under Code Sec. 6033(e)).

Further, certain penalties will not be imposed under Code Secs. 6038, 6038A, 6038C, 6038F [ 6039F] and 6677 for failure to timely file several IIRs, such as Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.

Comment. Note that the Notice refers to Code Sec. 6038F, which does not exist. The context indicates that the reference should be to Code Sec. 6039F. The IRS may issue a correction.

Certain penalties will not be imposed under Code Sec. 6698(a)(1) and (2) for failure to timely file and show the required information on a Form 1065, U.S. Return of Partnership Income.

Certain penalties will not be imposed under Code Sec. 6699(a)(1) and (2) for failure to timely file and show the required information on a Form 1120-S, U.S. Income Tax Return for an S corporation.

In addition, the IRS will not impose the penalties under Code Sec. 6721(a)(2)(A) for failure to timely file any information return as defined under Code Sec. 6724(d)(1) that includes (1) 2019 returns that were filed on or before August 1, 2020, with an original due date of January 31, 2020, February 28, 2020 (if filed on paper) or March 31, 2020 (if filed electronically) or March 15, 2020; and (2) 2020 returns that were filed on or before August 1, 2021, with an original due date of January 31, 2021, February 28, 2021 (if filed on paper) or March 31, 2021 (if filed electronically) or March 15, 2021.

Exceptions

The penalty relief does not apply to any penalties not listed. Additionally the penalty relief does not apply to returns for which the penalty for fraudulent failure to file under Code Sec. 6651(f) or the penalty for fraud under Code Sec. 6663 apply. The penalty relief also does not apply to penalties in an accepted offer in compromise under Code Sec. 7122 or any penalty settled in a closing agreement under Code Sec. 7121 or finally determined in a judicial proceeding.

NTA Applauds IRS Move To Provide Late Filing Penalty Relief

National Taxpayer Advocate Erin Collins applauded the Internal Revenue Service’s decision to provide late-filing penalty relief to taxpayers who filed late tax returns for tax years 2019 and 2020.

"The IRS has taken a major step in providing broad, taxpayer-favorable relief from late-filing penalties for 2019 and 2020 tax years," Collins said in an August 24, 2022 blog post, adding that the agency " deserves substantial credit for its willingness to listen to Congress, stakeholders, and TAS [Taxpayer Advocate Service], and undertake a bold step requiring significant administrative effort and resources to benefit all taxpayers affected by the pandemic".

The IRS has issued guidance to taxpayers, who have inappropriately received forgiveness of their Paycheck Protection Program ('PPP') loan, and has encouraged them to take steps towards compliance, such as filing amended returns that include the forgiven loan amounts, as income.

The IRS has issued guidance to taxpayers, who have inappropriately received forgiveness of their Paycheck Protection Program ('PPP') loan, and has encouraged them to take steps towards compliance, such as filing amended returns that include the forgiven loan amounts, as income. The PPP loan program was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act) to assist small US businesses that were adversely affected by the COVID-19 pandemic in paying certain expenses and was further extended by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act. The IRS has discovered that, some recipients received forgiveness of their PPP loan through misrepresentation or omission and either did not qualify to receive a PPP loan or misused the loan proceeds. Under the terms of the PPP loan program, lenders could forgive the full amount of the loan, if the loan recipient meets three conditions, namely:

• Eligible Recipient: The loan recipient was eligible to receive the PPP loan if they were a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity, and was in business on or before February 15, 2020, and had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.
• Eligible Expenses: The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.
• Application for loan forgiveness: The loan recipient had to apply for loan forgiveness, which requires a loan recipient to attest to eligibility, verify certain financial information, and meet other legal qualifications.

The IRS has stipulated that, if the above conditions are not met, then the amount of the loan proceeds that were forgiven, must be included in income and any additional income tax must be paid. The IRS has also informed that, reporting tax-related illegal activities relating to PPP loans, may be done through submission of Form 3949-A, Information Referral.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country.

The IRS has reminded taxpayers to develop emergency preparedness plans due to the upcoming hurricane season and the ongoing threat of wildfires in some parts of the country. September is declared as the National Preparedness Month. The IRS advised taxpayers to:

• secure critical documents such as tax returns, birth certificates, deeds, titles, and insurance policies inside waterproof containers in a secure space;
• duplicate and scan key documents for backup storage on electronic media that provide security and easy portability, such as a flash drive, a CD, or in the cloud;
• reconstruct records after a disaster for tax purposes, getting federal assistance or insurance reimbursement; and
• record all property, especially expensive and high value items—the IRS disaster-loss workbooks in Publication 584 and Publication 584-B can help individuals and businesses compile lists of belongings or business equipment.

In addition, the IRS recommends the following for employers:

• employers should create an Electronic Federal Tax Payment System account at EFTPS.gov to monitor their payroll tax deposits and receive email alerts; and
• employers who use payroll service providers should check the payroll service provider’s fiduciary bonds as they could protect the employer in the event of default by the provider.

Taxpayers who have lost some or all their records during a disaster can visit the IRS's Reconstructing Records webpage. In addition, taxpayers residing in a federally declared disaster can check for the available disaster tax relief on the IRS Tax Relief in Disaster Situations or Around the Nation webpages.

The IRS automatically identifies taxpayers located in the covered disaster area and applies filing and payment relief. Taxpayers affected by a disaster can contact the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues. Further, taxpayers affected by a disaster outside of a federally declared disaster area may qualify for disaster relief. This includes taxpayers who are not physically located in a disaster area but who have records essential for filing or payment deadlines postponed during the relief period that are located in a covered disaster area. In addition, a special rule allows both individuals and businesses to choose to deduct uninsured or unreimbursed disaster losses on either the tax return for the year the disaster occurred, or the return for the previous year.

The IRS has released information regarding the pre-screening and certification process for employers taking advantage of the Work Opportunity Tax Credit (WOTC). 

The IRS has released information regarding the pre-screening and certification process for employers taking advantage of the Work Opportunity Tax Credit (WOTC). The information relates to hiring designated categories of workers who face significant barriers to employment, including:

• Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients;
• Certain veterans, including unemployed or disabled veterans;
• Qualified long-term unemployment recipients; and
• Long-term family assistance recipients

The WOTC, which succeeded the Targeted Jobs Tax Credit (TJTC), included the requirement for employers to pre-screen job applicants. To pre-screen a job applicant, on or before the day a job offer is made, a pre-screening notice (Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) must be completed by the job applicant and the employer. After pre-screening a job applicant, the IRS requires the employers to make a request for certification by submitting Form 8850 to the appropriate state workforce agency, no later than 28 days after the employee begins work.

The Service also notified that, tax-exempt organizations can claim the WOTC against the employer’s share of social security tax for hiring qualified veterans, by filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. Further information can be found in the Form 8850 instructions or on the WOTC page on IRS.gov.

Businesses are still waiting for pandemic relief made available to them during the COVID-19 outbreak amid ongoing processing delays at the Internal Revenue Service, according to the Treasury Inspector General for Tax Administration.

Businesses are still waiting for pandemic relief made available to them during the COVID-19 outbreak amid ongoing processing delays at the Internal Revenue Service, according to the Treasury Inspector General for Tax Administration.

According to an August 31, 2022, report posted to the TIGTA web site, the IRS "did not begin processing claims for qualified Sick and Family Leave Credits and the Employee Retention Credit for 12 months and claims for the Social Security Tax Deferral for 16 months after the pandemic relief legislation was enacted."

TIGTA attributed this delay to a "lack of updated programming and procedural guidance," as well as a "lack of training, erroneously suspended claims, and a lack of prioritization of claims" that contributed to the delays in processing claims.

Employers filing claims for these pandemic benefits would have filed a Form 941-X, which would have amended a previously filed Form 941 if they did not make the initial claim for these benefits on the Form 941 or if they needed to amend the amount of original claim on the already-filed Form 941.

"As of February 1, 2022, there were 447,435 Forms 941-X waiting to be processed," the report states. "Over 90 percent (402,814) of these Forms 941-X were over-aged, i.e. have not been processed within 45 calendar days. In addition, 60,885 (13.6 percent of the Forms 941-X were not processed within 180 calendar days."

TIGTA described the over-aged inventory as "an ongoing challenge for the IRS."

Additionally, the IRS watchdog found claims that should have been reviewed but were not resulted "in $45 million in potentially erroneous nonrefundable employer tax credits being allowed" when they otherwise might not have had proper reviews been conducted.

TIGTA recommends that IRS develop a plan to prioritize processing backlogged claims, update the examination referral process, and update training for IRS employees regarding referrals. IRS did not agree with the latter recommendations, but did all others stated in the report.

"Management stated they completed subsequent review of completed Form 941-X claims and determined no additional training was needed," the report states. "However, the IRS’s subsequent reviews do not address the concerns identified in our report. Accounts Management employees cited unclear guidance and training as to why 73 percent of claims were not referred when required."

The IRS has released a list of exceptions for the inclusion of a cancelled student loan debt in income. Generally, had a taxpayer's student loan been cancelled or repaid by someone else, the taxpayer was mandated to include the cancelled or repaid loan amount as part of their gross income, for tax purposes. 

The IRS has released a list of exceptions for the inclusion of a cancelled student loan debt in income. Generally, had a taxpayer's student loan been cancelled or repaid by someone else, the taxpayer was mandated to include the cancelled or repaid loan amount as part of their gross income, for tax purposes. However, the American Rescue Plan Act of 2021 has modified the treatment of student loan forgiveness for discharges in 2021 through 2025, wherein the taxpayer may be able to exclude the repaid or cancelled loan amount from his gross income, if the loan could be categorized as one of the following:

• A loan for post-secondary educational expenses.
• A private education loan.
• A loan from an educational organization described in Code Sec. 170(b)(1)(A)(ii).
• A loan from an organization exempt from tax under Code Sec. 501(a) to refinance a student loan.

Taxpayers can find more information about the list of exceptions to canceled student loan debt in income https://www.irs.gov/forms-pubs/modified-treatment-of-student-loan-forgiveness-for-discharges-in-2021-through-2025.

Upgrading the Internal Revenue Service’s antiquated information technology infrastructure will help honest taxpayers, especially those making $400,000 or less, from being audited, Department of the Treasury Secretary Janet Yellen said.

Upgrading the Internal Revenue Service’s antiquated information technology infrastructure will help honest taxpayers, especially those making $400,000 or less, from being audited, Department of the Treasury Secretary Janet Yellen said.

Speaking September 15, 2022, at an IRS facility in New Carrollton, Md., Yellen reiterated that the $80 billion in additional funds allocated to the IRS in the recent Inflation Reduction Act would not be used to increase audits on lower earning taxpayers.

"I’ve directed that enforcement resources will not be used to raise audit rates for households making under $400,000 a year relative to historical levels," Yellen said, according to the prepared remarks posted on the Treasury Department website. "In fact, we expect audit rates for honest taxpayers to decline, once the IRS has the right technological infrastructure in place. This means a simpler tax filing season for taxpayers who are doing everything right."

The Treasury Department’s focus on getting high income individual taxpayers and corporations to pay their fair share of taxes has been a consistent message Sec. Yellen and other Treasury and IRS officials have been sending since the funding was approved.

"In 2019, the top one percent of Americans was estimated to owe over a fifth of unpaid taxes – totaling around $160 billion," Yellen said, "Data shows that less than half of all taxes from more complex sources of income are paid. Yet nearly all taxes due from wages and salaries – which are earned by ordinary Americans – are paid," adding that "working families are shouldering a disproportionate burden of investing in our roads, schools, military, and more."

She called that inequity "unacceptable," and said that the funding from the Inflation Reduction Act "will go toward auditing more high earners who have not paid their full bill. With it, we are estimated to raise hundreds of billions of dollars in revenue."

Sec. Yellen also suggested that tax filing could become simpler as the agency updates its IT infrastructure. She cited a statistic that it takes an average American 13 hours to file a tax return, while in Sweden, some can simply file with a text message.

"The Inflation Reduction Act finally provides the funding to transform the IRS into a 21st century agency," she said. "While all the improvements won’t be done overnight, taxpayers can expect to feel real differences during the next filing season."

The most immediate difference will be with those seeking assistance. Yellen said Tax Assistance Centers will be fully staffed for the next tax season, allowing for the IRS to help "at least 2.7 million Americans," up from 900,000 Americans helped in the previous year.

Similarly, the IRS is increasing staffing at its call centers and is targeting an 85 percent level of service (meaning between 8 and 9 of every 10 calls is answered) up from the current level of 10 to 15 percent during the most recent tax filing season. It is also targeting a reduction of wait times to less than 15 minutes from the near 30 minutes of wait time during the 2022 tax filing season.

Sec. Yellen also committed to the digitization of paper tax returns through some form of scanning and moving away from the current use of manual transcribing, something both tax professionals and the National Taxpayer Advocate have been calling for.

"For taxpayers, this means faster processing and faster refunds," she said. "The IRS will also build online capabilities to enable taxpayers to fully interact with the agency digitally. Currently, when taxpayers receive a notice from the IRS, they generally must respond via mail. During this coming filing season, millions of taxpayers will be able to receive and respond to notices online."

NTA Offers Suggestions on How New IRS Funding Should Be Allocated

National Taxpayer Advocate Erin Collins offered suggestions on how the Internal Revenue Service should spend the $80 billion in additional funding it received from Congress in the Inflation Reduction Act, signed into law earlier this year.

In the first of two blog posts on the subject posted September 14, 2022, Collins focused on the immediate needs of the agency.

She wrote that before the IRS moves forward in plans to improve its overall operations, "it is imperative that it fulfills its core filing season mission by eliminating the backlog of unprocessed original and amended paper-filed tax returns, pay all pending refunds, and work through its backlog of overaged correspondence."

To achieve this, she outlined the following recommendations:

• hire or re-assign employees to process the backlog of paper-filed tax returns and correspondence;
• hire enough employees to answer 85 percent of taxpayer phone calls and institute “customer callback” technology on all toll-free lines;
• improve services for taxpayer professionals;
• continue to suspend automated collection notices until the backlog is eliminated; and
• hire enough employees to fully staff Taxpayer Assistance Centers and extend walk-in capabilities.

The recommendations preceded remarks made by Department of the Treasury Secretary Janet Yellen on September 15, 2022, in which she highlighted a number of these recommendations as priorities for the IRS, including fully staffing Taxpayer Assistance Centers and improving call center service levels.

Longer Term Recommendations

In her second blog post on the subject, posted September 15, 2022, Collins focused more on long-term initiatives the IRS can embark on to improve the taxpayer experience.

The recommendations ranged from the basic, such as hiring more human resource employees and ensuring proper training for all IRS employees to updating antiquated information technology infrastructure, improving transparency and issuing clear notices and guidance.

On the IT side, Collins’ recommendation topics touched on some of the usual suspects, including improving online functionality and access to tax records and automating the scanning process for paper filings. She also called for implementing technology to allow taxpayers and tax professionals to upload documents for auditors, as well as improving the readability of transcripts, and enabling all taxpayers to have the ability to electronically file their tax returns.

Other technology recommendations include improving the voicebots and chatbots as well as overhauling the IRS website to make it more user friendly.

In the area of improving transparency, Collins noted that during the 2020 and 2021 filing seasons, the IRS "failed to provide weekly reports proving tax return processing timeframes so that taxpayers would know what to expect when they filed their returns or submitted correspondence. This lack of proactive transparency and timely information left taxpayers confused and frustrated, reaching for the phones, searching the Internet, and looking for tax professionals to help."

As for improving notices and guidance, Collins noted that despite improvements over the years, "some critical notices remain confusing and vague, and don’t provide taxpayers with adequate IRS contact information. In some cases, the IRS limits the number of characters and words in its notices."

She noted that under the Taxpayer Bill of Rights that taxpayers have the right to be informed. If the IRS knows something, "it needs to timely, accurately, and clearly say it," Collins wrote. "Failure to do so may well lead to more complications and problems for taxpayers, requiring additional time and resources by taxpayers, tax professionals, and the IRS to resolve them."

Finally, Collins called for an increase to the Taxpayer Advocate Service funding, noting that its "case advocacy operations are already stretched thin, and we will need to hire additional employees if the IRS ramps up its compliance activities, as that inevitably will lead to more TAS cases."

"IRS leaders often tell us they agree with our recommendations in concept, but they lack the resources to implement them," Collins wrote in the second blog post. "With the supplemental funding it has received, these initiatives can now be undertaken."

Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271

Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271

President Donald Trump has signed bipartisan legislation, which expands a religious exemption for the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate. The exemption is effective for taxable years beginning after December 31, 2018.

Religious Exemption

SUPPORT for Patients and Communities Act ( HR 6) amends Code Sec. 5000A(d)(2)(a) to expand the religious conscience exemption for the ACA individual mandate. Individual taxpayers who rely solely on a religious method of healing for whom the acceptance of medical health services would be inconsistent with their religious beliefs are exempt from the ACA mandate to maintain health insurance or pay a penalty.

Tax Reform

Additionally, last year’s tax reform legislation essentially repeals the ACA’s individual mandate. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) repeals the ACA’s shared responsibility payment for individuals failing to maintain minimum essential coverage effective January 1, 2019.

Congressional Republicans are looking to move forward with certain legislative tax efforts during Congress’s lame-duck session. The House’s top tax writer, who will hand the reins to Democrats next year, has reportedly outlined several tax measures that will be a priority when lawmakers return to Washington, D.C., during the week of November 12. However, President Donald Trump’s recently touted 10-percent middle-income tax cut does not appear to be one of them.

Congressional Republicans are looking to move forward with certain legislative tax efforts during Congress’s lame-duck session. The House’s top tax writer, who will hand the reins to Democrats next year, has reportedly outlined several tax measures that will be a priority when lawmakers return to Washington, D.C., during the week of November 12. However, President Donald Trump’s recently touted 10-percent middle-income tax cut does not appear to be one of them.

Democrats Take the House

Republicans will lose their one-party rule in Washington, D.C. in the 116th Congress beginning in January 2019. As a result of the November 6 midterm elections, Democrats will control the House during the next Congress, and Republicans will retain control of the Senate.

Currently, Rep. Kevin Brady, R-Tex., serves as chairman of the House’s tax-writing Ways and Means Committee. Republicans’ majority in both chambers of Congress enabled the GOP, in coordination with the Trump administration, to enact tax reform legislation last year. However, the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) reportedly did not turn out to be as popular as they had hoped. The TCJA’s unpopularity is at least in part why Republicans lost vital seats in the House, according to several reports.

Lame-Duck

Before the turnover of power, however, Brady is reportedly gearing up to introduce a tax extenders measure during the lame-duck session, which would extend certain temporary or expired tax breaks. Generally, Democrats have been supportive of year-end tax extender legislation. At this time, the details of the tax-extender proposal remain unclear.

Additionally, Brady reportedly said on November 7 that a TCJA technical corrections bill with "minor changes" will move in the lame-duck session. Further, the Senate is expected to take up a House-approved retirement savings measure that is part of House Republicans’ "Tax Reform 2.0" efforts.

Looking Forward

House Ways and Means Committee ranking member Richard Neal, D-Mass., is expected to chair the committee in the 116th Congress. Neal has a fairly moderate tax-legislative record, and is considered on Capitol Hill to be "business-friendly." To that end, Neal has recently sponsored several retirement savings measures, which would enhance employer workplace savings accounts. Additionally, infrastructure and tax-related health care initiatives are expected to be a priority among House Democrats.

GOP Retains Senate

Republicans will continue to lead the Senate in the 116th Congress. While the GOP Senate majority may not be enough to approve additional GOP tax legislation, it is likely to prevent Democrats from repealing parts of the TCJA. However, it is expected on Capitol Hill that hearings will be held in both chambers’ tax writing committees to examine various provisions of the new tax law. Although a divided Congress can result in fewer tax bills being approved, successful legislation will likely be bipartisan.

The Senate Finance Committee’s (SFC) top ranking Democrat has introduced a bill to restore a retirement savings program known as myRA that was terminated by Treasury last year. The myRA program was created by former President Obama through an Executive Order.

The Senate Finance Committee’s (SFC) top ranking Democrat has introduced a bill to restore a retirement savings program known as myRA that was terminated by Treasury last year. The myRA program was created by former President Obama through an Executive Order.

Retirement Savings

"Cost-of-living is soaring with working families having less and less to save for their futures," SFC ranking member Ron Wyden, D-Ore., said in a November 15 tweet. "Today, I’m introducing a bill to address this retirement crisis."

The Encouraging Americans to Save Bill is co-sponsored by Sens. Ben Cardin, D-Md., Bob Casey, D-Pa., Amy Klobuchar, D-Minn., and Michael Bennet, D-Colo. An earlier version of the bill, Sen. 2492, was introduced by Wyden in the 114th Congress that also aimed to expand the myRA program.

"The Encouraging Americans to Save [Bill] enhances retirement savings incentives by restructuring the existing, nonrefundable saver’s credit into a refundable, government matching contribution of up to $500 a year for middle-class workers who save through 401(k) type plans or IRAs, "Wyden’s November 15 press release noted. Additionally, the bill would restore the myRA program, which Treasury determined last year was too costly to continue.

myRA Program

The Obama-era myRA program was designed as a government-sponsored retirement savings program available to individuals without access to employer-sponsored retirement plans. Although the program was determined to have very little demand to warrant its high operating costs, Democrats attributed the low sign-up to the program still being in its infancy. However, Republicans criticized the program as an "executive overreach" that could not become successful based on its investments in little interest yielding Treasury bonds and posed certain risks to taxpayers and employees.

House

House Ways and Means Committee ranking member Richard Neal, D-Mass., along with Wyden, sent a letter last year to Treasury Secretary Steven Mnuchin urging Treasury to continue the myRA program. Neal is expected to become chairman of the House’s tax writing committee this coming January in the 116th Congress.

However, considering the Trump administration ended the program, it is seen as unlikely on Capitol Hill that Trump would support legislation to restore it. Moreover, Republicans will retain their majority-hold of the Senate in the next Congress, thus further limiting its chances of success.

A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November.

A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November.

Middle-Income Tax Cut

President Donald Trump announced on October 22 that a new 10 percent tax cut would soon be unveiled that will focus specifically on middle-income taxpayers. "President Trump is determined to provide further tax relief for middle-class families," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an October 23 statement. "We will continue to work with the White House and Treasury over the coming weeks to develop an additional 10 percent tax cut focused specifically on middle-class families and workers, to be advanced as Republicans retain the House and Senate," Brady added.

Comment. Notably, Brady is essentially highlighting in his statement that any such additional tax cut measure would require a Republican majority for congressional approval. As November midterm elections near, there is "talk" on Capitol Hill that Republicans may lose control of the House.

The additional 10 percent tax cut for middle-income taxpayers would aim to build upon the individual tax cuts enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). To that end, the House passed a "Tax Reform 2.0"package last month, which would make permanent the TCJA’s individual and small business tax credits. The TCJA’s individual tax cut provisions were enacted temporarily through 2025 in accordance with certain Senate budget rules. Although the TCJA did not receive one Democratic vote, the Tax Reform 2.0 package did clear the House with some bipartisan support.

New Congress, New Tax Cut

"We expect to advance this in the new session of Congress if Republicans maintain control of the House and Senate," Brady, said of the tax cut in an October 26 televised interview. However, President Trump said a couple of days before that a " resolution" would be introduced for the tax cut by the week of October 29.

Democratic lawmakers have been criticizing Trump’s announcement as nothing more than politically-driven rhetoric ahead of the November 6 midterm elections. Several top congressional Democrats have voiced intent to repeal, at least in part, the TCJA enacted last December. While Republicans, on the other hand, want to continue building upon the TCJA’s tax cuts.

"What President Trump is looking at is a 10 percent cut focused on middle-class workers and families…he still believes middle-class families are the ones always in the squeeze," Brady said on October 26. "We’ve been working with the White House and the Treasury on some ideas about how best to do it," he added.

Net Neutral

Trump has predicted that the tax cut will be net neutral. A chief complaint of last year’s tax reform among Democrats is the TCJA estimated $1.4 trillion price tag over a 10-year budget window.

"If you speak to Brady and a group of people, we're putting in a tax reduction of 10 percent, which I think will be a net neutral because we're doing other things, which I don't have to explain now," Trump said. A spokesperson for Brady has reportedly said that cost measures for the tax cut will be addressed once the proposal has been scored.

Looking Ahead

At this time, it is considered likely on Capitol Hill that Republicans will retain control of the Senate, but several predictions continue to float that the GOP will lose its House majority. Republicans would likely need to retain control of both chambers for any chance of approving further individual tax cuts or making permanent those enacted under the TCJA.

Although, the House approved its "Tax Reform 2.0" package last month, which includes measures to make permanent the TCJA’s individual tax cuts and enhance various savings accounts and business innovation, the Senate has showed little interest in taking up the package as a whole before the end of the year. However, consideration of the retirement and savings measure in the lame-duck session remains a possibility.

IRS Commissioner Charles Rettig gave his first speech since being confirmed as the 49th chief of the Service at the American Institute of CPAs (AICPA) November 13 National Tax Conference in Washington, D.C. "You’re going to see things [I do] and go, ‘I can’t believe he did that,’" Rettig said.

IRS Commissioner Charles Rettig gave his first speech since being confirmed as the 49th chief of the Service at the American Institute of CPAs (AICPA) November 13 National Tax Conference in Washington, D.C. "You’re going to see things [I do] and go, ‘I can’t believe he did that,’" Rettig said.

Rettig, nominated by President Donald Trump last February and sworn in as IRS Commissioner on October 1, was a practicing tax attorney for over 30 years. "I’m not going to lose my tax edge," he told CPAs and other tax professionals.

Modernizing the IRS

Rettig, since being confirmed, has maintained that a top priority of the IRS is updating the Service’s technology. "We must work on our IT modernization efforts," Rettig said in a previous statement.

Additionally, Rettig discussed the IRS’s antiquated information technology (IT) systems and software at the AICPA event. "I can call Google…or All State and a recording…says, 'you are 14th in line, we can call you back, you won't lose your place in line," Rettig said. "We don't have those tools, we need those tools."

However, Rettig emphasized that the IRS’s employees should have pride in their roles, and that many IRS challenges are a result of constrained financial resources. IRS employees are "people who care,"Rettig said. Further, Rettig said he wants the IRS to gain taxpayers’ respect.

Additionally, in line with the IRS’s increased efforts toward transparency, Rettig said that employee training materials for last year’s tax reform will soon be posted to the IRS’s website. The Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) was enacted last December. Rettig is tasked with overseeing the new tax law’s implementation.

Tax Reform

A copy of Rettig’s prepared remarks for the AICPA event was provided to Wolters Kluwer by the IRS on November 14. Notably, an IRS spokesperson told Wolters Kluwer that Rettig "did not stick to the script." In an informal outline of areas on which Rettig intends to focus, "the top of the list is continuing to implement the Tax Cuts and Jobs Act, which contains the most sweeping tax changes in 30 years,"Rettig stated in the prepared remarks. "The IRS has already made great progress in this area, but more remains to be done."

IRS Guidance

The IRS is committed to helping taxpayers and tax professionals understand the new tax law changes, as well as file returns next year timely and accurately, Rettig noted. To that end, the IRS will continue to issue guidance this year related to tax reform, according to Rettig. "You can expect additional guidance in the next several weeks in a number of areas," he added, which include TCJA provisions related to the following:

• Opportunity Zones;
• the limitation on the business interest expense deduction; and
• the Base Erosion and Anti-Abuse Tax (BEAT).

Additionally, the IRS will continue to update taxpayer forms and instructions related to new tax law provisions, Rettig noted. "We’re well on our way to having those completed in time for [the 2019] filing season."

The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules.

The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules.

Transition Tax

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, revived and amended Code Sec. 965. The new Code Sec. 965 generally requires U.S. shareholders pay a mandatory one-time repatriation "transition" tax on untaxed foreign earnings of certain foreign corporations.

"The Tax Cuts and Jobs Act treats these foreign earnings as repatriated and places a 15.5 percent tax on cash or cash equivalents, and an 8 percent tax on the remaining earnings. Generally, the transition tax can be paid in installments over an eight-year period when a taxpayer files a timely election under section 965(h),"Treasury Secretary Steven Mnuchin said in a statement.

The IRS held an October 22 public hearing on NPRM REG-104226-18, which provides rules for implementing the transition tax created under last year’s tax reform. IRS officials did not provide any feedback at the hearing.

AICPA Recommendations

In an October 31 comment letter to the IRS, the AICPA offered 15 recommendations to provide taxpayers further clarity and guidance on tax reform’s transition tax requirements. The AICPA’s recommendations include the following:

• Clarify that previously taxed earnings (PTI) under Code Sec. 965(b)(4)(A) are deemed included in Code Sec. 951 for purposes of applying Code Sec. 1248(d).
• Clarify that the portion of a Code Sec. 965 inclusion liability attributable to Code Sec. 956 is eligible for the appropriate reduced rate of tax as a consequence of the deduction provided for in Code Sec. 965(c).
• Provide taxpayers with additional flexibility when making the basis adjustment election under Proposed Reg. §1.965-2(f) by including the ability to make partial basis adjustments, elect adjustments on an entity-by-entity basis, and modify the proposed consistency provision on related persons.
• Provide guidance as to the ordering of distributions of PTI between Code Sec. 965(a) PTI and Code Sec. 965(b) PTI for purposes of applying Code Sec. 959(c) and Code Sec. 986(c).
• Provide relief to taxpayers that make or have made late elections under the proposed regulations and clarify the procedure for obtaining such relief.
• Provide that U.S. shareholders that are members of the same consolidated group are treated as a single U.S. shareholder for all purposes with respect to Code Sec. 965.
• Clarify that the PTI amount created under Code Sec. 965(b)(4)(A) is not taken into account under Code Sec. 864(e)(4)(D) for purposes of allocating and apportioning interest expense.
• Exercise the authority under Code Sec. 965(o) to provide relief from the income inclusion to certain affected taxpayers. Specifically, provide guidance excluding a foreign corporation that is considered a controlled foreign corporation (CFC) solely as a result of the "downward attribution" rules of Code Sec. 318(a)(3) from the definition of an specified foreign corporation (SFC) for any U.S. shareholder not considered a related party (within the meaning of Code Sec. 954(d)(3)) with respect to the domestic corporation to which ownership was attributed.
• Provide a carve-out for certain "triggering events" of an S corporation Code Sec. 965(i), such as where the S corporation and relevant shareholders maintain direct or indirect ownership of the transferred assets (e.g., tax-free transfers).
• Provide guidance on the interaction between a Code Sec. 962 election and a Code Sec. 965(i) election, including clarifying that an eligible taxpayer may make a Code Sec. 962 election for a Code Sec. 965 tax liability for which they intend to defer inclusion under Code Sec. 965(i).

ABA Recommendations

Likewise, the ABA made similar recommendations on the proposed regulations and related guidance in an October 29 letter sent to IRS Commissioner Charles Rettig. The ABA’s 80-page letter grouped its principal recommendations into the three categories:

• the application of Code Sec. 965 to passthrough entities (other than S corporations) and individuals;
• the application of the netting of accumulated post-1986 deferred foreign income with deficits in other related entities; and
• issues in applying the foreign tax credit.

Last year’s tax reform created a new Opportunity Zone program, which offers qualifying investors certain tax incentives aimed to spur investment in economically distressed areas. Treasury Secretary Steven Mnuchin has predicted that the Opportunity Zone program will create $100 billion in private capital that will be invested in designated opportunity zones.

Last year’s tax reform created a new Opportunity Zone program, which offers qualifying investors certain tax incentives aimed to spur investment in economically distressed areas. Treasury Secretary Steven Mnuchin has predicted that the Opportunity Zone program will create $100 billion in private capital that will be invested in designated opportunity zones.

The IRS released the much anticipated proposed regulations for the Opportunity Zone program in October ( REG-115420-18). The proposed rules provide "clarity and some good news for taxpayers," Micheal Bernier, partner at Ernst & Young’s National Tax practice, told Wolters Kluwer in an emailed statement.

Opportunity Zones

The Opportunity Zone program was created under the Tax Cuts and Jobs Act ( P.L. 115-97) enacted in December 2017. The TCJA added Code Secs. 1400Z-1 and 1400Z-2, which include procedural rules for designating opportunity zones and provisions allowing qualifying taxpayers to elect certain income tax benefits. Although not a single Democrat voted for the TCJA, the Opportunity Zone program was based on a bipartisan bill sponsored by Sens. Tim Scott, R-S.C., and Cory Booker, D-N.J. The program "creates tax incentives to help stimulate the flow of capital into communities that need opportunity the most," Cory Booker said in an October 29 tweet.

Generally, the proposed rules have been considered on Capitol Hill as leaning favorably toward taxpayers. However, stakeholders and practitioners are reporting that many questions remain. To that end, the Office of Information and Regulatory Affairs (OIRA), housed under the Office of Management and Budget (OMB), has announced that a second package of regulations is expected to be completed by the end of this year.

Qualified Opportunity Funds

The TCJA’s Opportunity Zone program generally established the following investor tax benefits:

• a temporary tax deferral for capital gains realized on the sale of appreciated assets and reinvested within 180 days in a qualified opportunity fund (QOF);
• the elimination of up to 10 or 15 percent of the tax on the capital gain that is invested in the QOF and held between five and seven years; and
• the permanent exclusion of tax when exiting a qualified opportunity fund investment held for at least 10 years.

"Most importantly, taxpayers can use the fund as collateral. This was a surprise and is important," Bernier told Wolters Kluwer. "The type of investments made by Opportunity Funds do have some strings attached, which are designed to make sure the investments are creating economic activity in the Opportunity Zones, not just buying and holding existing assets," he added. "Under an Opportunity Zone structure, if you refinance the property and take cash out of the Opportunity Zone fund, that would be a disposition and would trigger the gain, thus reducing the amount of investment that is eligible for the 10-year deferral."

Real Estate Investors

Additionally, real estate investors stand to receive significant tax advantages through the Opportunity Zone program, according to Bernier. "As collateral, it is possible to borrow against the Opportunity Zone fund, a very important option for real estate investors," he said. "There are a few extra hurdles to using that strategy, but it’s valuable in the real estate world and would be the rough equivalent of a cash-out refinancing."

Additionally, Bernier noted the generous latitude that Treasury and the IRS used in defining certain statutory terms. For example, "‘substantially all’ of owned or leased assets was defined as 70 percent [in the proposed regulations]; this could have been as high as 90 percent or more," Bernier said. Further, "the time allowance for working capital is set at 30 months to deal with cash. This helps in getting the development done," he added.

Too Flexible?

The proposed regulations for the Opportunity Zone program may be too flexible, according to an October article released by the liberal-leaning Urban-Brookings Tax Policy Center (TPC). "Neither the statute nor the guidance ensure that the investments will benefit low- and moderate-income residents of these communities,"the TPC article noted. "The investment flexibility makes it very difficult to evaluate the success of Opportunity Zones."

Additionally, TPC researchers noted the need for proper reporting under the Opportunity Zone program. "The next round of IRS regulations and tax forms is expected to detail those reporting requirements,"the TPC article said. "It will be vital that this disclosure provide the public with the answers to a series of basic questions: Who is investing in Opportunity Zones? How much is being invested? How is the money being used?"

Likewise, the conservative-leaning Tax Foundation noted in an October 23 article that the proposed regulations do nothing to ensure the program’s success. "The benefits given to investors through opportunity funds are remarkably generous, and many of these regulations only increase and widen those benefits without regard to the results," the article said.

Further, stakeholders testifying before the Senate Small Business Committee in early October also emphasized the importance of establishing proper reporting metrics for the program.

Questions Remain

Although stakeholder feedback has been largely positive, stakeholders and practitioners have noted several areas where additional IRS guidance is needed. Particularly, uncertainties surrounding the application of the QOF penalty, tax treatment of the sale of a QOF asset, and clarity on the definition of qualified opportunity zone business property are reportedly among items circulating the tax community as needing further guidance.

After the IRS released the proposed regulations, Sen. Scott praised the guidance while also noting that it is incomplete. "The first set of rules released by the Treasury Department today reinforce that this will not be another bureaucratic process burdened by red tape, but rather a streamlined, efficient process that allows for investments to truly help communities in need," Scott said.

Additionally, Bernier told Wolters Kluwer that future regulations are needed to "fill in gaps." The next package of proposed regulations are "anticipated in November and December, "he added.

To that end, the House’s top tax writer has urged stakeholders in a recent statement to provide feedback on the proposed regulations. Moreover, those comments should include "identifying any areas where additional technical guidance would be valuable in providing certainty to potential investors and project managers," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said.

The IRS is expected to soon release proposed regulations for tax reform’s new business interest limitation. "They are so broad that nearly every domestic taxpayer will be impacted," Daniel G. Strickland, an associate at Eversheds Sutherland, told Wolters Kluwer.

The IRS is expected to soon release proposed regulations for tax reform’s new business interest limitation. "They are so broad that nearly every domestic taxpayer will be impacted," Daniel G. Strickland, an associate at Eversheds Sutherland, told Wolters Kluwer.

The first set of proposed regulations for the Code Sec. 163(j) business interest limitation is expected to focus primarily on corporations. A second package of proposed regulations, expected sometime in December, will reportedly address the business interest limitation’s treatment of partnerships and S corporations.

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, amended Code Sec. 163(j) to include a broader limitation on the business interest expense deduction. Before last year’s tax reform, the former Code Sec. 163(j) "earnings stripping" rules were applied much more narrowly to a specific type of debt-to-equity ratio held by corporations. Now, the amended Code Sec. 163(j)limitation encompasses all debt, regardless of entity or individual. The new business interest limitation was intended by Republicans, at least in part, to serve as a revenue raiser to help offset tax reform’s significant corporate tax rate reduction from 35 to 21 percent.

OMB Review

Currently, the proposed regulations for the Code Sec. 163(j) business interest limitation are under review at the Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA). OIRA received the proposed regulations from Treasury and the IRS on October 25, according to OIRA’s website.

It is expected on Capitol Hill that a 10-day expedited review process that is available for tax reform-related regulations was requested.

Business Interest Limitation

Under the amended Code Sec. 163(j), a taxpayer’s annual business interest expense for the tax year, effective for tax years after December 31, 2017, is limited to the following three factors:

• business interest income;
• 30 percent of adjustable taxable income (ATI); and
• floor plan financing interest.

Under the TCJA, business interest excludes "investment interest" as defined in Code Sec. 163(d). Additionally, the calculation requirements for "adjusted taxable income" are set to change in 2022.

Practitioner Insight

"In terms of statutory language, phrases like ‘properly allocable’ jump off the page,"Strickland told Wolters Kluwer. Under the TCJA, "business interest" is defined as any interest paid or accrued on indebtedness that is properly allocable to a trade or business. It remains to be seen how the IRS will identify what is "properly allocable,"according to Strickland.

"Since propriety differs between taxpayers and the government, it will be interesting to see how the regulations handle it," Strickland said. "Will we get a two-pronged objective and subjective test or will there be a bright line rule?" he posited.

Additionally, Strickland said that tax practitioners expect allocation rules will be included, but noted that it remains unclear what form the rules will take. Whether there will be separate rules for different types of entities and how the IRS will treat allocation between exempt and non-exempt entities and within consolidated groups are all interesting yet unsettled components, according to Strickland.

Further, Strickland predicted that the forthcoming regulations will clarify how Code Sec. 951A’s global intangible low-taxed income (GILTI) provision will interact with Code Sec. 163(j). "In the same vein, I expect that we will see how 163(j) plays with 168(k) and 267A, among other sections," he added. "As we get each new piece of the puzzle, the whole picture comes into focus."

The House has approved two tax bills that are part of Republicans’ three-pronged "Tax Reform 2.0" package. The two measures, approved by the House on September 27, focus on retirement savings and business innovation.

The House has approved two tax bills that are part of Republicans’ three-pronged "Tax Reform 2.0" package. The two measures, approved by the House on September 27, focus on retirement savings and business innovation.

The most controversial bill of the package, which would make permanent tax reform’s individual and small business tax cuts enacted last December, was approved by the House on September 28 (see the following story in this Issue). At this time, the Senate is neither expected to vote on the Tax Reform package before midterm elections in November nor approve the Tax Reform 2.0 package in its entirety.

Tax Reform 2.0
The Tax Reform 2.0 package was approved by the House Way and Means Committee on September 13. The following three bills are included in the package:

• Protecting Family and Small Business Tax Cuts Act of 2018 (HR 6760);
• Family Savings Act of 2018 (HR 6757); and
• American Innovation Act of 2018 (HR 6756).

The House approved HR 6757 on September 27 by a 240-to-177 vote. HR 6756 was approved minutes later by a 260-to-156 vote.

Savings Accounts
HR 6757 proposes an expansion of certain savings incentives. Among other things, the bill would eliminate the age limit on individual retirement account (IRA) contributions. Additionally, it would create a Universal Savings Account (USA) to which individuals could contribute up to $2,500 annually. Withdrawals from USA accounts would be tax free. Tax-advantaged funds in USA accounts could be used for purposes other than retirement. Also, the bill would expand Code Sec. 529 plans to permit use for expenses related to trade schools, home schooling, and up to $10,000 in total distributions for student loan repayment.

Business Innovation
HR 6756 would improve the tax treatment of certain start-up business expenses. The bill would allow new businesses to write off up to $20,000 of start-up and organization expenditures. Additionally, HR 6756 would allow for a change in start-up ownership without triggering limits on certain tax benefits.

Democratic Criticism
Democrats remain united in their opposition of Republicans’ Tax Reform 2.0 efforts. The lack of Democratic support makes the package’s success in the Senate, at least in current form, highly unlikely.

At least 60 Democratic votes would be needed for approval. Senate Majority Leader Mitch McConnell, R-Ky., has said that the Senate will not take up any bills in the package until the requisite votes are accounted for.

Specifically, Democrats criticize HR 6760 for extending TCJA provisions, a law that Democrats claim primarily benefits wealthy individuals and corporations. However, some Democratic support is expected in the Senate on the business innovation bill, HR 6756. There is talk on Capitol Hill that the bill could be approved by Congress in the lame duck session toward the end of the year.

White House
The Trump administration announced its support of the Tax Reform 2.0 package in a September 26 Statement of Administration Policy. The White House praised HR 6760 for "preventing a tax increase on millions of middle-income families and small businesses after 2025." Additionally, the Trump administration praised HR 6757, saying it would "assist start-up companies and entrepreneurs by allowing them to write off more costs associated with starting their new business and by allowing them to raise capital and expand without losing their previously accrued tax benefits."

The House has approved a tax bill that would make permanent tax reform’s individual and small business tax cuts enacted last December. The controversial bill is part of Republican’s three-bill "Tax Reform 2.0" package, two of which cleared the House on September 27 (see the previous story in this Issue).

The House has approved a tax bill that would make permanent tax reform’s individual and small business tax cuts enacted last December. The controversial bill is part of Republican’s three-bill "Tax Reform 2.0" package, two of which cleared the House on September 27 (see the previous story in this Issue).

Individual, Small Business Tax Cuts
The House approved the Protecting Family and Small Business Tax Cuts Act of 2018 (HR 6760) on September 28 by a 220-to-191 vote. The bill would make permanent certain individual and small business tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

HR 6760 would make permanent certain TCJA individual tax cuts that are set to expire after 2025. These TCJA provisions were made temporary to comply with certain Senate budget rules applicable to the reconciliation process requiring only a simply GOP majority. Notably, these provisions include, among others:

• lower individual tax rates;
• a larger standard deduction;
• a $10,000 annual cap on the state and local tax (SALT) deduction; and
• a 20 percent deduction of business income for certain passthrough entities.

HR 6760 would reduce federal revenue by $631 billion over the next decade, according to a cost estimate by the nonpartisan Joint Committee on Taxation (JCT), (JCX-79-18). However, House Ways and Means Chairman Kevin Brady, R-Tex., highlighted the JCT’s findings particular to the bill’s macroeconomic effects. "Tax Reform 2.0 will permanently provide over $140 billion in annual tax relief for middle-class families, boost American GDP and investment, and create 1.1 million new jobs," Brady said in a statement, citing to the JCT report.

Democratic Support
Although the TCJA did not receive one Democratic vote, HR 6760, which extends many of the TCJA’s individual provisions, received three Democratic votes. Ten Republicans voted against the bill, all of whom hail from high-tax states and oppose the $10,000 annual cap on the SALT deduction.

Over 40 Democrats voted for the Family Savings Act of 2018 (HR 6757) and the American Innovation Act of 2018 (HR 6756), which focus on enhancing savings accounts and start-up business tax breaks. All three bills are now headed to the Senate, where the package is not expected to be considered before midterm elections in November. Additionally, the entire package is not expected to be approved by the Senate. However, it is considered likely on Capitol Hill that HR 6757, which promotes retirement and family savings, could be approved by the Senate in the lame-duck session.

"It’s encouraging to receive 44 Democratic votes in support of elements of Tax Reform 2.0," Brady said in a September 28 statement. "I’m confident that working with the Senate we can advance bipartisan bills to the President’s desk," he added.

Democratic Criticism
Although the Tax Reform 2.0 package did receive some Democratic support in the House, Democrats in both the House and Senate remain largely opposed to Republican efforts to extend the TCJA’s individual and small business tax cuts. Many Democrats have criticized the TCJA for primarily benefiting wealthy individuals and corporations.

"The Republicans’ tax 2.0 legislation is another reckless tax cut for the wealthy that leaves behind average, hardworking families," Ways and Means Committee ranking member, Richard Neal, D-Mass., said on the House floor just prior to the HR 6760 vote. "In less than a year, House Republicans have handed out trillions of tax cuts for the wealthy and big corporations," Neal added in a September 28 statement released after the 2.0 package cleared the chamber.

Meanwhile, House Speaker Paul Ryan, R-Wis., praised the Tax Reform 2.0 package for propelling economic growth and helping middle income taxpayers. "On top of making lower rates for individuals and small businesses permanent, these bills create new savings options for families to plan for education and retirement,"Ryan said in a September 28 statement.

Looking Ahead
House lawmakers left Washington, D.C. on September 28 to begin campaigning ahead of midterm elections in November. The Senate is not expected to take up the Tax Reform 2.0 package, if at all, until later this fall.

As for whether any of the three bills will become law this year, Brady remains optimistic. "We had 41 Democratic votes in support of retirement savings and that innovation for start-ups. I think that has a very good chance, with bipartisan support of getting to the President’s desk this year," Brady said in a September 28 televised interview. "The [individual tax cuts] permanency bill, that’s separate, will go to the Senate after today. [Senate Majority] Leader Mitch McConnell, has made it clear – when he sees a path for 60 votes, he’ll bring it forward."

Stakeholders are urging the IRS to clarify its guidance on tax reform’s new passthrough deduction. The IRS held an October 16 public hearing on proposed rules for the new Code Sec. 199Apassthrough deduction at its headquarters in Washington D.C. The IRS released the proposed regulations, REG-107892-18, on August 8.

Stakeholders are urging the IRS to clarify its guidance on tax reform’s new passthrough deduction. The IRS held an October 16 public hearing on proposed rules for the new Code Sec. 199Apassthrough deduction at its headquarters in Washington D.C. The IRS released the proposed regulations, REG-107892-18, on August 8.

Over 20 stakeholders and practitioners spoke at the hearing. Additionally, over 300 comments on the proposed rules have been submitted to Treasury and the IRS.

Passthrough Deduction
The new 20-percent deduction of qualified business income for passthrough entities, subject to certain limitations, was enacted as part of tax reform legislation last December. The Tax Cuts and Jobs Act ( P.L. 115-97) created the new Code Sec. 199A passthrough deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. The deduction is scheduled to sunset in 2026.

Rental Real Estate
Several speakers at the hearing asked the IRS for guidance clarifying whether rental real estate activities are eligible for the deduction. Additionally, Troy Lewis, testifying on behalf of the American Institute of Certified Professional Accountants (AICPA), asked the IRS for guidance on specific circumstances in which rental real estate activities would not produce qualified trade or business income pursuant to the adopted Code Sec. 162 standard.

"Without further guidance clarifying when the rental of real estate would fail to rise to the level of a section 162 trade or business, unnecessary ambiguity exists that will likely create a divergence in practice," the AICPA said in its written comments. "Taxpayers are thus left to pursue their own interpretation of the rules under section 199A and the IRS will likely face greater complexity of administration."

Likewise, the Council for Electronic Revenue Communication Advancement (CERCA) submitted comments highlighting the uncertainty as to whether and when a rental property is generally considered a qualifying trade or business for purposes of the Code Sec. 199A deduction. Notably, CERCA referenced the preamble to the regulations that indicates taxpayers should look to existing case law to determine whether rental activities meet the Code Sec. 162 standard. However, existing case law does not consistently apply a set of factors that taxpayers could reliably apply as rules, according to CERCA.

Determining that all rental real estate is a trade or business for purposes of the deduction would significantly simplify the deduction, Iona Harrison said, testifying on behalf of the National Association of Realtors. Making such a determination would also simplify IRS administration, she added.

SSTB
Several speakers and a number of comment letters requested that the IRS clarify its definition of a specified service trade or business (SSTB). The SSTB limitation is one of the most controversial provisions of the deduction. SSTBs are considered a "trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees," according to the IRS.

To that end, Major League Baseball (MLB) has pitched its assertion to the IRS that professional sports clubs are neither "personal services corporations" nor provide "services," as defined in Code Sec. 1202(e)(3)(A). The Office of the Commissioner of Baseball, which governs the 30 MLB clubs, has asserted in written comments that the business of a professional sports club is not an SSTB under Code Sec. 199A. Thus, "its owners should be allowed the full 199A deduction," Commissioner Robert D. Manfred, Jr. wrote in submitted comments.

Questions Remain
The October 16 public hearing served more as an opportunity for stakeholders to highlight issues rather than a forum for the IRS to provide answers. Treasury and the IRS are expected to consider hearing testimony and written comments when finalizing the rules. The regulations are expected to be finalized before the 2019 tax filing season.

Top Senate tax writers have introduced a bipartisan bill to prevent duplicative taxation on digital goods and services. The bill aims to establish a framework across multiple jurisdictions for taxation of digital goods and services, including electronic music, literature, and mobile apps, among other things.

Top Senate tax writers have introduced a bipartisan bill to prevent duplicative taxation on digital goods and services. The bill aims to establish a framework across multiple jurisdictions for taxation of digital goods and services, including electronic music, literature, and mobile apps, among other things.

The Digital Goods and Services Tax Fairness Act (Sen. 3581) was reintroduced on October 11 by Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., and SFC member John Thune, R-S.D. A similar measure was previously introduced in 2015 by Thune and Wyden in the 114th Congress. A companion bill is expected to be reintroduced in the House.

Digital Marketplace
While the digital marketplace continues to evolve, federal law addressing taxation of digital goods and services "lags" behind, according to a joint press release issued by Thune and Wyden. "As a result, some consumers can be taxed multiple times on a single digitally delivered product or service by different tax jurisdictions," Thune said. "Our bipartisan legislation simply prevents this duplicative and discriminatory taxation, which will help ensure today’s digital economy isn’t held back unnecessarily and can continue to offer opportunities to entrepreneurs and consumers alike," Thune added.

"Preventing unfair taxes on music, books and other important goods and services benefits consumers and innovators alike," Wyden said. "This bipartisan legislation solves a 21st century tax riddle by establishing a comprehensive set of rules for states to follow."

The IRS has released Draft Instructions for the 2018 Form 1040. Additionally, the IRS has cautioned taxpayers that the draft instructions are subject to change. The IRS released a draft of the 2018 Form 1040 and six accompanying schedules last June.

The IRS has released Draft Instructions for the 2018 Form 1040. Additionally, the IRS has cautioned taxpayers that the draft instructions are subject to change. The IRS released a draft of the 2018 Form 1040 and six accompanying schedules last June.

Generally, the IRS does not release draft forms but has done so in this case as a "courtesy," the instructions state. "Do not rely on draft forms, instructions, and publications for filing,"the IRS wrote. Further, drafts of instructions and publications generally undergo some changes before being finalized, the IRS noted.

2018 Form 1040
Starting with the 2019 tax filing season, many taxpayers will be able to file federal income taxes on a new postcard-sized Form 1040. The IRS planned to finalize the new base 2018 Form 1040 this summer, an IRS spokesperson previously told Wolters Kluwer. "This early release is part of our standard process to invite stakeholder input into draft forms before finalizing them," the IRS spokesperson told Wolters Kluwer after the official release of the draft 2018 Form 1040.

Shorter Form, Six Schedules
The new, two-sided Form 1040 is intended to replace and consolidate current Forms 1040, 1040A and 1040EZ. "This new approach will simplify the 1040 so that all 150 million taxpayers can use the same form," the IRS said.

The shortened form reflects many of the changes to the tax code enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Some of these changes include the higher standard deduction and the elimination of certain deductions and personal exemptions. The new form now has 23 lines, decreased from 79. However, there are now six separate schedules that some taxpayers who continue to itemize will need to include with their return.

Last year’s Tax Reform created a new 20-percent deduction of qualified business income for passthrough entities, subject to certain limitations. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) created the new Code Sec. 199A passthrough deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, the provision was enacted only temporarily through 2025. The controversial deduction has remained a buzzing topic of debate among lawmakers, tax policy experts, and stakeholders. In addition to its impermanence, the new passthrough deduction’s ambiguous statutory language has created many questions for taxpayers and practitioners.

Last year’s Tax Reform created a new 20-percent deduction of qualified business income for passthrough entities, subject to certain limitations. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) created the new Code Sec. 199A passthrough deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, the provision was enacted only temporarily through 2025. The controversial deduction has remained a buzzing topic of debate among lawmakers, tax policy experts, and stakeholders. In addition to its impermanence, the new passthrough deduction’s ambiguous statutory language has created many questions for taxpayers and practitioners.

The IRS released the much-anticipated proposed regulations on the new passthrough deduction, REG-107892-18, on August 8. The guidance has generated a mixed reaction on Capitol Hill, and while significant questions may have been answered, it appears that many remain. Indeed, an IRS spokesperson told Wolters Kluwer Tax & Accounting before the regulations were released that the IRS’s goal was to issue complete regulations but that the guidance "would not cover every question that taxpayers have."

Wolters Kluwer recently spoke with Joshua Wu, member, Clark Hill PLC, about the tax implications of the new passthrough deduction and proposed regulations. That exchange included a discussion of the impact that the new law and IRS guidance, both present and future, may have on taxpayers and tax practitioners.

I. Qualified Business Income and Activities

Wolters Kluwer: What is the effect of the proposed regulations requiring that qualified business activities meet the Code Sec. 162 trade or business standard? And for what industries might this be problematic?

Joshua Wu: The positive aspect of incorporating the Section 162 trade or business standard is that there is an established body of case law and administrative guidance with respect to what activities qualify as a trade or business. However, the test under Section 162 is factually-specific and requires an analysis of each situation. Sometimes courts reach different results with respect to activities constituting a trade or business. For example, gamblers have been denied trade or business status in numerous cases. In Groetzinger, 87-1 ustc ¶9191, 480 U.S. 23 (1987), the Court held that whether professional gambling is a trade or business depends on whether the taxpayer can show he pursued gambling full-time, in good faith, regularly and continuously, and possessed a sincere profit motive. Some courts have held that the gambling activity must be full-time, from 60 to 80 hours per week, while others have questioned whether the full-time inquiry is a mandatory prerequisite or permissive factor to determine whether the taxpayer’s gambling activity is a trade or business. See e.g., Tschetschot , 93 TCM 914, Dec. 56,840(M)(2007). Although Section 162 provides a built-in body of law, plenty of questions remain.

Aside from the gambling industry, the real estate industry will continue to face some uncertainty over what constitutes a trade or business under Code Secs. 162 and 199A. The proposed regulations provide a helpful rule, where the rental or licensing of tangible or intangible property to a related trade or business is treated as a trade or business if the rental or licensing and the other trade or business are commonly controlled. But, that rule does not help taxpayers in the rental industry with no ties to another trade or business. The question remains whether a taxpayer renting out a single-family home or a small group of apartments is engaged in a trade or business for purposes of Code Secs. 162 and 199A. Some case law indicates that just receiving rent with nothing more may not constitute a trade or business. On the other hand, numerous cases have found that managing property and collecting rent can constitute a trade or business. Given the potential tax savings at issue, I suspect there will be additional cases in the real estate industry regarding the level of activity required for the leasing of property to be considered a trade or business.

Qualified Business Income

Wolters Kluwer: How does the IRS define qualified business income (QBI)?

Joshua Wu: QBI is the net amount of effectively connected qualified items of income, gain, deduction, and loss from any qualified trade or business. Certain items are excluded from QBI, such as capital gains/losses, certain dividends, and interest income. Proposed Reg. §1.199A-3(b) provides further clarity on QBI. Most importantly, they provide that a passthrough with multiple trades or businesses must allocate items of QBI to such trades or businesses based on a reasonable and consistent method that clearly reflects income and expenses. The passthrough may use a different reasonable method for different items of income, gain, deduction, and loss, but the overall combination of methods must also be reasonable based on all facts and circumstances. Further, the books and records must be consistent with allocations under the method chosen. The proposed regulations provide no specific guidance or examples of what a reasonable allocation looks like. Thus, taxpayers are left to determine what constitutes a reasonable allocation.

Unadjusted Basis Immediately after Acquisition

Wolters Kluwer: What effect does the unadjusted basis immediately after acquisition (UBIA) of qualified property attributable to a trade or business have on determining QBI?

Joshua Wu: For taxpayers above the taxable income threshold amounts, $157,500 (single or married filing separate) or $315,000 (married filing jointly), the Code limits the taxpayer’s 199A deduction based on (i) the amount of W-2 wages paid with respect to the trade or business, and/or (ii) the unadjusted basis immediately after acquisition (UBIA) of qualified property held for use in the trade or business.

Where a business pays little or no wages, and the taxpayer is above the income thresholds, the best way to maximize the deduction is to look to the UBIA of qualified property. Rather than the 50 percent of W-2 wages limitation, Section 199A provides an alternative limit based on 25 percent of W-2 wages and 2.5 percent of UBIA qualified property. The Code and proposed regulations define UBIA qualified property as tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year. The proposed regulations helpfully clarify that UBIA is not reduced for taxpayers who take advantage of the expanded bonus depreciation allowance or any Section 179expensing.

De Minimis Exception

Wolters Kluwer: How is the specified service trade or business (SSTB) limitation clarified under the proposed regulations? And how does the de minimis exception apply?

Joshua Wu: The proposed regulations provide helpful guidance on the definition of a SSTB and avoid what some practitioners feared would be an expansive and amorphous area of section 199A. Under the statute, if a trade or business is an SSTB, its items are not taken into account for the 199A computation. Thus, the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial and brokerage services, investment management, trading, dealing in securities, and any trade or business where the principal asset of such is the reputation or skill of one or more of its employees or owners, do not result in a 199A deduction.

There is a de minimis exception to the general rule for taxpayers with taxable income of less than $157,500 (single or married filing separate) or $315,000 (married filing jointly). Once those thresholds are hit, the 199A deduction phases-out until it is fully eliminated at $207,500 (single) or $415,000 (joint).

The proposed regulations provide guidance for each of the SSTB fields. Importantly, they also limit the "reputation or skill" category. The proposed regulations state that the "reputation or skill" clause was intended to describe a "narrow set of trades or businesses, not otherwise covered by the enumerated specified services." Thus, the proposed regulations limit this definition to cases where the business receives income from endorsing products or services, licensing or receiving income for use of an individual’s image, likeness, name, signature, voice, trademark, etc., or receiving appearance fees. This narrow definition is unlikely to impact most taxpayers.

Wolters Kluwer recently spoke with Joshua Wu, member, Clark Hill PLC, about the tax implications of the new Code Sec. 199A passthrough deduction and its recently-released proposed regulations, REG-107892-18. That exchange included a discussion of the impact that the new law and IRS guidance, both present and future, may have on taxpayers and tax practitioners.

Wolters Kluwer recently spoke with Joshua Wu, member, Clark Hill PLC, about the tax implications of the new Code Sec. 199A passthrough deduction and its recently-released proposed regulations, REG-107892-18. That exchange included a discussion of the impact that the new law and IRS guidance, both present and future, may have on taxpayers and tax practitioners.

II. Aggregation, Winners & Losers

Wolters Kluwer: How do the proposed regulations provide both limitations and flexibility regarding the available election to aggregate trades or businesses?

Joshua Wu: Treasury agreed with various comments that some level of aggregation should be permitted to account for the legal, economic and other non-tax reasons that taxpayers operate a single business across multiple entities. Permissive aggregation allows taxpayers the benefit of combining trades or businesses for applying the W-2 wage limitation, potentially resulting in a higher limit. Under Proposed Reg. §1.199A-4, aggregation is allowed but not required. To use this method, the business must (1) qualify as a trade or business, (2) have common ownership, (3) not be a SSTB, and (4) demonstrate that the businesses are part of a larger, integrated trade or business (for individuals and trusts). The proposed regulations give businesses the benefits of electing aggregation without having to restructure the businesses from a legal standpoint. Businesses failing to qualify under the above test will have to consider whether a legal restructuring would be possible.

Wolters Kluwer: How does Notice 2018-64 Methods for Calculating W-2 Wages for Purposes of Section 199A, which accompanied the release of the proposed regulations, coordinate with aggregation?

Joshua Wu: Notice 2018-64 contains a proposed revenue procedure with guidance on three methods for calculating W-2 wages for purposes of section 199A. The Unmodified Box method uses the lesser of totals in Box 1 of Forms W-2 or Box 5 (Medicare wages). The Modified Box 1 method takes the total amounts in Box 1 of Forms W-2 minus amounts not wages for income withholding purposes, and adding total amounts in Box 12 (deferrals). The Tracking wages method is the most complex and tracks total wages subject to income tax withholding. The calculation method is dependent on the group of Forms W-2 included in the computation and, thus, will vary depending upon whether businesses are aggregated under §1.199A-4 or not. Taxpayers with businesses generating little or no Medicare wages may consider aggregating with businesses that report significant wages in Box 1 that are still subject to income tax withholding. Under the Modified Box 1 method, that may result in a higher wage limitation.

Crack & Pack

Wolters Kluwer: What noteworthy anti-abuse safeguards did the proposed regulations seek to establish? How do the rules address "cracking" or "crack and pack" strategies?

Joshua Wu: Treasury included some anti-abuse provisions in the proposed regulations. One area that Treasury noted was the use of multiple non-grantor trusts to avoid the income threshold limitations on the 199A deduction. Taxpayers could theoretically use multiple non-grantor trusts to increase the 199A deduction by taking advantage of each trust’s separate threshold amount. The proposed regulations, under the authority of 643(f), provide that two or more trusts will be aggregated and treated as a single trust if such trusts have substantially the same grantor(s) and substantially the same primary beneficiary or beneficiaries, and if a principal purpose is to avoid tax. The proposed regulations have a presumption of a principal purpose of avoiding tax if the structure results in a significant tax benefit, unless there is a significant non-tax purpose that could not have been achieved without the creation of the trusts.

Another anti-abuse issue relates to the "crack and pack" strategies. These strategies involve a business that is limited in its 199A deduction because it is an SSTB spinning off some of its business or assets to an entity that is not an SSTB and could claim the 199A deduction. For example, a law firm that owns its building could transfer the building to a separate entity and lease it back. The law firm is an SSTB and, thus, is subject to the 199A limitations. However, the real estate entity is not an SSTB and can generate a 199A deduction (based on the rental income) for the law partners. The proposed regulations provide that a SSTB includes any business with 50 percent common ownership (direct or indirect) that provides 80 percent or more of its property or services to an excluded trade or business. Also, if a trade or business shares 50 percent or more common ownership with an SSTB, to the extent that trade or business provides property or services to the commonly-owned SSTB, the portion of the property or services provided to the SSTB will be treated as an SSTB. The proposed regulations provide an example of a dentist who owns a dental practice and also owns an office building. The dentist rents half the building to the dental practice and half to unrelated persons. Under [Proposed Reg.] §1.199A-5(c)(2), the renting of half of the building to the dental practice will be treated as an SSTB.

Winners & Losers

Wolters Kluwer: Generally, what industries can be seen as "winners" and "losers" in light of the proposed regulations?

Joshua Wu: The most obvious "losers" in the proposed regulations are the specified services businesses (e.g., lawyers, accountants, doctors, etc.) who are further limited by the anti-abuse provisions in arranging their affairs to try and benefit from 199A. On the other hand, certain specific service providers benefit from the proposed regulations. For example, health clubs or spas are exempt from the SSTB limitation. Additionally, broadcasters of performing arts, real estate agents, real estate brokers, loan officers, ticket brokers, and art brokers are all exempt from the SSTB limitation.

Wolters Kluwer: What areas of the Code Sec. 199A provision stand out as most complex when calculating the deduction, and how does this complexity vary among taxpayers?

Joshua Wu: With respect to calculating the deduction, one complex area is planning to maximize the W-2 wages limitation. Because compensation as W-2 wages can reduce QBI, and potentially the 199A deduction, determining the efficient equilibrium point between having enough W-2 wages to limit the impact of the wage limitation, while preserving QBI, will be a fact-driven complex planning issue that must be determined by each taxpayer. Another area of complexity will be how taxpayers track losses which may reduce future QBI and, thus, the 199A deduction. The proposed regulations provide that losses disallowed for taxable years beginning before January 1, 2018, are not taken into account for purposes of computing QBI in a later taxable year. Taxpayers will be left to track pre-2018 and post-2018 losses and determine if a loss in a particular tax year reduces QBI or not.

III. Looking Ahead

Questions Remain

Wolters Kluwer: An IRS spokesperson told Wolters Kluwer that the IRS did not expect the proposed regulations to answer all questions surrounding the deduction. Indeed, Acting IRS Commissioner David Kautter has said that stakeholder feedback would help finalize the regulations. What significant questions remain unanswered for taxpayers and tax practitioners, and has additional uncertainty been created with the release of the IRS guidance?

Joshua Wu: On the whole, the proposed regulations did a good job addressing the most important areas of Section 199A. However, there are many areas where additional guidance would be helpful. Such guidance may be in the form of additional regulations or other administrative pathways. For example, the proposed regulations did not address the differing treatment between a taxpayer operating as a sole proprietor versus an S corporation. Wages paid to an S corporation shareholder boosts the W-2 limitation but are not considered QBI. Thus, with the same underlying facts, the 199Adeduction may vary between taxpayers operating as a sole proprietor versus those operating as an S corporation.

Possible Changes to Proposed Regulations

Wolters Kluwer: In what ways do you see the passthrough deduction rules changing when the final regulations are released?

Joshua Wu: I suspect that the core components of the proposed regulations will not change significantly. However, I would not be surprised if Treasury were to include more specific examples with respect to real estate and whether certain types of activity constitute a trade or business. Additionally, the proposed regulations will likely generate comments and questions from various industry groups related to the SSTB definitions and specific types of services (e.g., do trustees and executors fall under the legal services definition). Treasury may change the definitions of SSTBs in response to comments and clarify definitions for industry groups.

Tax Reform 2.0

Wolters Kluwer: The White House and congressional Republicans are currently moving forward on legislative efforts known as "Tax Reform 2.0." The legislative package proposes making permanent the passthrough deduction. How does the impermanence of this deduction currently impact taxpayers? (Note: On September 13, the House Ways and Means Committee marked up a three-bill Tax Reform 2.0 package. The measure is expected to reach the House floor for a full chamber vote by the end of September.)

Joshua Wu: The 199A deduction has a significant impact on the choice of entity question for businesses. With the 21 percent corporate rate, we have seen many taxpayers considering restructuring away from passthrough entities to a C corporation structure. The 199A deduction is a large consideration in whether to restructure or not, but its limited effective time does raise questions about the cost effectiveness of planning to obtain the 199A deduction where the benefit will sunset in eight years.

Key Takeways

Wolters Kluwer: Aside from advice on specific taxpayer situations, what key takeaways should tax practitioners generally alert clients to ahead of the 2019 tax filing season?

Wolters Kluwer: Aside from advice on specific taxpayer situations, what key takeaways should tax practitioners generally alert clients to ahead of the 2019 tax filing season?

Joshua Wu: Practitioners should remind clients who may benefit from the 199A deduction to keep detailed records of any losses for each line of business, as this may impact the calculation of QBI in the future. Practitioners should also help clients examine the whole of their activity to define their "trades or businesses." This will be essential to calculating the 199A deduction and planning to maximize any such deduction. Finally, practitioners should remember that some of the information that may be necessary to determine a 199A deduction may not be in their client’s possession. Practitioners need to plan in advance with their clients regarding how information about each trade or business will be obtained (e.g., how will a limited partner in a partnership obtain information regarding the partnership’s W-2 wages and/or UBIA of qualified property).

Wolters Kluwer: Any closing thoughts or comments?

Joshua Wu: Practitioners and taxpayers should remember that the regulations are only proposed and may change before they become final. Any planning undertaken this year should carefully weigh the economic costs and be rooted in the statutory language of 199A. It will be some time before case law helps clarify the nuances of Section 199A, and claiming the deduction allows the IRS to more easily impose the substantial understatement penalty if a taxpayer gets it wrong.

Wolters Kluwer has projected annual inflation-adjusted amounts for tax year 2019. The projected amounts include 2019 tax brackets, the standard deduction, and alternative minimum tax amounts, among others. The projected amounts are based on Consumer Price Index figures released by the U.S. Department of Labor on September 12, 2018.

Wolters Kluwer has projected annual inflation-adjusted amounts for tax year 2019. The projected amounts include 2019 tax brackets, the standard deduction, and alternative minimum tax amounts, among others. The projected amounts are based on Consumer Price Index figures released by the U.S. Department of Labor on September 12, 2018.

The Tax Cuts and Jobs Act of 2017 (TCJA) ( P.L. 115-97) mandated a change from the Consumer Price Index for All Urban Consumers (CPI-U) to the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). Official amounts for 2019 should be released by the IRS later in 2018.

Individual Tax Brackets

The projected bracket ranges for individuals in 2019 are as follows.

For married taxpayers filing jointly:

The 10 percent bracket applies to taxable incomes up to $19,400
The 12 percent bracket applies to taxable incomes over $19,400 and up to $78,900
The 22 percent bracket applies to taxable incomes over $78,900 and up to $168,400
The 24 percent bracket applies to taxable incomes over $168,400 and up to $321,450
The 32 percent bracket applies to taxable incomes over $321,450 and up to $408,200
The 35 percent bracket applies to taxable incomes over $408,200 and up to $612,350
The 37 percent bracket applies to taxable incomes over $612,350

For heads of households:

The 10 percent bracket applies to taxable incomes up to $13,850
The 12 percent bracket applies to taxable incomes over $13,850 and up to $52,850
The 22 percent bracket applies to taxable incomes over $52,850 and up to $84,200
The 24 percent bracket applies to taxable incomes over $84,200 and up to $160,700
The 32 percent bracket applies to taxable incomes over $160,700 and up to $204,100
The 35 percent bracket applies to taxable incomes over $204,100 and up to $510,300
The 37 percent bracket applies to taxable incomes over $510,300

For unmarried taxpayers:

The 10 percent bracket applies to taxable incomes up to $9,700
The 12 percent bracket applies to taxable incomes over $9,700 and up to $39,450
The 22 percent bracket applies to taxable incomes over $39,450 and up to $84,200
The 24 percent bracket applies to taxable incomes over $84,200 and up to $160,700
The 32 percent bracket applies to taxable incomes over $160,700 and up to $204,100
The 35 percent bracket applies to taxable incomes over $204,100 and up to $510,300
The 37 percent bracket applies to taxable incomes over $510,300

For married taxpayers filing separately:

The 10 percent bracket applies to taxable incomes up to $9,700
The 12 percent bracket applies to taxable incomes over $9,700 and up to $39,450
The 22 percent bracket applies to taxable incomes over $39,450 and up to $84,200
The 24 percent bracket applies to taxable incomes over $84,200 and up to $160,725
The 32 percent bracket applies to taxable incomes over $160,725 and up to $204,100
The 35 percent bracket applies to taxable incomes over $204,100 and up to $306,175
The 37 percent bracket applies to taxable incomes over $306,175

For estates and trusts:

The 10 percent bracket applies to taxable incomes up to $2,600
The 24 percent bracket applies to taxable incomes over $2,600 and up to $9,300
The 35 percent bracket applies to taxable incomes over $9,300 and up to $12,750
The 37 percent bracket applies to taxable incomes over $12,750

Standard Deduction

TCJA also roughly doubled the amount of the standard deduction. For 2019, the following standard deduction amounts are projected:

For married taxpayers filing jointly, $24,400
For heads of households, $18,350
For unmarried taxpayers and well as married taxpayers filing separately, $12,200

AMT Exemptions

TCJA eliminated the AMT for corporations, and increased the exemption amounts, and the exemption phaseouts, for individuals. For 2019, the AMT exemption amounts are projected to be:

For married taxpayers filing jointly, $111,700
For unmarried individuals and heads of households, $71,700
For married taxpayers filing separately, $55,850

Estate and Gift Tax

The following amounts related to transfer taxes (estate, generation-skipping, and gift taxes) are projected for 2019:

The gift tax annual exemption is projected to be $15,000 in 2019

The estate and gift tax applicable exclusion (increased under TCJA) is projected to be $11,400,000 for decedents dying in 2019

The exclusion for gifts made in 2019 to a spouse who is not a U.S. citizen is projected to be $155,000 for 2019

Other Amounts

The following other amounts are also projected for 2019:

The adoption credit for 2019 is projected to be $14,080 for 2019.

For 2019, the allowed Roth IRA contribution amount is projected to phase out for married taxpayers filing jointly with income between $193,000 and $203,000 For heads of household and unmarried filers, the projected phaseout range is between $122,000 to $137,000.

The maximum amount of deductible contributions that can be made to an IRA is projected to be $6,000 for 2019. The increased contribution amount for taxpayers age 50 and over will, therefore, be $7,000.

The deduction for traditional IRA contributions is projected to begin to phase out for married joint filers whose income is greater than $103,000 if both spouses are covered by a retirement plan at work. If only one spouse is covered by a retirement plan at work, the phaseout is projected to begin when modified adjusted gross income reaches $193,000. For heads of household and unmarried filers who are covered by a retirement plan at work, the 2019 income phaseout range for deductible IRA contributions is projected to begin at $64,000.

For 2019, the $2,500 student loan interest deduction is projected to begin to phase out for married joint filers with modified adjusted gross income (MAGI) above $140,000. For single taxpayers, the 2019 deduction is projected to begin to phase out at a MAGI level of over $70,000.

The amount of the 2019 foreign earned income exclusion under Code Sec. 911 is projected to be $105,900.

The IRS has released long-awaited guidance on new Code Sec. 199A, commonly known as the "pass-through deduction" or the "qualified business income deduction." Taxpayers can rely on the proposed regulations and a proposed revenue procedure until they are issued as final.

The IRS has released long-awaited guidance on new Code Sec. 199A, commonly known as the "pass-through deduction" or the "qualified business income deduction." Taxpayers can rely on the proposed regulations and a proposed revenue procedure until they are issued as final.

Code Sec. 199A allows business owners to deduct up to 20 percent of their qualified business income (QBI) from sole proprietorships, partnerships, trusts, and S corporations. The deduction is one of the most high-profile pieces of the Tax Cuts and Jobs Act ( P.L. 115-97).

In addition to providing general definitions and computational rules, the new guidance helps clarify several concepts that were of special interest to many taxpayers.

Trade or Business

The proposed regulations incorporate the Code Sec. 162 rules for determining what constitutes a trade or business. A taxpayer may have more than one trade or business, but a single trade or business generally cannot be conducted through more than one entity.

Taxpayers cannot use the grouping rules of the passive activity provisions of Code Sec. 469 to group multiple activities into a single business. However, a taxpayer may aggregate trades or businesses if:

• each trade or business is itself a trade or business;
• the same person or group owns a majority interest in each business to be aggregated;
• none of the aggregated trades or businesses can be a specified service trade or business; and
• the trades or businesses meet at least two of three factors which demonstrate that they are in fact part of a larger, integrated trade or business.

Specified Service Business

Income from a specified service business generally cannot be qualified business income, although this exclusion is phased in for lower-income taxpayers.

A new de minimis exception allows some business to escape being designated as a specified service trade or business (SSTB). A business qualifies for this de minimis exception if:

• gross receipts do not exceed $25 million, and less than 10 percent is attributable to services; or
• gross receipts exceed $25 million, and less than five percent is attributable to services.

The regulations largely adopt existing rules for what activities constitute a service. However, a business receives income because of an employee/owner’s reputation or skill only when the business is engaged in:

• endorsing products or services;
• licensing the use of an individual’s image, name, trademark, etc.; or
• receiving appearance fees.

In addition, the regulations try to limit attempts to spin-off parts of a service business into independent qualified businesses. Thus, a business that provides 80 percent or more of its property or services to a related service business is part of that service business. Similarly, the portion of property or services that a business provides to a related service business is treated as a service business. Businesses are related if they have at least 50-percent common ownership.

Wages/Capital Limit

A higher-income taxpayer’s qualified business income may be reduced by the wages/capital limit. This limit is based on the taxpayer’s share of the business’s:

• W-2 wages that are allocable to QBI; and
• unadjusted basis in qualified property immediately after acquisition.

The proposed regulations and Notice 2018-64, I.R.B. 2018-34, provide detailed rules for determining the business’s W-2 wages. These rules generally follow the rules that applied to the Code Sec. 199 domestic production activities deduction.

The proposed regulations also address unadjusted basis immediately after acquisition (UBIA). The regulations largely adopt the existing capitalization rules for determining unadjusted basis. However, "immediately after acquisition" is the date the business places the property in service. Thus, UBIA is generally the cost of the property as of the date the business places it in service.

Other Rules

The proposed regulations also address several other issues, including:

• definitions;
• basic computations;
• loss carryovers;
• Puerto Rico businesses;
• coordination with other Code Sections;
• penalties;
• special basis rules;
• previously suspended losses and net operating losses;
• other exclusions from qualified business income;
• allocations of items that are not attributable to a single trade or business;
• anti-abuse rules;
• application to trusts and estates; and
• special rules for the related deduction for agricultural cooperatives.

Effective Dates

Taxpayers may generally rely on the proposed regulations and Notice 2018-64 until they are issued as final. The regulations and proposed revenue procedure will be effective for tax years ending after they are published as final. However:

• several proposed anti-abuse rules are proposed to apply to tax years ending after December 22, 2017;
• anti-abuse rules that apply specifically to the use of trusts are proposed to apply to tax years ending after August 9, 2018; and
• if a qualified business’s tax year begins before January 1, 2018, and ends after December 31, 2017, the taxpayer’s items are treated as having been incurred in the taxpayer’s tax year during which business’s tax year ends.

Comments Requested

The IRS requests comments on all aspects of the proposed regulations. Comments may be mailed or hand-delivered to the IRS, or submitted electronically at www.regulations.gov (indicate IRS and REG-107892-18). Comments and requests for a public hearing must be received by September 24, 2018.

The IRS also requests comments on the proposed revenue procedure for calculating W-2 wages, especially with respect to amounts paid for services in Puerto Rico. Comments may be mailed or hand-delivered to the IRS, or submitted electronically to Notice.comments@irscounsel.treas.gov, with “ Notice 2018-64” in the subject line. These comments must also be received by September 24, 2018.

The IRS’s proposed pass-through deduction regulations are generating mixed reactions on Capitol Hill. The 184-page proposed regulations, REG-107892-18, aim to clarify certain complexities of the new, yet temporary, Code Sec. 199A deduction of up to 20 percent of income for pass-through entities. The new deduction was enacted through 2025 under the Tax Cuts and Jobs Act (TCJA), ( P.L. 115-97). The pass-through deduction has remained one of the most controversial provisions of last year’s tax reform.

The IRS’s proposed pass-through deduction regulations are generating mixed reactions on Capitol Hill. The 184-page proposed regulations, REG-107892-18, aim to clarify certain complexities of the new, yet temporary, Code Sec. 199A deduction of up to 20 percent of income for pass-through entities. The new deduction was enacted through 2025 under the Tax Cuts and Jobs Act (TCJA), ( P.L. 115-97). The pass-through deduction has remained one of the most controversial provisions of last year’s tax reform.

A legislative package that would make permanent the pass-through deduction, as well as other individual tax cuts, is expected to move though the House this fall. However, the House’s legislative efforts are not expected, at this time, to pass muster in the more narrowly GOP-controlled Senate.

Criticism

Several Democratic lawmakers and tax policy experts have already started to weigh in on the proposed regulations, which were released on August 8 while Congress remained in its annual August recess. Democrats have criticized the new deduction for primarily benefiting the wealthy. Meanwhile, several tax policy experts have taken to Twitter to note that the deduction is overly complex and administratively burdensome.

Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., has reportedly said that the proposed regulations "confirm that the fortunate few win," under the new tax law. "Tax planners are already scouring through the nearly 200 pages of regulations in search of new ways to keep wealthy clients from paying their fair share."

Compliance Burdens

The pass-through deduction could add 25 million hours to taxpayers’ annual reporting burden, according to the proposed regulations. Additionally, the IRS has estimated that gross reporting annualized costs to taxpayers will total approximately $1.3 billion over 10 years.

Furthermore, the IRS has estimated that the compliance burden will vary between taxpayers, averaging between 30 minutes and 20 hours. The administrative burden on smaller pass-through entities is anticipated to be on the lower end of the estimate, according to the IRS.

Comment. Ryan Kelly, partner at Alston & Bird LLP, told Wolters Kluwer on August 13 that the IRS’s 25 million-hour estimate, whether accurate or not, suggests that there will be a significant increase in administrative compliance costs. "There is a real cost to tax compliance in lost time and productivity for taxpayers," Kelly said. However, Kelly predicted that taxpayers’ Code Sec. 199A compliance burden will eventually decrease. "Time will reveal the extent of taxpayers’ administrative burden to comply; however, it is likely that as time goes on the taxpayers’ compliance burden will fall as taxpayers, tax practitioners, and the Service all become more familiar with section 199A and how it is intended to operate."
Meanwhile, the chairs of the House and Senate tax writing committees have both praised Treasury and the IRS for quickly releasing the much anticipated regulations. Additionally, several tax policy experts have also praised the proposed regulations for alleviating confusion, as well as taxpayer anxiety, about ambiguous provisions of the law.

"This first-ever 20 percent deduction for small businesses allows our local job creators to keep more of their money so they can hire, invest, and grow in their communities," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in a statement. "These proposed regulations are intended to provide certainty and flexibility for Main Street businesses in this historic new small business deduction."

Improvements to the proposed regulations are expected in the coming months as stakeholders submit comments. A public hearing at IRS headquarters in Washington, D.C., has been scheduled for October 16. "Evolution of tax regulations is generally never a pretty process, but it is a necessary process that in this case will hopefully happen sooner rather than later," Kelly told Wolters Kluwer.

You may have done some spring cleaning and found that you have a lot of clothes that you no longer wear or want, and would like to donate to charity. Used clothing that you want to donate to charity and take a charitable deduction for, however, is subject to a few rules and requirements.

Under IRS guidelines, clothing, furniture, and other household items must be in good used condition or better, to be deductible. Shirts with stains or pants with frayed hems just won't cut it. Furthermore, if the item(s) of used clothing are not in good used condition or better, and you wish to deduct more than $500 for a single piece of clothing, the IRS requires a professional appraisal.

For donations of less than $250, you must obtain a receipt from the charity, reflecting the donor's name, date and location of the contribution, and a reasonably detailed description of the donation. It is your responsibility to obtain this written acknowledgement of your donation.

Used clothing contributions worth more than $500

If you are deducting more than $500 with respect to one piece of used clothing you donate, you must file Form 8283, Noncash Charitable Contributions, with the IRS. For donated items of used clothing worth more than $500 each, you must attach a qualified appraisal report is to your tax return. The Form 8283 asks you to include information such as the date you acquired the item(s) and how you acquired the item(s) (for example, were the clothes a holiday gift or did you buy the items at the store).

Determining the fair market value of used clothing

You may also need to include the method you used to determine the value of the used clothing. According to the IRS, the valuation of used clothing does not necessarily lend itself to the use of fixed formulas or methods. Typically, the value of used clothing that you donate, is going to be much less than you when first paid for the item. A rule of thumb, is that for items such as used clothing, fair market value is generally the price at which buyers of used items pay for used clothing in consignment or thrift stores, such as the Salvation Army.

To substantiate your deduction, ask for a receipt from the donor that attests to the fact that the clothing you donated with in good, used condition, or better. Moreover, you may want to take pictures of the clothing.

If you need have questions about valuing and substantiating your charitable donations, please contact our office.