The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.
The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.
PPP Loans
The CARES Act expanded the Small Business Administration’s (SBA’s) existing Section 7(a) loan program to include certain PPP loans. The PPP is made available from the SBA to provide small businesses with loans to help pay payroll costs, mortgages, rent, and utilities during the COVID-19 (coronavirus) crisis. All payments of principal, interest, and fees under the loans are deferred for at least 6 months. The loans are also forgiven for amounts payroll costs, mortgage or rent obligations, and certain utility payments incurred between February 15 and June 30. The loans are 100 percent guaranteed by the SBA.
Deductions Prohibited
If the SBA forgives a taxpayer’s PPP loan pursuant to Act. Sec. 1106(b) of the CARES Act, the amount of the loan is excluded from gross income. Under Reg. §1.265-1 taxpayers cannot deduct expenses that are allocable to income that is either wholly excluded from gross income or wholly exempt from the taxes. This rule exists in order to prevent double tax benefits. Thus, the IRS has determined that taxpayers who have their PPP loans forgiven may not deduct any business or interest expenses related to the income associated with the loan.
Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.
Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.
Additionally, SBA is expected to issue regulations and guidance to assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities, according to Treasury.
Measures included in the application and instructions intended to reduce compliance burdens and simplify the process for borrowers include:
Eligible individuals who are not otherwise required to file federal income tax returns for 2019 may use a new simplified return filing procedure to make sure they receive the Economic Impact Payments (EIPs) provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136).
Eligible individuals who are not otherwise required to file federal income tax returns for 2019 may use a new simplified return filing procedure to make sure they receive the Economic Impact Payments (EIPs) provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136).
Alternatively, these eligible individuals may use the "Non-Filers: Enter Payment Info Here" tool, available at www.irs.gov/coronavirus to submit the information the IRS needs to issue their payments.
EIPs and Recovery Rebate Credit
The CARES Act provides a fully refundable Recovery Rebate Credit for the 2020 tax year. However, the IRS is making EIPs during 2020 to refund the credit in advance, based on 2019 or 2018 information. Most individuals are eligible for the credit, except for nonresident aliens and individuals who qualify as another taxpayer’s dependent.
The maximum credit is $1,200 for each eligible individual, plus $500 for each qualifying child. There is no minimum income requirement, but the credit is phased out for higher-income individuals. Eligible individuals and qualifying children generally must have valid Social Security numbers.
Taxpayers who filed 2019 or 2018 returns automatically receive their Economic Payments. If the taxpayer identified an account for direct deposit of a refund, the Economic Impact Payment is direct deposited into the same account. Otherwise, the IRS mails a paper check to the taxpayer’s last known address.
Nonfilers who received Social Security and railroad retirement, survivor or disability benefits before 2020 also receive EIPs based on their Forms SSA-1099 or Form RRB-1099 via direct deposit or paper checks, in the same way they receive their benefits. Recipients of supplemental security income (SSI) or Veterans Administration Compensation and Pension (C&P) benefits also automatically receive EIPs in the same way they receive their benefits. These nonfilers may use the "Non-Filers: Enter Payment Info Here" tool to provide information about their qualifying children so that they also receive the $500 additional credit.
Other nonfilers who are not required to file returns, such as people with income below the filing threshold, may use the "Non-Filers: Enter Payment Info Here" tool to provide basic information that allows the IRS to calculate and issue their EIPs.
Simplified Filing Procedures
Rather than using the "Non-Filers: Enter Payment Info Here" tool, a simplified return filer may use a simplified procedure to file a paper or electronic return for 2019 on Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors. A simplified return filer is an eligible individual who:
Simplified returns are due by October 15, 2020. The IRS urges these individuals to file electronically to speed receipt of their payments.
Simplified Return Information
The simplified return should include only the following information:
Generally lines 1 through 24 of the return are left blank, even if the values for these lines are in fact not zero, except as values are required for electronic returns.
The IRS will compute the Economic Impact Payment based on this information. The IRS will not challenge the accuracy of the items of income that are properly reported under these procedures.
To encourage businesses that have experienced an economic hardship due to COVID-19 to keep employees on their payroll, the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) has provided several new credits for employers, including a new employee retention credit. The IRS has issued a fact sheet summarizing a few key points about the new credit.
To encourage businesses that have experienced an economic hardship due to COVID-19 to keep employees on their payroll, the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) has provided several new credits for employers, including a new employee retention credit. The IRS has issued a fact sheet summarizing a few key points about the new credit.
Certain employers can claim the credit for wages paid after March 12, 2020, and before January 1, 2021. This includes tax-exempt organizations, employers with suspended operations due to a government order related to COVID-19, and those that have experienced a significant decline in gross receipts. The credit amount is 50 percent of up to $10,000 in qualified wages paid to an employee. This means that an employer’s maximum credit for qualified wages paid to any employee is $5,000.
Qualified wages include the cost of employer-provided health care, but not the amount of qualified sick leave wages or family leave wages for which the employer received tax credits under the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127). Qualified wages vary based on the average number of the employer’s full-time employees in 2019:
In each case, the wages that qualify are those paid for a calendar quarter in which the employer experiences an economic hardship.
To claim the credit, employers must report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return, beginning with the second quarter of 2020. If an employer does not have enough federal employment taxes to cover the amount of the credit (after they have deferred deposits of employer Social Security taxes), it may request an advance payment of the credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19, to the IRS.
The IRS has more information on the credit at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act and https://www.irs.gov/coronavirus-tax-relief-and-economic-impact-payments.
The Treasury Department and the IRS have provided tax relief to certain individuals and businesses affected by travel disruptions arising from the coronavirus (COVID-19) emergency.
The Treasury Department and the IRS have provided tax relief to certain individuals and businesses affected by travel disruptions arising from the coronavirus (COVID-19) emergency. Under the guidance:
COVID-19 Medical Condition Travel Exception
Travel and related disruptions resulting from the COVID-19 emergency may cause foreign individuals who did not anticipate meeting the “substantial presence test” under Code Sec. 7701(b)(3) to become U.S. residents for federal tax purposes during 2020, and may impact an individual’s qualifications for certain treaty benefits. To address this, Rev. Proc. 2020-20 allows certain foreign individuals to claim a COVID-19 Medical Condition Travel Exception to becoming U.S. residents, and provides similar relief for determining whether an individual (whether or not an eligible for the medical travel exception) qualifies for U.S. income tax treaty benefits for income from dependent personal services performed in the United States.
An individual can claim a COVID-19 Medical Condition Travel Exception if he or she:
The COVID-19 Emergency Period is a period of up to 60 consecutive calendar days selected by an individual, starting on or after February 1, 2020, and on or before April 1, 2020, during which he or she is physically present in the United States on each day.
An eligible individual who intended to leave the United States during his or her COVID-19 Emergency Period but could not leave due to COVID-19 emergency travel disruptions can exclude up to 60 calendar days of presence in the United States for the substantial presence test. The COVID-19 emergency will be considered a medical condition that kept the individual from leaving the United States on each day during his or her COVID-19 Emergency Period, and will not be treated as a pre-existing medical condition.
Further, any days of presence during an individual’s COVID-19 Emergency Period on which he or she was unable to leave the United States due to COVID-19 emergency travel disruptions will not be counted in determining his or her eligibility for treaty benefits for income from employment or performing other dependent personal services within the United States.
The guidance provides details on claiming a COVID-19 Medical Condition Travel Exception and an exemption from income withholding under a U.S. income tax treaty.
Foreign Earned Income Exclusion Relief
Rev. Proc. 2020-27 provides a waiver for certain individuals who failed to meet the eligibility requirements of Code Sec. 911(d)(1) for the foreign earned income exclusion because adverse conditions in a foreign country kept the individual from meeting the requirements during 2019 and 2020. The COVID-19 emergency is an adverse condition that precluded the normal conduct of business in:
The covered period ends on July 15, 2020, unless the Treasury Department and IRS announce an extension.
Under this relief, an individual who left the particular foreign country on or after the dates stated above, but on or before July 15, 2020, will be treated as a qualified individual under the foreign earned income exclusion rules for the period when he or she was present in, or was a bona fide resident of, that foreign country if the individual establishes a reasonable expectation that he or she would have met the requirements of Code Sec. 911(d)(1) but for the COVID-19 Emergency. An individual who was first physically present or established residency in China after December 1, 2020, or another foreign country after February 1, 2020, is not eligible.
Individuals seeking to qualify for the foreign earned income exclusion because they could reasonably have been expected to have been present in a foreign country for 330 days but for the COVID-19 Emergency, and have met the other requirements to qualify, may use any 12-month period to meet the qualified individual requirement.
Previously issued revenue procedures under Code Sec. 911(d)(4) remain in full force and effect. Rev. Proc. 2020-14, 2020-16 I.R.B. 661, is supplemented.
U.S. Business Activities
Nonresident aliens who perform services or other activities in the United States, and foreign corporations that employ individuals to perform services or other activities in the United States, and are engaged in a U.S. trade or business are subject to federal tax on their business income from that trade or business. If the individuals performing those services or activities are temporarily in the United States solely due to COVID-19 emergency travel disruptions, the nonresident alien or foreign corporation might be treated as engaged in a U.S. trade or business even though it would not be if the individuals performing the services were not present in the United States.
IRS frequently asked questions (FAQs)—at https://www.irs.gov/newsroom/information-for-nonresident-aliens-and-foreign-businesses-impacted-by-covid-19-travel-disruptions—provide that certain U.S. business activities conducted by a nonresident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether the individual or entity is engaged in a U.S. trade or business or has a U.S. permanent establishment, if those activities would not have been conducted in the United States but for the COVID-19 travel disruptions.
The IRS and the Employee Benefits Security Administration are extending certain timeframes during the Outbreak Period for group health plans, disability and other welfare plans, pension plans, and participants and beneficiaries of these plans during the COVID-19 National Emergency. The beginning of the Outbreak Period is March 1, 2020. The end date is yet to be determined.
The IRS and the Employee Benefits Security Administration are extending certain timeframes during the Outbreak Period for group health plans, disability and other welfare plans, pension plans, and participants and beneficiaries of these plans during the COVID-19 National Emergency. The beginning of the Outbreak Period is March 1, 2020. The end date is yet to be determined.
Outbreak Period
Under the relief, all group health plans, disability and other employee welfare benefit plans, and employee pension benefit plans subject to ERISA or the IRC must disregard the period from March 1, 2020, until sixty days after the announced end of the National Emergency.
Affected Deadlines for Plan Participants
The following periods and dates for all plan participants, beneficiaries, qualified beneficiaries, or claimants:
Affected Dates for Group Health Plans
With respect to group health plans, and their sponsors and administrators, the Outbreak Period shall be disregarded when determining the date for providing a COBRA election notice under Code Sec. 4980B(f)(6)(D) and ERISA section 606(c).
Due to the 2019 Novel Coronavirus outbreak (COVID-19), the IRS has provided increased flexibility with respect to:
Due to the 2019 Novel Coronavirus outbreak (COVID-19), the IRS has provided increased flexibility with respect to:
This relief is retroactive to January 1, 2020.
An employer that decides to amend one or more of its Code Sec. 125 cafeteria plans to provide for mid-year election changes for employer-sponsored health coverage, health FSAs, or dependent care assistance programs, or to provide for an extended period to apply unused amounts remaining in a health FSA or a dependent care assistance program to pay or reimburse medical care expenses or dependent care expenses in a manner consistent with this relief, must adopt a plan amendment on or before December 31, 2021, which may be effective retroactively to January 1, 2020.
Cafeteria Plan Elections
Qualified benefits provided under a cafeteria plan include employer-provided accident and health plans excludable under Code Secs. 105(b) and 106, health FSAs excludable under Code Secs. 105(b) and 106, and dependent care assistance programs excludable under Code Sec. 129. Elections regarding these benefits are generally irrevocable, and must be made prior to the first day of the plan year. However, a cafeteria plan may permit an employee to revoke an election during a period of coverage and make a new election under certain circumstances, such as if the employee experiences a change in status or there are significant changes in the cost of coverage.
During 2020, a cafeteria plan may also permit eligible employees to:
To accept an employee’s revocation of an existing election for employer-sponsored health coverage, the employer must receive from the employee an attestation in writing that the employee is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer. The employer may rely on the written attestation provided by the employee, unless the employer has actual knowledge that the employee is not, or will not be, enrolled in other comprehensive health coverage not sponsored by the employer.
This relief may be applied retroactively to periods on or after January 1, 2020.
Health FSAs, Dependent Care Assistance
A cafeteria plan may permit the carryover of unused amounts remaining in a health FSA at the end of a plan year, subject to the carryover limit (currently $550). Additionally, cafeteria plan may permit a grace period to apply unused amounts (including amounts remaining in a health FSA or dependent care assistance program) at the end of a plan year to pay expenses incurred for those same qualified benefits during the period of up to two months and 15 days immediately following the end of the plan year. For a health FSA, a cafeteria plan may adopt a carryover or a grace period (or neither), but may not adopt both.
For unused amounts remaining in a health FSA or a dependent care assistance program at the end of a grace period or plan year ending in 2020, a cafeteria plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses incurred through December 31, 2020. For example, if an employer sponsors cafeteria plan with a health FSA that has a calendar year plan year and provides for a grace period ending on March 15 immediately following the end of each plan year, the employer may amend the plan to permit employees to apply unused amounts remaining in an employee’s health FSA as of March 15, 2020, to reimburse the employee for medical care expenses incurred through December 31, 2020.
This relief may be applied on or after January 1, 2020 and on or before December 31, 2020.
Impact of Health FSA Reimbursements
Code Sec. 223 permits eligible individuals to establish and contribute to health savings accounts (HSAs). With respect to any month, an eligible individual is any individual who:
An HDHP is a health plan that satisfies the minimum annual deductible requirement and maximum out-of-pocket expenses requirement under Code Sec. 223(c)(2)(A).
Coverage by a general purpose health FSA is coverage by a health plan that disqualifies an otherwise eligible individual from contributing to an HSA. Similarly, a telemedicine arrangement would generally disqualify an otherwise eligible individual from contributing to an HSA.
The government has previously provided relief for these issues. Notice 2020-15, I.R.B. 2020-14, 559, provides that a health plan that otherwise satisfies the requirements to be an HDHP will not fail to be an HDHP merely because the health plan provides medical care services and items purchased related to testing for and treatment of COVID-19. Likewise, Section 3701 of the CARES Act amends Code Sec. 223(c) to provide a temporary safe harbor for providing coverage for telehealth and other remote care services.
The new relief clarifies that Notice 2020-15 may be applied retroactively to January 1, 2020. For example, an otherwise eligible individual with coverage under an HDHP who also received coverage beginning February 15, 2020, for telehealth and other remote care services under an arrangement that is not an HDHP will not be disqualified from contributing to an HSA during 2020.
The IRS has released proposed regulations that address changes made to Code Sec. 162(f) by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). The proposed regulations provide operational and definitional guidance on the deductibility of fines and penalties paid to governmental entities.
The IRS has released proposed regulations that address changes made to Code Sec. 162(f) by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). The proposed regulations provide operational and definitional guidance on the deductibility of fines and penalties paid to governmental entities.
TCJA Changes
Under amended Code Sec. 162(f), businesses may not deduct fines and penalties that are paid or incurred after December 21, 2017, due to the violation of a law or the investigation of a violation of law, if a government or similar entity is a complainant or investigator. Exceptions are available in certain cases where the payment was made for restitution, remediation, taxes due, or to come into compliance with a law.
In order for the exceptions to apply, the taxpayer must identify the payment as restitution or compliance in a court order or settlement agreement. In addition, Code Sec. 6050X requires that the officer or employee that has control over the suit or agreement, or the individual designated by the government or entity, must file a return with the IRS.
Establishing Restitution or Remediation
Under the proposed regulations, a taxpayer can establish that a payment was made for restitution or remediation by providing documentary evidence showing:
The proposed regulations provide a list of documents that taxpayers can use to satisfy the establishment requirement. The regulations also clarify that reporting of the amount by a government or governmental entity under Code Sec. 6050X alone does not satisfy the establishment requirement.
Identification Requirement
According to Code Sec. 162(f)(2)(A), an order or agreement must identify the amount paid or incurred as restitution, remediation, or to come into compliance with a law. The proposed regulations state that an order or agreement should identify a payment by stating both (1) the nature of, or purpose for, each payment, and (2) the amount of each payment identified. Reporting of the amount by a government or governmental entity under Code Sec. 6050X does not satisfy the identification requirement.
Taxes and Interest
Under Code Sec. 162(f)(4), taxpayers may still deduct any taxes due, including any related interest on the taxes. However, the proposed regulations clarify that taxpayers may not deduct interest related to penalties.
Reporting Requirements
The proposed regulations provide appropriate officials with operational, administrative, and definitional rules for complying with statutory information reporting requirements with respect to Code Sec. 162(f). If the aggregate amount a payor is required to pay equals or exceeds the threshold amount under Proposed Reg. §1.6050X-1(g)(5), the appropriate official must file an information return with the IRS with respect to the amounts or incurred paid and any additional information required.
According to the proposed regulations, they must provide this information by filing Form 1098-F, Fines, Penalties, and Other Amounts, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns, on or before the annual due date. However, the proposed regulations do not require an appropriate official to file information returns for each tax year in which a payor makes a payment pursuant to a single order or agreement. Instead, the appropriate official must file only one information return for the aggregate amount identified in the order or agreement.
The proposed regulations also require that the appropriate official furnish a written statement to each payor with respect to which it is required to file an information return. The written statement must include the information that was reported on the information return, and a legend that identifies the statement as important tax information that is being furnished to the IRS. They can satisfy this requirement by providing a copy of Form 1098-F to the payor.
Material Change
According to the TCJA, the amendments to Code Sec. 162(f) apply to agreements entered into on or after December 22, 2017. The proposed regulations clarify that if the parties to an agreement that was binding prior to December 22, 2017, make a material change to that agreement on or after the date that the proposed regulations become final, the regulations will apply to the agreement.
If there is a material change to the agreement, the proposed regulations require the appropriate official to update the IRS by filing a corrected Form 1098-F on or before January 31 of the year following the calendar year. The proposed rules also require the appropriate official to furnish an amended written statement to the payor.
Definitions
The proposed regulations also define key terms and phrases for purposes of Code Sec. 162(f) and Code Sec. 6050X. These include "government," "governmental entity," "nongovernmental entity treated as a governmental entity," "restitution," "remediation of property," "amounts paid to come into compliance with a law," "appropriate official," "payor," and "threshold amount."
Effective Date
Proposed Reg. §1.162-21 is proposed to apply to tax years beginning on or after the date the proposed regulations are published as final regulations, but those rules do not apply to amounts paid or incurred under any order or agreement which became binding under applicable law before such date. Prior to the effective date, taxpayers may rely on Proposed Reg. §1.162-21, but only if they apply the rules in their entirety and in a consistent manner.
Proposed Reg. §1.6050X-1 is proposed to apply to orders and agreements that become binding under applicable law on or after January 1, 2022.
Comments
Taxpayers may submit comments via the Federal eRulemaking Portal at www.regulations.gov by following the online instructions for submitting comments and indicating IRS and REG-104591-18. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. Hard copy submissions must be addressed to: CC:PA:LPD:PR (REG-104591-18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Until further notice, any comments submitted on paper will be considered only to the extent practicable.
A partnership was denied a charitable contribution deduction because it had entered in an conservation easement that violated the perpetuity requirement of Code Sec. 170(h)(5) and its regulations. The Tax Court held that if there is a judicial extinguishment of an easement the donee receives a proportionate value of any proceeds.
A partnership was denied a charitable contribution deduction because it had entered in an conservation easement that violated the perpetuity requirement of Code Sec. 170(h)(5) and its regulations. The Tax Court held that if there is a judicial extinguishment of an easement the donee receives a proportionate value of any proceeds.
Easement Deed
The taxpayer had donated a conservation easement to a land trust and claimed a charitable contribution deduction. The easement deed provided that if the conservation restriction were extinguished at some future date, the donee would receive a share of the proceeds equal to the fair market value (FMV) of the easement on the date the contribution was made. The deed further provided that the donee’s share as thus determined would be reduced by the value of any improvements made by the donor after granting the easement.
The taxpayer argued that Reg. §1.170A-14(g)(6) does not say that the donee is entitled to a proportionate "share" of any proceeds upon extinguishment of the easement but proportionate "value." It argued this means fixed value, and because the regulation requires that the value be fixed as of the donation date, the donee was not entitled to any proceeds attributable to the value of post-donation improvements.
Windfall for Donees?
The IRS disallowed the deduction, contending that the extinguishment clause violated the requirements of Reg. §1.170A-14(g)(6). The Tax Court concurred with the IRS’s reasoning and held that the easement deed violated the "protected in perpetuity" requirement of Code Sec. 170(h)(5), as interpreted in Reg. §1.170A-14(g)(6).
The court held that the donee’s share of the "proportionate value" as used in the regulation means a fraction of the proceeds from a judicial extinguishment, and not a fixed value.
The taxpayer argued that it was unfair for a donee to receive extinguishment proceeds attributable to the value of improvements made solely by the donor, because it would amount to an unintended charitable contribution for which it received no deduction. However, the Tax Court found that the purpose of the regulation is to avoid any windfalls to donors, not donees, if an easement was extinguished. The easement deed violated the regulation because the donee must be entitled to any proceeds from extinguishment or condemnation that were at least equal to the total proceeds multiplied by a fraction defined by the ratio of the FMV of the easement to the FMV of the unencumbered property determined as of the date of the easement deed.
The taxpayer was not liable for accuracy-related penalties, because it acted reasonably and in good faith. The partner was unfamiliar with the nuances of setting up a conservation easement and had relied on private letter rulings.
Regulation Valid
The taxpayer challenged the validity of Reg. §1.170A-14(g)(6), which the Tax Court addressed in a concurrent opinion. The taxpayer contended the "proportionate value" approach to division of proceeds from a judicial extinguishment of the easement does not take into account the possibility of donor improvements. The Tax Court held that the regulation was properly promulgated, as it substantially revised the text regarding the proportionate value in response to comments and had only received one comment on the possibility of improvements. The court therefore found that the regulation was valid under the Administrative Procedure Act, 5 U.S.C. Section 553.
The Tax Court further relied on the two-part test given in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), and held that the construction of Code Sec. 170(h)(5) as set forth in Reg. §1.170A-14(g)(6) was valid. The Treasury exercised reasoned judgment by adhering to a simple rule that split sale proceeds in a direct proportional manner on the basis of a fraction determined as of the date the gift was made. Because the regulation as drafted ensures satisfaction of the statutory mandate that the conservation purpose be "protected in perpetuity," the regulation was not arbitrary, capricious, or manifestly contrary to the Code.
The IRS has released proposed regulations clarifying that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions:
The IRS has released proposed regulations clarifying that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions:
These deductions are not affected by the suspension of the deductibility of miscellaneous itemized deductions for tax years beginning after December 31, 2017, and before January 1, 2026. The proposed regulations also provide guidance on determining the character, amount, and allocation of deductions in excess of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust. Specifically, the proposed regulations clarify that the character of the deductions does not change when succeeded to by a beneficiary on termination of the estate or trust, and require the fiduciary to separately identify deductions that may be limited when claimed by the beneficiary. The proposed regulations affect estates, non-grantor trusts (including the S portion of an electing small business trust), and their beneficiaries.
Section 67(g)
Code Sec. 67(g), as added by the Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA), prohibits individual taxpayers from claiming miscellaneous itemized deductions for any tax year beginning after December 31, 2017, and before January 1, 2026. The Treasury Department and the IRS had issued Notice 2018-61, 2018-31 I.R.B. 278, announcing that proposed regulations would address the effect of Code Sec. 67(g) on the deductibility of certain expenses described in Code Sec. 67(b) and (e) incurred by estates and non-grantor trusts. The notice states that regulations would clarify that expenses described in Code Sec. 67(e) remain deductible in determining the adjusted gross income of an estate or non-grantor trust during the tax years in which Code Sec. 67(g) applies.
Notice 2018-61 requested comments regarding the effect of Code Sec. 67(g) on the ability of the beneficiary to deduct amounts comprising the Code Sec. 642(h)(2) excess deduction on the termination of an estate or trust considering Code Sec. 642(h) and Reg. §1.642(h)-2(a), and expressed the intent to address this issue in regulations. The Treasury Department and IRS also requested comments on whether the separate deductions comprising the Code Sec. 642(h)(2) excess deduction (such as Code Sec. 67(e) deductions) should be analyzed separately when applying Code Sec. 67.
Instead of getting a paper check, you may want to have your refund deposited directly into your bank account or other financial account. Forms 1040, 1040A, and 1040EZ have a line for designating direct deposit of your refund, right after the line showing the amount of your refund.
If you choose direct deposit, for the first time starting this year, you can split your refund deposit among two or three accounts. To split the refund, you must submit Form 8888, Direct Deposit of Refund to More Than One Account, with your return. You must identify the amount being deposited into each account, and the total must equal the amount on Form 1040 that is being refunded to you.
An amount may be directly deposited into a checking account, a savings account, or another account such as an individual retirement account. You must establish the account before you request direct deposit. If the account is an IRA, you must make sure that the trustee will accept direct deposit. You must also notify the IRA trustee which year the deposit will be applied to. If the deposit is for the prior year, you must verify that the deposit was made by the due date of the return (which this year is April 17).
The direct deposit accounts are shown on lines 1, 2 and 3 of Form 8888. If you owe past-due federal tax, the IRS can use your refund to offset your liability. The past-due amount will first be deducted from the direct deposit shown on line 3, then the deposit on line 2, and finally from the deposit on line 1. If the amount deducted was going into an IRA, you may need to correct your IRA contribution and change your return.
Only 50 percent of the cost of meals is generally deductible. A meal deduction is customarily allowed when the meal is business related and incurred in one of two instances:
(1) while traveling away from home (a circumstance in which business duties require you to be away from the general area of your tax home for longer than an ordinary day's work); and
(2) while entertaining during which a discussion directly related to business takes place.
Entertainment expenses generally do not meet the "directly related test" when the taxpayer is not present at the activity or event. Both your meal and the meal provided to your business guest(s)' is restricted to 50 percent of the cost.
Related expenses, such as taxes, tips, and parking fees must be included in the total expenses before applying the 50-percent reduction. However, allowable deductions for transportation costs to and from a business meal are not reduced.
The 50-percent deduction limitation also applies to meals and entertainment expenses that are reimbursed under an accountable plan to a taxpayer's employees. It doesn't matter if the taxpayer reimburses the employees for 100 percent of the expenses. "Supper money" paid when an employee works late similarly may be tax free to the employee but only one-half may be deducted by the employer. The same principle applies to meals provided at an employees-only business luncheon, dinner, etc.
A special exception to the 50 percent rule applies to workers who are away from home while working under Department of Transportation regulations. For these workers, meals are 75 percent deductible in 2006 and 2007.
When a per diem allowance is paid for lodging, meal, and incidental expenses, the entire amount of the federal meals and incidental expense (M&IE) rate is treated as an expense for food or beverages subject to the percentage limitation on deducting meal and entertainment expenses. When a per diem allowance for lodging, meal, and incidental expenses for a full day of travel is less than the federal per diem rate for the locality of travel, the payer may treat 40 percent of the per diem allowance as the federal M&IE rate.
"Lavish" meals out of proportion to customary business practice are generally not deductible to the extent they are lavish. Generally, meals taken alone whentraveling generally have a lower threshold for lavishness than meals considered an entertainment expense for which a client or other business contact is "wined and dined."
The standard mileage rate may be taken in lieu of proving actual expenses such as depreciation on your automobile and the cost of gas. You must still prove that you took the trip for business and that you took it in your vehicle, whether owned or leased. The standard mileage rate applies to the actual miles driven and not simply to miles traveled.
Car travel for business is a deductible expense. The standard mileage rate can be used to determine the deductible amount, rather than keeping track of actual expenses for using a car. An individual who owns or leases a car and has other expenses, such as gasoline, can deduct actual expenses or can take the standard mileage rate, even if the standard mileage rate is higher.
Rather than drive to a business destination, an individual can travel by rail, bus, plane or taxi. However, the standard mileage rate is not available if the individual travels by other means, rather than by motor vehicle. In this situation, the deduction is limited to reasonable expenses for the manner of travel used by the individual, which may be the actual expenses incurred. On the latter point, the Tax Court has taken this approach in the case of a businessman who traveled by charter rather than by commercial plane. The court allowed the use of first class plane fare but not the cost of the charter.
For further assistance on how to maximize your travel expense deductions, whether by automobile, jet or otherwise, please feel free to contact this office.
A: If you have the money, contributing to your IRA immediately on January 1st or as soon thereafter as possible is the best strategy. The #1 advantage of an IRA is that interest or other investment income earned on the account accumulates without tax each year. The sooner the money starts working at earning tax-free income, the greater the tax advantage. With a traditional IRA, that tax advantage means no tax until you finally withdraw the money at retirement or for a qualified emergency. In the case of a Roth IRA, the tax advantage comes in the form of the investment income that is never taxed.
While the earliest date to contribute to an IRA for a current year is January 1st of that year, the latest date is 15 1/2 months later, on April 15th of the next year when your tax return is due. (Because of the weekend-next business day rule that's April 16, 2007 for 2006 tax-year contributions.)
Although you may file for an extension to file your tax return, that extension does not extend the time you have to contribute to an IRA; April 15th is the deadline. Another caveat: If you make a contribution after December 31st it will be presumed to be made for the next year unless you designate it as relating back to the year just ended. Finally, until the due date for your return, you are allowed to withdraw any IRA contribution, plus earnings on that contribution.
Soon, the recently-passed Pension Protection Act of 2006 will give you another option: designating all or a portion of your tax refund for the year to be directly deposited into your IRA account. In fact, the IRS has moved quickly to provide several refund options, already announcing that new Form 8888 will be created to give all individual filers the ability to split their refunds in up to three financial accounts, such as checking, savings and retirement accounts.
In addition to knowing when to make IRA contributions, you also need to know how much you are able to contribute and whether a traditional or a Roth IRA makes more sense. For those who are already covered by a retirement plan, restrictions on contributing to deductible IRAs must be heeded. Nondeductible and "spousal" IRAs also are options to be considered. Please call our offices if you need further guidance on any of the IRA rules. They are worth using and can grow into a substantial additional nest egg for you at retirement.
Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. The new Pension Protection Act cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."
Good used or better condition
The new law does not define good or better condition. For guidance, you can look to the standards that many charities already have in place. Many charities will not accept your donations of clothing or household items unless they are in good or better condition.
Clothing cannot be torn, soiled or stained. It must be clean and wearable. Many charities will reject a shirt with a torn collar or a jacket with a large tear in a sleeve. As one charity spokesperson summed it up, "Don't donate anything you wouldn't want to wear yourself."
Household items include furniture, furnishings, electronics, appliances, and linens, and similar items. Food, paintings, antiques, art, jewelry and collectibles are not household items. Household items must be in working condition. For example, a DVD player that does not work is not in good used or better condition. You can still donate it (if the charity will accept it) but you cannot claim a tax deduction. Household items, particularly furnishings and linens, must be clean and useable.
The new law authorizes the IRS to deny a deduction for the contribution of a clothing or household item that has minimal monetary value. At the top of this list you can expect to find socks and undergarments, which have had inflated values for years.
Fair market value
You generally can deduct the fair market value of your donation. Unless your donation is new - for example, a blouse that has never been worn - its fair market value is not what you paid for it. Just like when you drive a new car off the dealer's lot, a new item loses value once you wear or use it. Therefore, its value is less than what you paid for it.
If you're not sure about an item's value, a reputable charity can help you determine its fair market value. Our office can also help you value your donations of used clothing and household items.
Get a receipt
Generally, you must obtain a receipt for your gift. If obtaining a receipt is impracticable, for example, you drop off clothing at a self-service donation center, you must maintain reliable written information about the contribution, such as the type and value of the property.
Charitable contributions of property of $250 or more must be substantiated by obtaining a contemporaneous written acknowledgement from the charity including an estimate of the value of the items. If your deduction for noncash contributions is greater than $500, you must attach Form 8283 to your tax return. Special rules apply if you are claiming a deduction of more than $5,000.
Exception
In some cases, the new rules about good used or better condition do not apply. The restrictions do not apply if a deduction of more than $500 is claimed for the single clothing or household item and the taxpayer includes an appraisal with his or her return.
If you have any questions about the new charitable contribution rules for donations of clothing and household items, give our office a call. The new rules apply to contributions made after August 17, 2006.
Starting in 2010, the $100,000 adjusted gross income cap for converting a traditional IRA into a Roth IRA is eliminated. All other rules continue to apply, which means that the amount converted to a Roth IRA still will be taxed as income at the individual's marginal tax rate. One exception for 2010 only: you will have a choice of recognizing the conversion income in 2010 or averaging it over 2011 and 2012.
The Tax Increase Prevention and Reconciliation Act of 2005 eliminated the $100,000 adjusted gross income (AGI) ceiling for converting a traditional IRA into a Roth IRA. While this provision does not apply until 2010, now may be a good time to make plans to maximize this opportunity.
The Roth IRA has benefits that are especially useful to high-income taxpayers, yet as a group they have been denied those advantages up until now. Currently, you are allowed to convert a traditional IRA to a Roth IRA only if your AGI does not exceed $100,000. A married taxpayer filing a separate return is prohibited from making a conversion. The amount converted is treated as distributed from the traditional IRA and, as a consequence, is included in the taxpayer's income, but the 10-percent additional tax for early withdrawals does not apply.
Significant benefits
While recognizing income sooner rather than later is usually not smart tax planning, in the case of this new opportunity to convert a traditional IRA to a Roth IRA, the math encourages it. The difference is twofold:
These can work out to be huge advantages, especially valuable to individuals with a degree of accumulated wealth who probably won't need the money in the Roth IRA account to live on during retirement.
Example. Mary's AGI in 2010 is $200,000 and she has traditional IRA balances that will have grown to $300,000. Assuming a marginal federal and local income tax of about 40 percent on the $300,000 balance, the $180,000 remaining in the account can grow tax free thereafter, with distributions tax free. Further assume that Mary is 45 years of age with a 90 year life expectancy and money conservatively doubles every 15 years. She will die with an account of $1.44 million, income tax free to her heirs. If the Roth IRA is bequeathed to someone in a younger generation with a long life expectancy, even factoring in eventual required minimum distributions, the amount that can continue to accumulate tax free in the Roth IRA can be staggering, eventually likely to reach over $10 million.
Planning strategies
Now is not too early to start planning to take advantage of the Roth IRA conversion opportunity starting in 2010. While planning to maximize the conversion will become more detailed as 2010 approaches and your assets and income for that year are more measurable, there are certain steps you can start taking now to maximize your savings.
Start a nondeductible IRA
The income limits on both kinds of IRAs have prevented higher income taxpayers from making deductible contributions to traditional IRAs or any contributions to Roth IRAs. They could always make nondeductible contributions to a traditional IRA, but such contributions have a limited pay-off (no current deduction, tax on account income is deferred rather than eliminated, required minimum distributions).
While a taxpayer could avoid these problems by making nondeductible contributions to a traditional IRA and then converting it to a Roth IRA, this option was not available for upper income taxpayers who would have the most to benefit from such a conversion. With the elimination of the income limit for tax years after December 31, 2009, higher income taxpayers can begin now to make nondeductible contributions to a traditional IRA and then convert them to a Roth IRA in 2010. In all likelihood, there will be little to tax on the converted amount.
What's more, taxpayers with $100,000-plus AGIs should consider continue making nondeductible IRA contributions in the future and roll them over into a Roth IRA periodically. As a result, the elimination of the income limit for converting to a Roth IRA also effectively eliminates the income limit for contributing to a Roth IRA.
Example. John and Mary are a married couple with $300,000 in income. They are not eligible to contribute to a Roth IRA because their AGI exceeds the $160,000 Roth IRA eligibility limit. Beginning in 2006, the couple makes the maximum allowed nondeductible IRA contribution ($8,000 in 2006 and 2007, and $10,000 in 2008, 2009, and 2010). In 2010, their account is worth $60,000, with $46,000 of that amount representing nondeductible contributions that are not taxed upon conversion. The couple rolls over the $60,000 in their traditional IRA into a Roth IRA. They must include $14,000 in income (the amount representing their deductible contributions), which they can recognize either in 2010, or ratably in 2011 and 2012.
Assuming they have sufficient earned income each year thereafter (until reaching age 70 1/2), John and Mary can continue to make the maximum nondeductible contributions to a traditional IRA and quickly roll over these funds into their Roth IRA, thereby avoiding significant taxable growth in the assets that would have to be recognized upon distribution from a traditional IRA.
Rollover 401(k) accounts
Contributions to a Section 401(k) plans cannot be rolled over directly into a Roth IRA. The lifting of the $100,000 AGI limit does not change this rule. However, they often can be rolled over into a traditional IRA and then, after 2009, converted into a Roth IRA.
Not everyone can just pull his or her balance out of a 401(k) plan. A plan amendment must permit it or, more likely, those who are changing jobs or are otherwise leaving employment can choose to roll over the balance into an IRA rather than elect to continue to have it managed in the 401(k) plan.
For money now being contributed to 401(k) plans by employees, an even better option would be for those contributions to be made to a Roth 401(k) plan. Starting in 2006, as long as the employer plan allows for it, Roth 401(k) accounts may receive employee contributions.
Gather those old IRA accounts
Many taxpayers opened IRA accounts when they were first starting out in the work world and their incomes were low enough to contribute. Over the years, many have seen those account balances grow. These accounts now may be converted into Roth IRAs starting in 2010, regardless of income.
Paying the tax
In spite of all the advantages of a Roth IRA, a conversion is advisable only if the taxpayer can readily pay the tax generated in the year of the conversion. If the tax is paid out of a distribution from the converted IRA, that amount is also taxed; and if the distribution counts as an early withdrawal, it is also subject to an additional 10-percent penalty. For those planning to convert who may not already have the funds available, saving now in a regular bank or brokerage account to cover the amount of the tax in 2010 can return an unusually high yield if it enables a Roth IRA conversion in 2010 that might not otherwise take place.
Careful planning is key
Transferring funds between retirement accounts can carry a high price tag if it is done incorrectly. For those who plan carefully, however, converting from a traditional IRA to a Roth IRA can yield very substantial after-tax rates of return. Please feel free to call our offices if you have any questions about how the 2010 conversion opportunity should fit into your overall tax and wealth-building strategy.