On July 4, President Donald Trump signed into law a Paycheck Protection Program (PPP) application extension bill that Congress had quickly passed just before the Independence Day holiday. According to several senators, the measure was "surprisingly" introduced and approved by unanimous consent in the Senate late on June 30. It cleared the House the evening of July 1.

On July 4, President Donald Trump signed into law a Paycheck Protection Program (PPP) application extension bill that Congress had quickly passed just before the Independence Day holiday. According to several senators, the measure was "surprisingly" introduced and approved by unanimous consent in the Senate late on June 30. It cleared the House the evening of July 1.

Most notably, the bill pushes out the PPP application window deadline five weeks from June 30 to August 8. "The resources are there. The need is there. We just need to change the date," Sen. Ben Cardin, D-Md., said. Prior to the extension, the small business loan program was set to expire at midnight on July 1 with over $130 billion left in funding.

Mnuchin, Rettig Testify
Treasury Secretary Steven Mnuchin and IRS Commissioner Charles "Chuck" Rettig testified before House and Senate committees on June 30, just hours before the PPP application period was set to close.

"There appears to be bipartisan support to repurpose the [remaining] $134 billion for PPP," Mnuchin told lawmakers during a House Financial Services Committee hearing on June 30. Mnuchin stated that "it should be done," and that the administration is looking toward targeted industry-specific relief.

Additionally, Mnuchin told lawmakers that he has been having discussions about more PPP-related relief with the House and Senate Small Business Committees. Reportedly, lawmakers are currently considering an extension or a second round of the PPP.

As for "phase four" of Congress’s next economic relief package, Mnuchin again alluded to a narrower approach. "We would anticipate that any additional relief would be targeted to certain industries that have been especially hard-hit by the pandemic, with a focus on jobs and putting all American workers who lost their jobs, through no fault of their own, back to work."

Meanwhile, several PPP-related bills have been introduced in the Senate over the last few weeks, and most recently a bipartisan PPP Forgiveness bill introduced on June 30. The Paycheck Protection Small Business Forgiveness Bill, authored by bipartisan members of the Senate Banking Committee, would streamline the forgiveness of certain PPP loans.

Senate Minority Leader Chuck Schumer, D-NY, also called for an extension of the small business loan program. "It is the last day small business can apply for PPP, but the economic crisis is not over. Senators Cardin, Shaheen, Coons and I will take to the Senate floor and demand we pass a bill to extend it," Schumer said in a June 30 tweet.

IRS 2020 Filing Season, Agency Redesign
In other news, Rettig testified on June 30 before the Senate Finance Committee (SFC) on IRS operations during the 2020 tax filing season. Notably, Rettig told senators that the decision not to further extend the 2019 tax year filing and payment deadline beyond July 15 was made in consultation with professional services organizations, adding that too many due dates can be confusing for taxpayers.

To that end, Treasury first signaled in a June 29 press release that it would not further extend the 2020 filing season. "Treasury and IRS encourage taxpayers to file their taxes by July 15, or file for an automatic extension of time to file to October 15," the press release stated.

"The IRS understands that those affected by the coronavirus may not be able to pay their balances in full by July 15, but we have many payment options to help taxpayers," Rettig said in the press release. "These easy-to-use payment options are available on IRS.gov, and most can be done automatically without reaching out to an IRS representative."

Additionally, Rettig told SFC members that the IRS is well underway in its redesign of the agency for the first time in over 20 years. As noted in Rettig’s testimony, the foundational components of a new holistic taxpayer experience will include the following:

• Expanded Digital Services. An improved experience through self-service digital channels by building upon existing online accounts and introducing online accounts for tax professionals and business taxpayers.
• Seamless Experience. Taxpayers should be guided to the resources and communication channels that will resolve their issues most effectively and efficiently.
• Proactive Outreach and Education. Educate the taxpayer community by proactively providing information in the language, timing, and method taxpayers need or prefer.
• Focused Strategies for Reaching Underserved Communities. Establish a consolidated program to engage with historically underserved communities to address issues of communication, education, transparency and trust, as well as access to quality products and services.
• Ecosystem of Partnerships. Establish, shepherd, and facilitate a collaborative and interactive network of partnerships across the entire tax ecosystem and bring together existing efforts.
• Enterprise Data Management and Advanced Analytics. An enterprise data management strategy that includes a cross-enterprise understanding of the customer experience, emerging needs and expectations, and operational data.

"If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me." — William Shakespeare

"If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me." — William Shakespeare

The Paycheck Protection Program (PPP) was enacted under the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) on March 27, 2020. The PPP, a seemingly ever-evolving small business loan program, was derived from an unprecedented partnership between certain private lending institutions and the U.S. Small Business Administration (SBA). After its enactment in late March, the program quickly went from concept to implementation when it launched on April 3, 2020.

Fast forward to a somewhat rocky roll-out with several speed bumps and shake-ups, akin to a Shakespearean plotline, President Donald Trump on June 5, 2020, signed into law the bipartisan Paycheck Protection Program Flexibility Act (PPPFA) of 2020 ( P.L. 116-142). The PPPFA makes several enhancements to the swiftly implemented loan program, including providing for an extension of the expense forgiveness period from 8-to-24 weeks. The legislation also reduces the 75 percent payroll ratio requirement to 60 percent, extends the two-year loan repayment requirement to five years for future borrowers (existing PPP loans can be extended up to five years if lender/borrower agree), allows payroll tax deferment for PPP recipients, and extends the June 30, 2020, rehiring deadline to December 31, 2020.

Accordingly, the SBA, in consultation with Treasury, officially published in the Federal Register updated interim final rules (effective immediately upon publication, as opposed to the "regular order" of first issuing a proposed rule with a preliminary comment period) on June 16 and June 18, and issued new and revised forgiveness applications forms on June 17. Additional guidance is expected. The SBA is accepting comments through the Federal eRulemaking Portal at www.regulations.gov.

Wolters Kluwer recently spoke with Daniel G. Strickland, an associate with Eversheds Sutherland, about some of the underlying tax policy issues and lingering complexities with the PPP, and subsequent legislation and guidance. Strickland, who regularly works with the IRS on behalf of taxpayers to obtain benefits offered by the IRS, and with taxpayers to resolve tax controversy disputes with the IRS, currently serves as co-chair of the Federal Bar Association’s Tax Practice and Procedure Committee, as well as chair of the D.C. Bar Association’s New Tax Practitioner Subcommittee. Prior to tax practice, Strickland clerked for several years at the U.S. Tax Court.

To Double-Dip, or not to Double-Dip: That is the Question…(Well, One of Them)
Wolters Kluwer: Can you expand upon the preventive double-benefit tax policy position behind the IRS’s controversial Notice 2020-32, I.R.B. 2020-21, 837, which states that business expenses paid with tax-exempt income, i.e. a forgivable PPP loan, are not deductible under Code Sec. 265? Treasury Secretary Steven Mnuchin said recently, "if the money that is coming is not taxable, you can't double dip."

Daniel Strickland: Good question. As you correctly state, the IRS published Notice 2020-32 to address the tax treatment of expenses that would otherwise be deductible but that were paid using PPP loan proceeds that are forgiven.

From the IRS’s perspective, Congress only exempted the amount of forgiveness from taxation; it did not allow deductions for the expenses paid with forgiven proceeds. Notice 2020-32 points to section 265 as providing legal support for the proposition that otherwise-deductible expenses are not allowable for deduction to the extent that the income is wholly exempt from taxation.

My take is that the IRS is drawing a line at government-sponsored business expenses. In other words, for the taxpayers to receive forgiveness, the loan proceeds must be spent in a certain way. If they are, then it is as if the government paid those expenses directly in a valiant effort to prop up the COVID-affected small businesses. But there is an issue with the IRS’s position: a borrower cannot know the extent to which it will even be eligible for forgiveness—let alone whether its substantiation will be sufficient. And given the deadline for application for forgiveness, borrowers might not even know in the same tax year.

Wolters Kluwer: Sen. John Cornyn, R-Tex., recently introduced the bipartisan Small Business Expense Protection Act ( S. 3612), which moves to essentially nullify Notice 2020-32, clarifying congressional intent that the receipt and forgiveness of a PPP loan would not affect the deductibility of ordinary business expenses. What is your take on the underlying policy of this bill, and do you see the IRS reversing Notice 2020-32 before the measure moves through Congress?

Daniel Strickland: Senator Cornyn has the right idea. In my mind, a few simple examples show the logic: If I borrowed money from a bank and spent the proceeds on deductible expenses, I could deduct those expenses from my income when I file my taxes. If the bank forgave my debt, I would need to recognize the forgiven amount as income. If, on the other hand, I received a gift, I could also use that gift to pay for deductible expenses and then deduct those expenses from my income. I would not generally include the gift in my income – setting aside the differences between corporate taxes and individual taxes—since many small businesses are sole proprietorships or disregarded entities. When the CARES Act provided that the forgiven PPP loan amounts were not subject to tax, conceptually, the loans are turned into gifts. The deductibility should be no different. And the tax treatment should be the same irrespective of the type of corporate entity involved.

That is where the Senator is coming from. Unfortunately, the existence of a bill in Congress isn’t going to be enough to convince the IRS to about-face. The fact that there are still holds on Senator Cornyn’s bill is concerning to me.

"Know You of This Taxation?"
Wolters Kluwer: Are there other tax-related implications taxpayers and practitioners should keep in mind specific to PPP loan forgiveness?

Daniel Strickland: There are always tax implications. In the absence of congressional action on the deductibility question, another arises regarding timing. As detailed in the SBA’s interim final rule, SBA-2020-0035:

If you do not submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you must begin paying principal and interest after that period. For example, if a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the borrower must begin making payments on or after October 10, 2021.

Taxpayers may not know whether—or to what extent—their PPP loans are forgiven until 2021, and some may not know until after they file their 2020 income tax returns. How should the deductions be reported?

In addition, we don’t know how the state and local taxing authorities will react.

Wolters Kluwer: Although the SBA, in consultation with Treasury, has addressed the PPPFA’s 60 percent "cliff" to allow for partial forgiveness if the 60 percent threshold is not reached, an added variable to the equation now exists. According to a June 8 joint Treasury/SBA statement and now updated guidance, partial forgiveness will be subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs. What is your interpretation of this new variable, and is the solution to the 60 percent "cliff," as termed by Sen. Susan Collins, R-Me., who was recently drafting a bill to address the issue, correctly addressed through regulatory guidance? Do you foresee any pushback?

Daniel Strickland: If I am honest, this one took me a couple times to read to understand that it isn’t internally inconsistent:

If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.

I certainly understand what the SBA is trying to do here, but I think the better explanation is in the SBA’s updated interim final rule, Docket No. SBA-2020-0035. The SBA does a great job explaining the math behind the partial forgiveness.

But to your question, I am not sure that this falls within the realm of regulatory guidance. The hurdle is going to be with the language of the PPPFA:

LIMITATION ON FORGIVENESS.—To receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, or any covered utility payment.

That being said, the SBA is creating a taxpayer-favorable solution to the PPPFA’s 60 percent "cliff." I am not sure who in their right mind will object, but given the pressure put onto the SBA’s rules in courts across the country, it will be interesting to see what happens next and how the agencies show reasoned decision-making in their rules that diverge from the statutory text.

"All’s Well That Ends Well?"
Wolters Kluwer: The PPP application process is scheduled to expire on June 30, 2020. Notably, prior to Senate approval of the PPPFA, the congressional record was updated with a letter from the bipartisan, bicameral PPPFA authors and policy architects to state that the PPPFA’s "extension of the covered period does not authorize the [SBA] to issue any new PPP loans after June 30, 2020, as this date remains fixed by section 1102(b) of the CARES Act." Furthermore, Treasury and the SBA, too, recently reaffirmed the June 30 cutoff date.

However, Mnuchin told lawmakers recently that another round of loans is on the discussion table, following Sen. Tim Scott’s, R-S.C., inquiry as to whether there is an appetite for further enhancing and extending the PPP. Moreover, fellow Senate Small Business Committee members Chris Coons, D-Del., and Ben Cardin, D-Md., have introduced the Prioritized Paycheck Protection Program (P4) Bill, which would authorize new lending under the PPP to borrowers with 100 employees or less who have or will soon exhaust the original PPP loan. A Democratic companion bill was introduced in the House on June 18.

Are you aware of any calls among taxpayers or practitioners to extend PPP loan applications beyond June?

Daniel Strickland: The SBA has been processing loans fast, processing more than 14 years’ worth of loans in 14 days in the initial round of funding. Since then, however, things have slowed down. I haven’t heard any calls for extension recently. But at the same time, the most recent numbers I saw suggested that there is still more than $125 billion available. The next round of published data will give us some indication of what happens. If there is still a significant amount of money left over, and if there is a need, I can certainly see Congress extending the loan application deadline without expanding the available funds. It would be additional taxpayer relief at no additional cost to the government. But with the PPPFA’s changes, we might see the remaining funds mostly or completely extended. In that case, I think we wouldn’t see an extension without another tranche of available funding.

"Confusion Now Hath Made His Masterpiece"
Wolters Kluwer: As for when pension expenses are paid and incurred, current guidance does not indicate whether the amount that is "paid by Borrower" can include retirement contributions attributable to all of 2019, 2020, or even the two years combined. Absent any further guidance, how would you advise taxpayers and practitioners on the matter?

Daniel Strickland: That is a tough question. The short answer is that there are a lot of unanswered questions like this one. The SBA and IRS are publishing guidance as quickly as they can, but it isn’t possible to give the requisite considered decision-making and answer all of the outstanding questions at the same time. What that means for taxpayers and practitioners is that each situation needs to be carefully considered. Without specific guidance, there is a risk that certain expenses don’t qualify for forgiveness or that a portion of the loan could be called for repayment.

The first thing that I advise is to work with an attorney to evaluate the specific facts of each situation and to look at the tax and business consequences of each option. In general, where there is no clear answer, having advice in writing from your attorney that the answer you choose is the right answer can help protect businesses from some of the negative consequences of being wrong.

Wolters Kluwer: Outside the most recently published interim final rules, are there other unanswered questions for which you think Treasury and the SBA could issue additional PPP guidance?

Daniel Strickland: There are a number of unanswered questions with respect to definitions. As you reference above, the one that makes most practitioners’ lists is this issue of paid versus incurred. The loan amount is determined using "monthly payments by the applicant for payroll costs incurred." And forgiveness is determined based on "the sum of the following costs incurred and payments made during the covered period." Another outstanding question is how the forgiveness reduction exemptions will work with the cure date being shifted to December 31 and how the "option to use an eight-week covered period" for those taxpayers who have already received their loan proceeds will work if the June 30 cure date falls within the 8-week covered period.

These are just the tip of the iceberg of unanswered questions.

Wolters Kluwer: Executive agencies, including the IRS and SBA, have been increasingly reliant on sub-regulatory FAQs as a means for issuing guidance lately. What are some potential consequences or drawbacks to this method?

Daniel Strickland: Receiving guidance by FAQ is certainly an efficient way to push information out to taxpayers and practitioners. But as you allude, there are some potential issues—both legal and practical. The first for me is in the second introductory paragraph:

Borrowers and lenders may rely on the guidance provided in this document as SBA’s interpretation of the Paycheck Protection Program Interim Final Rules . . . . The U.S. government will not challenge lender PPP actions that conform to this guidance 1[.]

Footnote 1 provides:

This document does not carry the force and effect of law independent of the statute and regulations on which it is based.

Although "borrowers . . . may rely on the guidance," it is only the SBA’s interpretation of its own interim final rules. There is certainly an open question as to the level of deference to which the FAQs are entitled.

Second to that is the issue of whether the government will challenge taxpayer actions that conform to the guidance. Although the guidance provides some comfort to lenders, and the lenders will be the ones approving loan forgiveness applications, there are still a slew of potential consequences in the fine print that could be asserted against borrowers.

Third is the complexity in advising clients. If you are paying daily attention to the guidance, the tempo of guidance isn’t a big deal, but what I am noticing is that the guidance is changing—think about the initial PPP interest rate of 0.50 percent fixed rate announced by Treasury that was later changed to 1.00 percent fixed rate—and few of the published thought guidance pieces are being updated. For practitioners who are trying to play catchup after receiving a client question, this can be complicated and a great deal of time can be lost spinning their wheels trying to figure out why two seemingly well-reasoned articles have divergent facts or conclusions.

Last, but not least, for taxpayers who are looking for answers online, this could be devastating when it comes to applications for forgiveness. If practitioners are having to sift through the outdated legal analysis by comparison to the newest FAQ iteration, how can taxpayers be confident that they are only relying on the correct version. And when the next round of guidance comes out, those taxpayers must rinse and repeat.

"Tomorrow, and Tomorrow, and Tomorrow…"
Wolters Kluwer: Looking ahead, any closing thoughts or advice for practitioners related to the PPP moving forward?

Daniel Strickland: We all want to get to the right answer. For taxpayers and practitioners alike, it is important to ask questions. The SBA, for example, is receptive to discussing concerns and comments. And given the frequency of guidance, it is more important than ever to be involved in the process. For taxpayers specifically, asking questions of their advisers can protect small businesses against the "penny-wise, pound-foolish" adage. I know I want to protect my clients from missteps and help them take fullest advantage of these benefits.

The U.S. Supreme Court upheld the Trump Administration’s rule under the Affordable Care Act (P.L. 111-148) that any nongovernment, nonpublicly traded employer can refuse to offer contraceptive coverage for moral or religious reasons, and that publicly traded employers can refuse to do so for religious reasons. Application of this rule had been halted by litigation, but the Administration is now free to apply it.

The U.S. Supreme Court upheld the Trump Administration’s rule under the Affordable Care Act (P.L. 111-148) that any nongovernment, nonpublicly traded employer can refuse to offer contraceptive coverage for moral or religious reasons, and that publicly traded employers can refuse to do so for religious reasons. Application of this rule had been halted by litigation, but the Administration is now free to apply it.

The issues in the case were: (1) whether the ACA actually requires contraceptive coverage or was that just a creature of regulations that any administration may change, and (2) whether the administration complied with Administrative Procedures Act (APA) in light of the surprising breadth of the regulation going well beyond religious objections to include any moral objection.

Contraceptive Regulation
The prior version of this regulation included an exception for religious employers and small businesses with a religious objection. They had to self-certify that they qualified. Some objected. Shortly after the Administration changed hands, it issued a new version as an interim final regulation.

The Treasury, Health and Human Services (HHS), and Labor Departments have nearly identical versions of these rules. The Treasury version is Reg. §54.9815-2713(a)(1)(iv), but it references HHS regulations (45 CFR 147.131–147.133), and that is where much of the change was made.

The new rule provides that a nongovernment employer that has religious or moral objections to providing coverage for some or all forms of birth control can simply not provide the coverage. These rules also apply to colleges and universities providing student health insurance coverage. The religious exemption is open to any nongovernment employer, including both nonprofit and for-profit entities. The same holds true for the moral exemption, except only the religious exemption is available for publicly traded employers. An objecting employer need not file anything with the government, though affected plan participants need to be notified of mid-plan year coverage changes. Employers are free to pick and choose among contraceptives if they do decide to offer contraceptive coverage.

These regulations extend the exemption for objecting employers to objecting health insurance issuers, and to objecting individuals under which a health insurance issuer may offer a separate benefit package option to any individual who objects to coverage or payments for some or all contraceptive services based on the individual’s sincerely held religious beliefs or moral convictions.

Authority Under ACA
The majority opinion by Justice Thomas viewed the ACA as blank slate on what it required for women’s preventive health. The relevant ACA provision provides that, with respect to women, a group health plan and a health insurance issuer shall, at a minimum provide additional preventive care and screenings "as provided for" in comprehensive guidelines supported by the Health Resources and Services Administration (HRSA), an agency of the Department of Health and Human Services (HHS). At the time of the ACA’s enactment, these guidelines were not yet written.

The HRSA Guidelines were based on recommendations compiled by the Institute of Medicine (now called the National Academy of Medicine). The Guidelines included the contraceptive mandate, which required health plans to provide coverage for all contraceptive methods and sterilization procedures approved by the Food and Drug Administration, as well as related education and counseling.

The same day the Guidelines were issued in 2011, the Departments of Labor, Health and Human Services, and the Treasury (the Departments) issued interim final regulations requiring contraceptive coverage, with exceptions for churches. The Departments determined that it was appropriate that HRSA take into account the mandate’s effect on certain religious employers, and concluded that HRSA had the discretion to do so through the creation of an exemption. Ever since, the HRSA has been tasked (according to the majority opinion) with devising religious exemptions. The majority opinion concluded that ACA granted the HRSA broad authority to define preventive care and screenings, which implies that the HRSA also has broad power to create any religious and moral exemptions. Thus, if the HRSA changes its mind, there is nothing in the ACA to prevent it.

Justice Ginsburg’s dissent (joined by Justice Sotomayor) argued the legislative language HRSA in fact only delegates to the HRSA the task of compiling a list of services that should be provided. The ACA did not delegate the authority to determine who must provide the coverage for these services. Justice Kagan’s concurrence (joined by Justice Breyer) disagreed with the majority and dissent about the clarity of the ACA’s language on this, but from the beginning the Departments acted as if it were up to the HRSA to make this call. Under the Chevron doctrine, the interpretation of unclear legislation by the agency tasked with enforcement is owed due deference by the courts.

No “Open-Mindedness” Test
The majority opinion found no violation of the Administrative Procedures Act. The fact that the final rules made only minor alterations to the interim final regulations did not render the final rules procedurally invalid, because nothing in the record suggested that the Departments maintained an open mind during the post-promulgation process. The “open-mindedness” test has no basis in the APA, according to Justice Thomas.

The majority opinion also addressed the issue of calling the document containing the interim final rules "Interim Final Rules with Request for Comments" instead of "General Notice of Proposed Rulemaking." The request for comments readily satisfied the APA notice requirements, Justice Thomas ruled. Even assuming that the APA requires an agency to publish a document entitled "notice of proposed rulemaking," there was no prejudicial error here.

Justice Kagan’s opinion questioned whether the rule was not arbitrary and capricious. The rule went beyond what the Departments’ justification supported, raising doubts about whether the solution lacks a "rational connection" to the problem described. Few employers have expressed reservations about self-certification, and in any case the new exemption includes any employer (except publicly traded employers) with a moral objection whether it is religious or not.

Where’s RFRA?
The majority opinion stopped its authority analysis at holding that the ACA authorized the regulation, and stated that it did not need go into the requirements of the Religious Freedom Restoration Act of 1993 (RFRA). Justice Alito (joined by Justice Gorsuch) filed a concurrence taking the position that RFRA compels an exemption for the Little Sisters and any other employer with a similar objection to what has been called the accommodation to the contraceptive mandate.

The IRS has issued guidance to employers on the requirement to report the amount of qualified sick and family leave wages paid to employees under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127). This reporting provides employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits under the Families First Act.

The IRS has issued guidance to employers on the requirement to report the amount of qualified sick and family leave wages paid to employees under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127). This reporting provides employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits under the Families First Act.

Background
Under the Families First Act, many employers with fewer than 500 employees must provide paid leave to employees due to circumstances related to the Coronavirus Disease 2019 (COVID-19). Certain employers must provide an employee with up to 80 hours of paid sick leave if the employee cannot work or telework because he or she:

1. is subject to a federal, state or local quarantine or isolation order related to COVID-19;
2. has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
3. is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
4. is caring for an individual who is subject to a federal, state, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
5. is caring for a son or daughter if the child’s school or place of care has been closed, or the child’s care provider is unavailable, due to COVID-19 precautions; or
6. is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretaries of the Treasury and Labor.

The employee is entitled to paid sick leave at his or her regular pay rate (or if higher, the applicable federal, state, or local minimum wage), up to:

• $511 per day ($5,110 in the aggregate) if the employee cannot work for reasons listed in (1), (2), or (3), above;
• $200 per day ($2,000 in the aggregate) if the employee cannot work for reasons listed in (4), (5), or (6) above.

The Families First Act also amends the Family and Medical Leave Act of 1993 to require employers to provide expanded paid family and medical leave to employees who cannot work or telework for reasons related to COVID-19. An employee can receive up to 10 weeks of paid family and medical leave at two-thirds the employee’s regular rate of pay, up to $200 per day ($10,000 in the aggregate) if the employee cannot work because he or she is caring for a son or daughter whose school or place of care is closed, or whose child care provider is unavailable, for reasons related to COVID-19.

Eligible employers may receive a refundable payroll credit for required qualified sick leave wages or qualified family leave wages paid to an employee, plus allocable qualified health plan expenses. An equivalent credit is available to self-employed individuals carrying on a trade or business, if the self-employed individual would be entitled to receive paid leave if he or she were an employee of an employer (other than himself or herself). The refundable credits apply to qualified leave wages paid with respect to the period beginning on April 1, 2020, and ending on December 31, 2020.

Reporting Qualified Leave Wages
In addition to reporting qualified sick leave wages paid and qualified family leave wages paid in Boxes 1, 3 (up to the social security wage base), and 5 of Form W-2 (or, in the case of compensation subject to the Railroad Retirement Tax Act (RRTA), in Boxes 1 and 14 of Form W-2), employers must report to the employee the following types and amounts of the wages that were paid, with each amount separately reported either in Box 14 of Form W-2 or on a separate statement:

• the total amount of qualified sick leave wages paid for reasons (1), (2), or (3) above, labelled as "sick leave wages subject to the $511 per day limit" or in similar language;
• the total amount of qualified sick leave wages paid for reasons (4), (5), or (6) above, labelled as "sick leave wages subject to the $200 per day limit" or in similar language; and
• the total amount of qualified family leave wages paid, labelled as "emergency family leave wages" or in similar language.

If a separate statement is provided and the employee receives a paper Form W-2, the statement must be included with the Form W-2 provided to the employee. If the employee receives an electronic Form W-2, the statement must be provided in the same manner and at the same time as the Form W-2.

Self-Employed Individuals
Self-employed individuals who are claiming qualified sick leave equivalent or qualified family leave equivalent credits, and who are also eligible for qualified sick leave and qualified family leave wages as employees, must report the qualified leave wage amounts described above on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with their income tax returns. They also must reduce (but not below zero) any qualified sick leave or qualified family leave equivalent credits by the amount of these qualified leave wages.

The IRS has issued guidance and temporary relief for required minimum distribution (RMD) changes in 2020. Distributions that would have been RMDs under old law are treated as eligible rollover distributions. The 60-day rollover period deadline for any 2020 RMDs already taken has been extended to August 31, 2020. Notice 2007-7, I.R.B. 2007-5, 395 is modified.

The IRS has issued guidance and temporary relief for required minimum distribution (RMD) changes in 2020. Distributions that would have been RMDs under old law are treated as eligible rollover distributions. The 60-day rollover period deadline for any 2020 RMDs already taken has been extended to August 31, 2020. Notice 2007-7, I.R.B. 2007-5, 395 is modified.

SECURE and CARES Acts
The new guidance addresses RMD issues arising from recent unexpected changes in the rules. The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) ( P.L. 116-94), enacted at the end of 2019, changed the required beginning date for RMDs for individuals turning age 70-1/2 in 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136), enacted in March 2020, waived the RMD requirements for 2020.

Plans, administrators, and individuals were taken by surprise. Some plans and participants treated distributions as RMDs even though they were not under new rules then in effect. The SECURE Act provided no relief. However, the CARES Act allowed plans and participants to treat would-be RMDs as eligible rollover distributions. Still, under the rules, individuals have 60 days to recontribute distributions, and can only do that once in a 12-month period. That left individuals who took early distributions twisting in the wind, not to mention people taking monthly RMD installments.

60-Day Deadline Extended
Under the new relief, any distribution already taken in 2020 that would have been an RMD under the old rules has a 60-day recontribution deadline of no earlier than August 31. For example, if someone took a distribution in January 2020 that would have been an RMD under the old rules (either sets of old rules), they have until August 31 to recontribute it to an eligible plan or IRA.

For an IRA owner or beneficiary who has already received a distribution that would have been an RMD in 2020 but for the 2020 RMD waiver under the CARES Act or the change in the required beginning date under the SECURE Act, the recipient may repay the distribution to the distributing IRA, even if the repayment is made more than 60 days after the distribution, provided the repayment is made no later than August 31, 2020. The repayment will be treated as a rollover, but will be subject to the one rollover per 12-month period limitation or the restriction on nonspousal beneficiary rollovers.

SECURE Act Relief
Distributions that were intended as RMDs but in fact are not due to the SECURE Act change in required beginning date are treated as eligible rollover distributions. RMDs do not have to satisfy rules regarding mandatory withholding, the option of a direct rollover, and notice of that right. Under this relief, individuals and plans can still treat these as eligible rollover distributions.

2020 Waiver Guidance
The IRS has clarified that the CARES Act relief applies for 2020 distributions that would have been RMDs, had it not been for the 2020 RMD waiver. These include distributions to a plan participant paid in 2020 (or paid in 2021 for the 2020 calendar year in the case of an employee who has a required beginning date of April 1, 2021) if the payments equal the amounts that would have been RMDs in (or for) 2020 had it not been for 2020 RMD waiver. They also include distributions that are one or more payments (that include the 2020 RMDs) in a series of substantially equal periodic payments made at least annually and expected to last for the participant’s life or life expectancy, the joint lives (or joint life expectancies) of the participant and the participant’s designated beneficiary, or for a period of at least 10 years.

For a plan participant with a required beginning date of April 1, 2021, distributions paid in 2021 that would have been an RMD for 2021 had it not been for the CARES Act are treated as eligible rollover distributions. However, a plan participant with a required beginning date of April 1, 2021, must still receive RMD for the 2021 calendar year by December 31, 2021. If the employee receives a distribution during 2021, that distribution is an RMD for the 2021 calendar year to the extent the total RMD for 2021 has not been satisfied even if the distribution is made on or before April 1, 2021, and accordingly, is not an eligible rollover distribution. However, to the extent the RMD for 2021 has been satisfied, subsequent amounts distributed in 2021 that would otherwise not be eligible rollover distributions may be rolled over.

Extended Deadlines Due to 2020 Waiver
If a plan permits an employee or beneficiary to elect whether the 5-year rule or the life expectancy rule applies in determining RMDs, then the deadline for making that election typically would be the end of calendar year following the calendar year of the employee’s death. For example, if a 50-year-old employee in a plan providing the election died in 2019 with his sister as his designated beneficiary, the plan provision would require the election by the end of 2020. However, that type of plan may be amended to permit the extension of the election deadline to the end of 2021.

The RMD waiver extends the time for making a direct rollover for a nonspouse designated beneficiary if the participant died in 2019. A special rule provides that if the 5-year rule applies to a benefit under a plan, the nonspouse designated beneficiary may determine the amount that is not eligible for rollover because it is an RMD using the life expectancy rule in the case of a distribution made prior to the end of the year following the year of death. This special rule is modified so that if the employee’s death occurred in 2019, the nonspouse designated beneficiary has until the end of 2021 to make the direct rollover and use the life expectancy rule.

Plan Amendments
The guidance provides a sample plan amendment for defined contribution plans that plan sponsors may adopt to implement waiver rules. Any plan amendment must be adopted no later than the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024, for governmental plans), and must reflect operation of the plan beginning with the effective date of the plan amendment. Timely adoption of the amendment must be shown by a written document signed and dated by the employer (including an adopting employer of a pre-approved plan). IRAs do not need to be amended.

The IRS has clarified and provided relief for mid-year amendments reducing safe harbor contributions. An updated safe harbor notice and an election opportunity must be provided even if the change is only for highly compensated employees. Coronavirus (COVID-19) relief applies if a plan amendment is adopted between March 13, 2020, and August 31, 2020. For nonelective contribution plans, the supplemental notice requirement is satisfied if provided no later than August 31, 2020, and the amendment that reduces or suspends contributions is adopted no later than the effective date of the reduction or suspension. Notice 2016-16, I.R.B., 2016-7, 318, is clarified.

The IRS has clarified and provided relief for mid-year amendments reducing safe harbor contributions. An updated safe harbor notice and an election opportunity must be provided even if the change is only for highly compensated employees. Coronavirus (COVID-19) relief applies if a plan amendment is adopted between March 13, 2020, and August 31, 2020. For nonelective contribution plans, the supplemental notice requirement is satisfied if provided no later than August 31, 2020, and the amendment that reduces or suspends contributions is adopted no later than the effective date of the reduction or suspension. Notice 2016-16, I.R.B., 2016-7, 318, is clarified.

Mid-Year Amendments
Safe harbor contributions for a plan year may be amended during the plan year to reduce or suspend future matching or nonelective contributions only under certain conditions. Among them are that the employer must either (1) be operating at an economic loss for the plan year, or (2) have included in the plan’s safe harbor notice for the plan year a statement that the plan may be amended during the plan year to reduce or suspend safe harbor contributions, and that the reduction or suspension will not apply earlier than 30 days after all eligible employees are provided notice of the reduction or suspension.

The reduction or suspension of safe harbor contributions may be effective no earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided in a supplemental notice. Eligible employees must be given a reasonable opportunity (including a reasonable period after receipt of the supplemental notice) prior to the reduction or suspension of safe harbor contributions to change their cash or deferred elections and, if applicable, their employee contribution elections.

Safe Harbor Contributions
Reductions or suspensions of contributions. If a plan amendment that reduces or suspends safe harbor matching or nonelective contributions during a plan year is adopted between March 13, 2020, and August 31, 2020, then the plan will not be treated as failing to satisfy the requirement that the employer either (1) is operating at an economic loss; or (2) has included in the plan’s safe harbor notice for the plan year a statement that (a) the plan may be amended during the plan year to reduce or suspend the safe harbor contributions and (b) the reduction or suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction or suspension.

Supplemental notice requirement. If a plan amendment that reduces or suspends safe harbor nonelective contributions during a plan year is adopted between March 13, 2020, and August 31, 2020, then the plan will not be treated as failing to satisfy the supplemental notice requirements merely because it is not provided to eligible employees at least 30 days before the reduction or suspension of safe harbor nonelective contributions is effective, provided that (1) the supplemental notice is provided to eligible employees no later than August 31, 2020, and (2) the plan amendment that reduces or suspends safe harbor nonelective contributions is adopted no later than the effective date of the reduction or suspension of safe harbor nonelective contributions.

There is no relief with respect to the timing of supplemental notices for a mid-year reduction or suspension of safe harbor matching contributions because matching contribution levels communicated to employees directly affect employee decisions regarding elective contributions (and, if applicable, employee contributions).

HCE Contributions
The new notice clarifies that an updated safe harbor notice and an election opportunity (as required by Notice 2016-16, I.R.B. 2016-7, 318) must be provided to highly compensated employees (HCEs) to whom the mid-year change applies, determined as of the date of issuance of the updated safe harbor notice. This rule applies even if the change only applies to HCEs.

The IRS amended final regulations with guidance on the Code Sec. 199A deduction for suspended losses and shareholders of regulated investment companies (RICs). The amendments address the treatment of suspended losses included in qualified business income (QBI), the deduction allowed to a shareholder in a regulated investment company (RIC), and additional rules related to trusts and estates. The IRS had previously issued final and proposed regulations addressing these issues (NPRM REG-134652-18)

The IRS amended final regulations with guidance on the Code Sec. 199A deduction for suspended losses and shareholders of regulated investment companies (RICs). The amendments address the treatment of suspended losses included in qualified business income (QBI), the deduction allowed to a shareholder in a regulated investment company (RIC), and additional rules related to trusts and estates. The IRS had previously issued final and proposed regulations addressing these issues ( NPRM REG-134652-18)

Background
Code Sec. 199A provides a deduction of up to 20 percent of qualified business income (QBI) from a U.S. trade or business operated as a sole proprietorship, or through a partnership, S corporation, trust, or estate. If the taxpayer’s taxable income exceeds the threshold amount in Code Sec. 199A(e)(2), the deduction may be limited. Statutory limitations are subject to phase-in rules. Code Sec. 199A also provides individuals and some trusts and estates a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

461(l) Losses
Under Reg. §1.199A-3(b)(1)(iv), previously disallowed losses or deductions allowed in the tax year are generally taken into account for computing QBI, except to the extent the losses or deductions were disallowed, suspended, limited, or carried over from tax years ending before January 1, 2018. The final regulations amend Reg. §1.199A-3(b)(1)(iv)(A) to specifically reference excess business losses disallowed by Code Sec. 461(l) and treated as a net operating loss (NOL) carryover for the tax year for purposes of determining any NOL carryover in subsequent tax years. The IRS notes that the list of statutes in the regulation is not exhaustive

Phase-in Rules for SSTB Losses
The amendments also clarify how the phase-in rules apply when a taxpayer has a suspended or disallowed loss or deduction from a specified service trade or business (SSTB). If the individual’s taxable income is at or below the threshold amount in the year the loss or deduction is incurred, the entire disallowed loss or deduction is treated as QBI from a separate trade or business in the later tax year in which the loss is allowed. If the individual’s taxable income is within the phase-in range, only a percentage of the disallowed loss or deduction is taken into account in the later tax year. If the individual’s taxable income exceeds the phase-in range, the loss or deduction is not included in QBI.

Conduit Treatment
The final regulations provide conduit treatment for qualified REIT dividends earned by a RIC. Conduit treatment happens when a RIC treats dividends paid to a shareholder in the same or similar manner as the shareholder would treat the underlying item of income or gain if the shareholder realized it directly. The Treasury Department and IRS continue to consider comments on whether to provide conduit treatment for qualified PTP income, and for RIC income from an activity that would generate QBI if conducted by a partnership or an S corporation.

Separate Share Rule
The separate share applies for a trust or estate described in Code Sec. 663(c) with substantially separate and independent shares for multiple beneficiaries. Under the final regulations, the trust or estate will be treated as a single trust or estate for determining taxable income, net capital gain, net QBI, W-2 wages, unadjusted basis immediately after acquisition (UBIA) of qualified property, qualified REIT dividends, and qualified PTP income for each trade or business of the trust or estate, and for computing the W-2 wage and UBIA of qualified property limitations.

Applicability
The amended regulations apply to tax years beginning 60 days after publication in the Federal Register. However, taxpayers may choose to apply the amendments before that date. Taxpayers who chose to rely on the proposed regulations issued in February 2019 may continue to do so until the date these amendments are published.

The Treasury Department and the IRS have released drafts of proposed partnership forms for tax year 2021 (the 2022 filing season). The proposed forms are intended to provide greater clarity for partners on how to compute their U.S. income tax liability for relevant international tax items, including claiming deductions and credits. The redesigned forms and instructions will also give useful guidance to partnerships on how to provide international tax information to their partners in a standardized format.

The Treasury Department and the IRS have released drafts of proposed partnership forms for tax year 2021 (the 2022 filing season). The proposed forms are intended to provide greater clarity for partners on how to compute their U.S. income tax liability for relevant international tax items, including claiming deductions and credits. The redesigned forms and instructions will also give useful guidance to partnerships on how to provide international tax information to their partners in a standardized format.

The draft forms are:

• Schedule K-2 (Form 1065), Partners’ Distributive Share Items—International, and Instructions for Schedule K-2.
• Schedule K-3 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc.—International ; and Instructions for Schedule K-3.

These proposed forms would apply to a partnership required to file Form 1065 only if it has "items of international tax relevance" (i.e., generally, foreign activities or foreign partners). The changes would not affect domestic partnerships with no international tax items to report.

Partner Reporting of International Items
Partners must report international tax information on their tax returns on several tax forms and schedules. They generally obtain this information from their partnerships, usually through narrative statements attached to one or more Schedules K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. Since partnerships compile these statements in a variety of formats, partners might have difficulties translating the statements onto their own returns.

To ease this burden, the Treasury and IRS state that the proposed changes would provide a standard format that offers greater clarity to both partnerships and their partners. This standard format is designed to better align the information that partnerships provide on the schedules with the tax forms used by partners, so that partners can more easily prepare their tax returns, and the IRS can more efficiently verify taxpayer compliance. It is intended that all information to be reported on the new schedules is already necessary for the partnership to provide to partners or is available to the partnership.

Draft Schedules K-2 and K-3
Any partnership that is required to file Form 1065, U.S. Return of Partnership Income, and has items relevant to the determination of the U.S. tax or certain withholding tax or reporting obligations of its partners under the international provisions of the Code, will be required to complete the relevant parts of Schedule K-2 and Schedule K-3.

The proposed parts included in new Schedule K-2 (Form 1065) replace portions of existing Form 1065, Schedule K, lines 16(a) through 16(r). The proposed schedule provides for international tax information to be reported in a standardized manner. The partnership will attach Schedule K-2 to its Form 1065.

The proposed parts included in new Schedule K-3 (Form 1065) replace portions of Schedule K-1 (Form 1065), Part III, Boxes 16 and 20. The proposed schedule provides information to the partner generally in the format of the following forms that the partner might need to complete:

• Form 1040, U.S. Individual Income Tax Return;
• Form 1040-NR, U.S. Nonresident Alien Income Tax Return;
• Form 1116, Foreign Tax Credit (Individual, Estate, or Trust;
• Form 1118, Foreign Tax Credit—Corporations;
• Form 1120, U.S. Corporation Income Tax Return;
• Form 1120-F, U.S. Income Tax Return of a Foreign Corporation;
• Form 4797, Sales of Business Property;
• Form 8949, Sales and Other Dispositions of Capital Assets;
• Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts;
• Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI); and
• Form 8993, Section 250 Deduction for Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI).

The partnership will provide Schedule K-3 to its partners according to the timeline for providing Schedule K-1.

Comments Requested
The draft schedules and instructions have been released to allow partnerships and other stakeholders time to consider the proposed changes and provide comments that can be taken into account in finalizing the schedules and instructions. The Treasury and IRS will be actively engaged with stakeholders to solicit input on these proposed changes before the forms are finalized later in 2020.

Affected stakeholders can submit comments through September 14, 2020. Written comments should be sent to the following email address: lbi.passthrough.international.form.changes@irs.gov with the subject line: "International Form Changes."

For additional information and updates, see https://www.irs.gov/businesses/1065-form-changes.

Other Revisions
The Treasury and IRS plan similar revisions, as applicable, to Form 1120-S, U.S. Income Tax Return for an S Corporation, and Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. They welcome comments on similar changes to be made to these forms for the 2021 tax year.

The Treasury and IRS have issued final regulations covering the Code Sec. 250 deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). Proposed regulations were issued on March 6, 2019 (NPRM REG-104464-18). The final regulations maintain the basic approach and structure of the proposed regulations and provide guidance on computation of the deduction and the determination of FDII, including in the consolidated return context. Additionally, rules requiring the filing of Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income, are finalized.

The Treasury and IRS have issued final regulations covering the Code Sec. 250 deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). Proposed regulations were issued on March 6, 2019 (NPRM REG-104464-18). The final regulations maintain the basic approach and structure of the proposed regulations and provide guidance on computation of the deduction and the determination of FDII, including in the consolidated return context. Additionally, rules requiring the filing of Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income, are finalized.

Section 250 Deduction
The Code Sec. 250 deduction is available to domestic corporations for:

• a portion of profits attributable U.S. activities that serve foreign markets, and
• a portion of profits of controlled foreign corporations (CFCs).

The deduction is available with respect to a domestic corporation’s "excess return" or return in excess of fixed return on tangible assets, derived from serving foreign markets. FDII is the portion of the excess return derived from serving foreign markets directly from the United States. GILTI is the portion of the excess return derived through foreign affiliates. The deduction results in a lower effective U.S. tax rate on a U.S. corporation’s FDII and GILTI.

Documentation Requirements
The proposed regulations defined terms and provide specific documents that were required to establish that income was derived from serving foreign markets. Commentators found that the proposed regulations could present compliance burdens. Accordingly, the final regulations provide a more flexible approach than the specific documentation requirements.

For many types of sales and services, eligibility for the Code Sec. 250 deduction is subject to the general requirement under the Code that deductions must be supported by sufficient substantiation, including the use of available business records.

More specific substantiation requirements are required for:

• intangible property;
• sales of general property to resellers and manufacturers; and
• the provision of general services to recipients.

The requirements include either:

• a specific document;
• information from the recipient obtained or created in the ordinary course of a trade or business; or
• a taxpayer statement with corroborating evidence.

Taxpayers may choose a method of substantiation among the methods. The specific substantiation requirements do not apply to businesses with less than $25 million in gross receipts. The final regulations also eliminate references to the use of market research to establish foreign use.

The final regulations clarify how to establish foreign use for sales of digital content and how to establish a recipient’s location outside of the United States with respect to electronically supplied services and advertising services. The final regulations:

• evaluate the sale of a copyrighted article under the general property rules, rather than under the rules for foreign use of intangible property;
• provide new rules for establishing whether a sale of digital content is for foreign use;
• define "digital content" as a computer program or any other content in digital format; and
• provide that a sale of general property that primarily includes digital content is a foreign-derived deduction eligible income (FDDEI) sale if the end user downloads or accesses the content on a device located outside of the United States.

The final regulations add two subcategories of general services:

• a subcategory of general services for electronically supplied services; and
• a subcategory for advertising services.

In these cases, the location of the recipient is where the content is accessed or viewed.

Foreign Military Sales and Services
The proposed regulations provided special rules to cover U.S. Defense Contractors’ military sales of equipment and provision of services to the U.S. government that are subsequently sold or provided to a foreign government.

The final regulations adopt the proposed regulations, which treat sales and services provided to the U.S. government under the Arms Export Control Act as a sale or provision of services to the foreign government that is eligible for the deduction. The final regulations relax the substantiation requirements, so that the general substantiation requirements apply.

Ratio of FDDEI to DEI
A corporation’s FDII is defined as its deemed intangible income (DII) multiplied by the corporation’s foreign-derived ratio. This is the ratio of the corporation’s foreign-derived deduction eligible income (FDDEI) to its deduction eligible income (DEI).

The final regulations retain the rule that the domestic corporation must allocate expenses to its gross FDDEI to determine the numerator of the foreign-derived ratio.

Deduction for Individuals
The final regulations extend the Code Sec. 250 deduction with respect to GILTI, to individuals—including individual partners and individual S corporation shareholders—making the Code Sec. 962 election to be treated as a domestic corporation.

Additional Changes
Additional changes in the final regulations generally expand situations in which a transaction will be an FDDEI transaction, including:

• a property service may be a FDDEI service if it is provided with respect to property temporarily located in the United States;
• the definition of transportation services is revised to include freight forwarding services;
• the sale of a manufacturing method or process intangible to a foreign unrelated party is for foreign use based on the location of the manufacture rather that the end user;
• elimination of the rule that allowed the deduction for sales of international property only if certain time and use thresholds were met and the replacement of foreign use based on place of registration;
• clarification that general property includes physical commodities sold pursuant to derivative contracts, and that hedging sales impact a taxpayer’s income; and
• removal of the rule that the sale of an interest in a foreign branch is treated as giving rise to foreign branch income preventing the deduction.

Taxpayers can also use any reasonable method to determine the ordering of rules that limit deductions based on taxable income until additional rules are issued.

The IRS is calling on any taxpayers involved in syndicated conservation easement transactions who receives a settlement offer from the agency to accept it soon. The Service made this request in the wake of the Tax Court’s recent strike down of four additional abusive syndicated conservation easement transactions.

Settlement Offers
Time-limited settlement offers, which the IRS announced on June 25 ( IR-2020-130), are only being made to certain taxpayers with pending docketed Tax Court cases involving this type of abusive transaction. The IRS declared that these and other recent Tax Court decisions support the abusive nature of the underlying syndicated conservation easement deduction.

The four recent Tax Court decisions in question disallowed conservation easement deductions totaling nearly $21 million ( Village at Effingham, LLC, TC Memo. 2020-102, Dec. 61,715(M); Riverside Place, LLC, TC Memo. 2020-103, Dec. 61,716(M); Maple Landing, LLC, TC Memo. 2020-104, Dec. 61,717(M); Englewood Place, LLC, TC Memo. 2020-105, Dec. 61,718(M)).

Abusive Transactions
While recognizing the important role of legitimate conservation easement deductions in incentivizing land preservation for future generations, the IRS pointed out that abusive syndicated conservation easement transactions have been of concern for several years.

In listed syndicated conservation easement structures, promoters syndicate ownership interests in real property through partnerships, using promotional materials to suggest that prospective investors may be entitled to a share of a conservation easement contribution deduction that equals or exceeds two and one-half times the investment amount. The promoters obtain an appraisal that greatly inflates the value of the conservation easement, based on a fictional and unrealistic highest and best use of the property before it was encumbered with the easement. After the investors invest in the partnership, the partnership donates a conservation easement to a land trust. Investors in the partnership then claim a deduction based on an inflated value. According to the IRS, the investors typically claim charitable contribution deductions that grossly multiply their actual investment in the transaction and defy common sense.

The IRS is aware that some promoters of these abusive transactions have downplayed the significance of the string of recent court decisions holding in the government’s favor, arguing that their cases are somehow different or that those decisions might be reversed on appeal. These promoters ignore common sense and argue that the real dispute is about value, neglecting to explain how the reporting of short-term appreciation, often exceeding many multiples of reality, could possibly withstand judicial scrutiny. "Taxpayers should ignore this nonsense, take an objective look at their cases, and cut their losses," said IRS Chief Counsel Mike Desmond; "abusive transactions, like settlement offers, do not get better with time, and this is a good opportunity to get out," he added.

Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.

Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.

Payments and Withholding

As a household employer, the parent must withhold and pay Social Security and Medicare taxes if the cash wages paid to the nanny exceed the threshold amount for the year. If the amount paid is less than the threshold, the parent does not owe any Social Security or Medicare taxes. For 2017, the domestic employee coverage threshold, as adjusted for a slightly different inflation factor and subject to rounding, will be $2,000, which is the same as for 2016 after rising from $1,900 in 2015. Earnings of any domestic employee are not subject to Social Security taxes if they do not exceed that threshold for the year. If the employee earns more than $1,000 in any calendar quarter, the parent must also pay federal unemployment (FUTA) tax on wages paid, up to $7,000. Publication 926, Household Employer's Tax Guide, has more information about withholding and paying employment taxes.  

If the amount paid is more than the threshold, the parent must withhold the employee's share of Social Security and Medicare taxes unless the parent chooses to pay both the employee's and the employer's share. The taxes are 15.3 percent of cash wages, 7.65 percent each for the employee and the employer. This includes 6.2 percent for Social Security and 1.45 percent for Medicare (hospitalization insurance).

The parent is not required to withhold income tax from the nanny's wages. However, the parent and the nanny may agree to withholding income tax from the nanny's wages. The nanny must provide a filled-out Form W-4, Employee's Withholding Allowance Certificate, to the employer.

The employment taxes amounts are part of the parent's tax liability and can trigger an estimated tax penalty if not enough is paid during the year. The parent submits estimated tax payments on Form 1040-ES, Estimated Tax for Individuals.

Forms to File

If the parent must pay Social Security and Medicare taxes, or if the parent withholds income tax, the parent must file Schedule H, Household Employment Taxes, with the parent's Form 1040. The parent may also need to file a Form W-2, Wage and Tax Statement, and furnish a copy of the form to the nanny. To complete Form W-2, the parent must obtain an employer identification number (EIN) from the IRS, either by applying online or by submitting Form SS-4, Application for Employer Identification Number.

Please do not hesitate to contact this office if you have any questions regarding your “nanny tax” responsibilities.

It is never too early to begin planning for the 2016 filing season, the IRS has advised in seven new planning tips published on its website. Although the current filing season has just ended, there are steps that taxpayers can take now to avoid a tax bill when April 2016 rolls around. For example, the IRS stated that taxpayers can adjust their withholding, take stock of any changes in income or family circumstances, maintain accurate tax records, and more, in order to reduce the probability of a surprise tax bill when the next filing season arrives.

It is never too early to begin planning for the 2016 filing season, the IRS has advised in seven new planning tips published on its website. Although the current filing season has just ended, there are steps that taxpayers can take now to avoid a tax bill when April 2016 rolls around. For example, the IRS stated that taxpayers can adjust their withholding, take stock of any changes in income or family circumstances, maintain accurate tax records, and more, in order to reduce the probability of a surprise tax bill when the next filing season arrives.

IRS Recommended Action Steps

Specifically, the IRS advised the taxpayers take the following steps now to jump start a successful 2016 filing season for their 2015 tax year returns:

• Consider filing a new Form W-4, Employee's Withholding Allowance Certificate, with an employer if certain life circumstances have changed (such as a change in marital status or the birth of a child). A new child could mean an additional exemption and/or tax credits that might lower your tax liability. Therefore you might benefit from claiming an extra withholding allowance. Conversely, getting married (or divorced) could change your income, making it advantageous to readjust your withholding accordingly.
• Report any changes or projected changes in income to the Health Insurance Marketplace (if taxpayer obtained insurance through a marketplace). Income affects the calculation of subsidy payments. Recipients of the advance premium tax credit may owe tax for 2015 if their subsidy payments are too high.
• Maintain accurate and organized tax records, such as home loan documents or financial aid documents. Many deductions must be substantiated with evidence, and staying organized now could facilitate the tax return filing process in the future.
• Find a tax return preparer. Looking for a qualified tax return preparer may be easier in the off-season, when you are under no immediate pressure to select a person. This can provide taxpayers with more time to evaluate a preparer's credentials.
• Plan to increase itemized deductions. If a taxpayer plans to purchase a house, contribute to charity, or incur medical expenses that may not be reimbursed during 2015, it may be beneficial to consider whether itemizing deductions would be more beneficial than claiming the standard deduction for 2015.
• Stay informed of the latest tax law changes. Keeping on top of developments can reduce confusion in the long run.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

The IRS expects to receive more than 150 million individual income tax returns this year and issue billions of dollars in refunds. That huge pool of refunds drives scam artists and criminals to steal taxpayer identities and claim fraudulent refunds. The IRS has many protections in place to discover false returns and refund claims, but taxpayers still need to be proactive.

Tax-related identity theft

Tax-related identity theft most often occurs when a criminal uses a stolen Social Security number to file a tax return claiming a fraudulent refund. Often, criminals will claim bogus tax credits or deductions to generate large refunds. Fraud is particularly prevalent for the earned income tax credit, residential energy credits and others. In many cases, the victims of tax-related identity theft only discover the crime when they file their genuine return with the IRS. By this time, all the taxpayer can do is to take steps to prevent a recurrence.

Being proactive

However, there are steps taxpayers can take to reduce the likelihood of being a victim of tax-related identity theft. Personal information must be kept confidential. This includes not only an individual's Social Security number (SSN) but other identification materials, such as bank and other financial account numbers, credit and debit card numbers, and medical and insurance information. Paper documents, including old tax returns if they were filed on paper returns, should be kept in a secure location. Documents that are no longer needed should be shredded.

Online information is especially vulnerable and should be protected by using firewalls, anti-spam/virus software, updating security patches and changing passwords frequently. Identity thieves are very skilled at leveraging whatever information they can find online to create a false tax return.

Impersonators

Criminals do not only steal a taxpayer's identity from documents. Telephone tax scams soared during the 2015 filing season. Indeed, a government watchdog reported that this year was a record high for telephone tax scams. These criminals impersonate IRS officials and threaten legal action unless a taxpayer immediately pays a purported tax debt. These criminals sound convincing when they call and use fake names and bogus IRS identification badge numbers. One sure sign of a telephone tax scam is a demand for payment by prepaid debit card. The IRS never demands payment using a prepaid debit card, nor does the IRS ask for credit or debit card numbers over the phone.

The IRS, the Treasury Inspector General for Tax Administration (TIGTA) and the Federal Tax Commission (FTC) are investigating telephone tax fraud. Individuals who have received these types of calls should alert the IRS, TIGTA or the FTC, even if they have not been victimized.

Tax-related identity theft is a time consuming process for victims so the best defense is a good offense. Please contact our office if you have any questions about tax-related identity theft.

The IRS requires that taxpayers substantiate their donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS's requirements.

The IRS requires that taxpayers substantiate their donations to charity. Whatever the donation is, whether money or a household item or clothing, the substantiation rules must be followed. The rules are complex and frequently tripped up taxpayers who had good intentions but failed to satisfy the IRS's requirements.

Substantiation

One way to understand the IRS's requirements is to break them down by monetary amount and the type of donation, money and/or household items or clothing.

• To deduct a contribution of cash, check, or other monetary gift (of less than $250), a taxpayer must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.
• To claim a deduction for contributions of cash or property equaling $250 or more, the taxpayer must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.
• If the total deduction for all noncash contributions for the year is over $500, the taxpayer must file Form 8283, Noncash Charitable Contributions, with the IRS.
• Donations valued at more than $5,000 generally require an appraisal by a qualified appraiser.

The IRS also requires that donations of clothing and household items be in good used condition or better to be deductible. Special rules apply to donations of motor vehicles, boats and aircraft.

Tax Court sheds light

In April, the U.S. Tax Court issued an instructive decision (Kunkel, TC Memo. 2015-71) on the steps taxpayers must take to deduct a contribution to a charitable organization. The taxpayers in Kunkel made a number of donations, some by cash and others of household items and clothing, but the court disallowed nearly all of the claimed deductions because the taxpayers failed to follow the rules.

In this case, the taxpayers reported $42,000 in charitable contributions, comprising $5,000 in cash and $37,000 in noncash donations. The noncash contributions were donations of books, clothing, furniture, and household items. The taxpayers told the IRS that they took the household items, clothing and books to charities in batches, which they claimed were worth less than $250 because they believed this eliminated the need to get receipts. Other times, one or more charities came to the taxpayers' residence and picked up the household items (however, the taxpayers were not home at the time of the pickup and the charities left undated doorknob hangers as receipts).

The Tax Court reminded the taxpayers that for all contributions of $250 or more, a taxpayer generally must obtain a contemporaneous written acknowledgment from the charity. The court found it implausible that the taxpayers had made their donations in batches worth less than $250. The court calculated that this would mean they had made these donations on 97 different occasions in one year. The court also found that the doorknob hangers were inadequate substantiation of their claimed donations. The doorknob hangers not specific to taxpayer, did not describe the property contributed, and were not contemporaneous written acknowledgments, the court found.

This article is a very high level overview of the IRS's substantiation requirements for donations to charity. If you have any questions about the substantiation or other requirements for a gift you are making to a charity, please contact our office for more details.

An employer must withhold income taxes from compensation paid to common-law employees (but not from compensation paid to independent contractors). The amount withheld from an employee's wages is determined in part by the number of withholding exemptions and allowances the employee claims. Note that although the Tax Code and regulations distinguish between withholding exemptions and withholding allowances, the terms are interchangeable. The amount of reduction attributable to one withholding allowance is the same as that attributable to one withholding exemption. Form W-4 and most informal IRS publications refer to both as withholding allowances, probably to avoid confusion with the complete exemption from withholding for employees with no tax liability.

An employer must withhold income taxes from compensation paid to common-law employees (but not from compensation paid to independent contractors). The amount withheld from an employee's wages is determined in part by the number of withholding exemptions and allowances the employee claims. Note that although the Tax Code and regulations distinguish between "withholding exemptions" and "withholding allowances," the terms are interchangeable. The amount of reduction attributable to one withholding allowance is the same as that attributable to one withholding exemption. Form W-4 and most informal IRS publications refer to both as withholding allowances, probably to avoid confusion with the complete exemption from withholding for employees with no tax liability.

An employee may change the number of withholding exemptions and/or allowances she claims on Form W-4, Employee's Withholding Allowance Certificate. It is generally advisable for an employee to change his or her withholding so that it matches his or her projected federal tax liability as closely as possible. If an employer overwithholds through Form W-4 instructions, then the employee has essentially provided the IRS with an interest-free loan. If, on the other hand, the employer underwithholds, the employee could be liable for a large income tax bill at the end of the year, as well as interest and potential penalties.

How allowances affect withholding

For each exemption or allowance claimed, an amount equal to one personal exemption, prorated to the payroll period, is subtracted from the total amount of wages paid. This reduced amount, rather than the total wage amount, is subject to withholding. In other words, the personal exemption amount is $4,000 for 2015, meaning the prorated exemption amount for an employee receiving a biweekly paycheck is $153.85 ($4,000 divided by 26 paychecks per year) for 2015.

In addition, if an employee's expected income when offset by deductions and credits is low enough so that the employee will not have any income tax liability for the year, the employee may be able to claim a complete exemption from withholding.

Changing the amount withheld

Taxpayers may change the number of withholding allowances they claim based on their estimated and anticipated deductions, credits, and losses for the year.  For example, an employee who anticipates claiming a large number of itemized deductions and tax credits may wish to claim additional withholding allowances if the current number of withholding exemptions he is currently claiming for the year is too low and would result in overwithholding.

Withholding allowances are claimed on Form W-4, Employee's Withholding Allowance Certificate, with the withholding exemptions. An employer should have a Form W-4 on file for each employee. New employees generally must complete Form W-4 for their employer. Existing employees may update that Form W-4 at any time during the year, and should be encouraged to do so as early as possible in 2015 if they either owed significant taxes or received a large refund when filing their 2014 tax return.

The IRS provides an IRS Withholding Calculator at www.irs.gov/individuals that can help individuals to determine how many withholding allowances to claim on their Forms-W-4. In the alternative, employees can use the worksheets and tables that accompany the Form W-4 to compute the appropriate number of allowances.

Employers should note that a Form W-4 remains in effect until an employee provides a new one. If an employee does update her Form W-4, the employer should not adjust withholding for pay periods before the effective date of the new form. If an employee provides the employer with a Form W-4 that replaces an existing Form W-4, the employer should begin to withhold in accordance with the new Form W-4 no later than the start of the first payroll period ending on or after the 30th day from the date on which the employer received the replacement Form W-4.

Beginning January 1, 2014, the Affordable Care Act (ACA) required individuals to carry minimum essential health coverage or make a shared responsibility payment, unless exempt. Individuals will report on their 2014 federal income tax return if they had minimum essential health coverage for all or part of the year. Individuals who file Form 1040, U.S. Individual Income Tax Return, will indicate on Line 61 if they were covered by minimum essential health coverage for 2014, if they are exempt from the requirement to carry minimum essential health coverage or if they are making an individual shared responsibility payment.

Beginning January 1, 2014, the Affordable Care Act (ACA) required individuals to carry minimum essential health coverage or make a shared responsibility payment, unless exempt. Individuals will report on their 2014 federal income tax return if they had minimum essential health coverage for all or part of the year. Individuals who file Form 1040, U.S. Individual Income Tax Return, will indicate on Line 61 if they were covered by minimum essential health coverage for 2014, if they are exempt from the requirement to carry minimum essential health coverage or if they are making an individual shared responsibility payment.

Minimum essential coverage

Minimum essential coverage is a term used to describe the type of coverage an individual needs to have to meet the individual responsibility requirement under the ACA. Nearly all individuals covered by employer-sponsored health insurance are treated under the ACA as carrying minimum essential coverage. Coverage obtained through the ACA Marketplace as well as Medicare, TRICARE and the Children’s Health Insurance Program (CHIP) qualifies as minimum essential coverage. An important exception to minimum essential coverage is coverage that provides limited benefits, such as stand-alone dental insurance, accident or disability income insurance and workers’ compensation insurance. If you have any questions whether your health coverage is minimum essential coverage requirement, please contact our office.

Exemptions     

The ACA sets out a number of categories of individuals exempt from the individual shared responsibility requirement:

• Members of Certain Religious Sects
• Short Coverage Gap
• Certain Noncitizens
• Coverage is Considered Unaffordable
• Household Income below the Return Filing Threshold
• Members of Federally-Recognized Native American Nations
• Members of Health Care Sharing Ministries
• Incarcerated individuals
• Hardships

Many of these exemptions are quite technical and have various sub-categories of exemptions. Some exemptions are available only through the ACA Marketplace, others only from the IRS and others from either the ACA Marketplace or the IRS. Please contact our office for more information about a particular exemption and how to apply for an exemption.

Shared responsibility payment

For 2014, the individual shared responsibility payment is the greater of:

• One percent of household income that is above the tax return filing threshold for the individual’s filing status; or
• The individual’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285, but capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2014.

For 2014, the annual national average premium for a bronze level health plan available through the Marketplace is $2,448 per individual ($204 per month per individual), but $12,240 for a family with five or more members ($1,020 per month for a family with five or more members).

Here’s an example from the IRS:

Emma and Noah are married and have two children under 18. The couple did not have minimum essential coverage for any family member for any month during 2014 and no one in the family qualified for an exemption from the individual shared responsibility requirement. For 2014, their household income is $70,000 and their filing threshold is $20,300. The IRS explained that to determine their individual shared responsibility payment using the income formula, the couple would subtract $20,300 (filing threshold) from $70,000 (2014 household income). The result is $49,700. One percent of $49,700 equals $497. The couple’s flat dollar amount is $285, or $95 per adult and $47.50 per child. The total of $285 is the flat dollar amount in 2014. The family’s annual national average premium for bronze level coverage through the Marketplace for 2014 is $9,792 ($2,448 x 4). Because $497 is greater than $285 and is less than $9,792, their shared responsibility payment is $497 for 2014, or $41.41 per month for each month the family is uninsured (1/12 of $497 equals $41.41).

Please contact our office for more information about the ACA’s individual shared responsibility requirement.

The IRS has announced an increase in the optional business standard mileage reimbursement rate for 2015. The business standard mileage rate increased by one and a half cents, to 57.5 cents (up from 56 cents for 2014). The 2015 standard mileage rate for medical and moving expenses decreased slightly to 23 cents (down from 23.5 cents for 2014). The charitable mileage rate, however, is set by statute at a flat 14 cents per mile without inflation adjustment each year. The revised rates apply to deductible transportation expenses paid or incurred for business or medical/moving expenditures, or qualified charitable miles driven, on or after January 1, 2015.

The IRS has announced an increase in the optional business standard mileage reimbursement rate for 2015. The business standard mileage rate increased by one and a half cents, to 57.5 cents (up from 56 cents for 2014). The 2015 standard mileage rate for medical and moving expenses decreased slightly to 23 cents (down from 23.5 cents for 2014). The charitable mileage rate, however, is set by statute at a flat 14 cents per mile without inflation adjustment each year. The revised rates apply to deductible transportation expenses paid or incurred for business or medical/moving expenditures, or qualified charitable miles driven, on or after January 1, 2015.

The IRS works with an independent contractor to establish the business, medical and moving expense standard rates. The IRS and the independent contractor take into account the fixed and variable costs of operating an automobile, such as fuel costs and maintenance expenses. The decline in fuel prices during 2014, however, was not reflected in the business standard mileage rate for 2015. Some practitioners have speculated this could indicate that the IRS does not expect the low gas prices to last. Alternatively, if prices continue to decline, the IRS could issue a mid-year adjustment of the rate during 2015.

Some background

The standard mileage rates for business use, medical and moving expenses, and charitable usage, may be used by an employee or self-employed taxpayer to compute the allowable deduction attributable to his or her business use of a car. Taxpayers also have the option of calculating the actual cost of operating a vehicle for business and deducting that amount, but using the standard mileage rate is the simplest method of computing automobile expenses because it simplifies the amount of required recordkeeping. This is because business standard mileage rate is designed to take into account costs such as maintenance and repairs, gas and oil, depreciation, insurance, and license and registration fees. For example, the depreciation component of the business standard mileage rate for 2015 will be 24 cents-per-mile, a two-cent increase from the 22-cents-per-mile rate that was effective for 2014.

Because depreciation and other costs are already factored into the standard rate, taxpayers using the standard mileage rate may not deduct depreciation, maintenance and fees, gasoline, insurance, or vehicle registration costs. The plus side is that standard mileage rate taxpayers do not need to maintain detailed records on these costs.

The taxpayer using the standard mileage rate need only keep a log of his or her business miles. To calculate the deduction, the taxpayer will multiply the standard mileage rate by the number of business miles traveled. Taxpayers using the standard rate may also deduct any business-related parking fees and tolls.

Requirements

Taxpayers must meet several requirements before they may use the business standard mileage rate. First, they must be either self-employed or an employee who has incurred automobile costs for business that were not reimbursed by the employer. The taxpayer must either own or lease the car. Additional requirements are listed in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Certain types of travel are not considered deductible, however. For example the cost of commuting from the taxpayer’s home to his or her place of business is considered nondeductible. In general, deductible transportation expenses are deemed ordinary and necessary costs of:

• Traveling from one workplace to another in the course of your business;
• Visiting clients or customers;
• Attending a business meeting away from your regular workplace; or
• Traveling from your home to a temporary workplace when a taxpayer has one or more regular places of work.

Fixed and variable rate (FAVR) allowance

Taxpayers may also use the fixed and variable rate allowance to substantiate automobile expenses. Under the FAVR method, an employer reimburses the employee’s expenses with a mileage allowance using a flat rate or stated schedule that combines periodic fixed and variable payments.

For purposes of computing the allowance under a FAVR plan, the standard automobile cost may not exceed $28,200 for automobiles; but the rate increases to $30,800 for trucks and vans (up from $30,400 for 2014).

Please contact this office if you have any questions regarding how your business or how you as an employee can qualify for use of the standard mileage rate (and whether you might be better off using the actual cost method for claiming a deduction for vehicle use).

IR-2014-114, Notice 2014-79

The upcoming filing season is expected to be challenging for taxpayers and the IRS as new requirements under the Patient Protection and Affordable Care Act kick-in. Taxpayers, for the first time, must make a shared responsibility payment if they fail to carry minimum essential health care coverage or qualify for an exemption. At the same time, there is growing uncertainty over one of the key elements of the Affordable Care Act: the Code Sec. 36B premium assistance tax credit as litigation makes its way to the U.S. Supreme Court.

The upcoming filing season is expected to be challenging for taxpayers and the IRS as new requirements under the Patient Protection and Affordable Care Act kick-in. Taxpayers, for the first time, must make a shared responsibility payment if they fail to carry minimum essential health care coverage or qualify for an exemption. At the same time, there is growing uncertainty over one of the key elements of the Affordable Care Act: the Code Sec. 36B premium assistance tax credit as litigation makes its way to the U.S. Supreme Court.

Individual shared responsibility payment

Individuals who are not exempt from the individual mandate and who do not carry minimum essential coverage in 2014 must make a shared responsibility payment. The payment is due when the individual files his or her 2014 tax return in 2015. In November, the IRS’s national ACA coordinator said that the agency will work with individuals who owe a shared responsibility payment and may not have the resources to make the payment when they file their return. Keep in mind that the IRS will apply any refund to a taxpayer’s unpaid shared responsibility payment. The IRS cannot, however, use its lien and levy power to collect an unpaid shared responsibility payment.

Note. For 2014, the shared responsibility payment amount generally is the greater of: One percent of the person's household income that is above the tax return threshold for their filing status; or a flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285. The individual shared responsibility payment, however, does not stay at this level after 2014. By 2016, the payment grows significantly.

In November, the IRS clarified when Medicaid coverage qualifies as minimum essential coverage and when it may not. The IRS also clarified how employer contributions to a cafeteria plan impact minimum essential coverage. Final regulations exclude employer contributions to a cafeteria plan from an employee’s household income for purposes of determining minimum essential coverage,

Exemptions

The IRS reminded individuals in November that they may be exempt from the requirement to carry minimum essential coverage. There are nine main exemptions: religious conscience; health care sharing ministries; members of federally recognized Native American nations; individuals whose income is below the minimum return filing threshold; individuals with a short coverage gap; hardship cases; affordability cases; incarcerated individuals; and individuals not lawfully present in the U.S.

Some exemptions are obtained through the Marketplaces, some through the filing process, and some either way. The exemptions for members of federally recognized Native American nations, members of health care sharing ministries and individuals who are incarcerated are available either from the Marketplace or claiming the exemption as part of filing a federal income tax return. The exemptions for lack of affordable coverage, a short coverage gap, and household income below the filing threshold and individuals who are not lawfully present in the U.S. may be claimed only as part of filing a federal income tax return. In November, the IRS removed references to specific hardships and streamlined the process for obtaining an exemption because of a hardship.

Code Sec. 36B litigation

The Code Sec. 36B premium assistance tax credit helps offset the cost of health insurance obtained through the ACA Marketplace. According to the U.S. Department of Health and Human Services (HHS), more than two-thirds of enrollees in Marketplace coverage were eligible for the credit in 2014. IRS regulations for the credit, however, have come under fire for being contrary to the ACA. The regulations allow enrollees in state-run Marketplaces and federal-facilitated Marketplaces to claim the credit. 

In July, the U.S. Court of Appeals for the District of Columbia Circuit struck down the IRS regulations in Halbig, 2014-2 USTC ¶50,366. The D.C. Circuit found that the plain language of the Affordable Care Act limits the credit to enrollees in state-run Marketplaces. In contrast, the Court of Appeals for the Fourth Circuit upheld the regulations in King, 2014-2 USTC ¶50,367. The Fourth Circuit found that it could not say definitively that Congress intended to limit the Code Sec. 36B credit to individuals who obtain insurance through state-run Marketplaces.

The U.S. Supreme Court announced in November that it will hear an appeal of King. The Supreme Court is expected to hear oral arguments about the IRS regulations in early 2015. A decision will likely be announced in June 2015. Our office will keep you posted of developments.

Open enrollment

The ACA Marketplace opened for enrollment for 2015 coverage on November 15 and runs through February 15, 2015. HHS explained that it has streamlined application procedures for individuals who are renewing coverage and who are applying for coverage for the first time. The Small Business Health Option Program (SHOP) also opened on November 15. Small employers (employers with 50 or fewer full-time equivalent employees) may enroll qualified employees in health coverage through SHOP.

Please contact our office if you have any questions about the Affordable Care Act and the new requirements.

As most people know, a taxpayer can take a distribution from an IRA without being taxed if the taxpayer rolls over (contributes) the amount received into an IRA within 60 days. This tax-free treatment does not apply if the individual rolled over another distribution from an IRA within the one-year period ending on the day of the second distribution.

As most people know, a taxpayer can take a distribution from an IRA without being taxed if the taxpayer rolls over (contributes) the amount received into an IRA within 60 days. This tax-free treatment does not apply if the individual rolled over another distribution from an IRA within the one-year period ending on the day of the second distribution.

Taxpayers and the IRS both believed that this one-rollover-per-year limit was applied separately to each IRA owned by the individual. If an individual owned two IRAs, for example, the taxpayer could do two rollovers in the appropriate period - one from each IRA. The IRS applied this interpretation in proposed regulations and in Publication 590, IRAs.

One rollover per taxpayer

In Bobrow, TC Memo. 2014-21, CCH Dec. 59,823(M), issued in January 2014, the Tax Court concluded that a taxpayer could make only one nontaxable rollover between IRAs within a one-year period, regardless of how many IRAs the taxpayer maintained. Thus, the one-per-year limit applied to the taxpayer, not to each separate IRA owned by the taxpayer.

In Notice 2014-15 and Announcement 2014-32, the IRS indicated that it would follow the Bobrow interpretation. It withdrew the proposed regulations, and will issue a new Publication 590-A, Contributions to IRAs, that applies the Bobrow interpretation.

Transition rule

In the notice and the announcement, the IRS provided a transition rule that it will not apply the new interpretation of the limit on permissible IRA rollovers until January 1, 2015. A distribution from an IRA in 2014 that is rolled over to another IRA will be disregarded in applying the new rule to 2015 distributions, provided that the 2015 distribution is from a different IRA that was included in the 2014 rollover.

Exceptions

The IRS noted that there are several types of rollovers that that are not subject to the Bobrow rule: a rollover from a traditional IRA to a Roth IRA; a rollover to or from a qualified plan; and trustee-to-trustee transfers. The IRS stated that trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly between IRAs, or by providing the IRA owner with a check made payable to the trustee of the receiving IRA.

However, a rollover between Roth IRAs would preclude a separate rollover within the one-year period between the individual's traditional IRAs; similarly, a rollover between traditional IRAs would preclude a rollover between Roth IRAs with the one-year period.

Some gifts to employees are too insignificant for the IRS to care about. The IRS calls these gifts de minimis fringe benefits. A de minimis fringe benefit is any gift or service with a value so small that accounting for it is unreasonable or administratively impracticable. The value must be nominal or very low. Turkeys given to employees at Thanksgiving are a good example.

Deduction for employer

If a gift is de minimis, you can deduct the cost of the gift as a business expense. It's a win-win situation for your employees too. They do not have to include the value of the gift in their taxable incomes or pay employment taxes on the gift.

Examples

The precise meaning of de minimis is difficult to define. Lots of gifts and services are treated as de minimis. Some are easy to identify; others are not. A list of de minimis gifts has been developed over many years by the IRS and the courts. It's the result of a lot of litigation.

Here are some frequent examples:

• Coffee and soft drinks;
• Doughnuts and other pastries;
• Fruit;
• Flowers;
• Holiday and birthday gifts with a low monetary value;
• Local telephone calls; and
• Photocopying.

Meals

Meals are tricky. Meals are not de minimis merely because an employer seldom feeds its employees or, when it does feed them, it fails to keep track of who had what. Substantial food and beverages are not de minimis. For example, the IRS ruled that an employer that paid between $100 and $700 per person to cater a luncheon at a business conference for its salespersons could not deduct the cost of the meal. In that case, the IRS determined that accounting for the cost of the meal was reasonable and administratively practicable.

Picnics are treated differently. So long as they are occasional and food costs are insubstantial, picnics generally qualify as de minimis fringe benefits. You can deduct the cost of the picnic and your employees don't have to include the value of the picnic in their incomes. You'll want to keep costs reasonable. An extravagant feast is not a picnic. Standard picnic foods and desserts, such as hamburgers, hot dogs and apple pie, should be deemed insubstantial. Contact our office today so we can help you plan an event for your employees that satisfies all of the de minimis rules.

The IRS has some good news for you. Under new rules, you may be able to gain a partial tax break on the full $250,000 capital gain exclusion ($500,000 if you file jointly with your spouse), even if you haven't satisfied the normal "two out of five year test" necessary to gain that tax benefit. You may qualify for an exception.

The IRS has some good news for you. Under generous tax rules, you may be qualify for a partial tax break on the full $250,000 capital gain exclusion ($500,000 if you file jointly with your spouse), even if you haven't satisfied the normal "two out of five year test" necessary to gain that tax benefit. You may qualify for an exception. However, under new rules established in the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income under Code Sec. 121 for periods that the home was not used as a principal residence.

Traditional approach

Homeowners who have owned or used their principal residence for less than two of the five years preceding the sale or exchange, or who have excluded gain from another sale or exchange during the last two years, may qualify for the reduced maximum exclusion if the sale or exchange is due to a change in place of employment, health, or unforeseen circumstances. The reduced exclusion is equal to the regular $250,000 ($500,000 for joint filers) exclusion amount multiplied by the number of days of ownership and use over the two-year period.

Reduced home sale exclusion

The 2008 Housing Act changed the homesale exclusion for home sales after December 31, 2008. Under the 2008 Housing Act, gain from the sale of a principal residence will no longer be excluded from a homeowner's gross income for periods that the home was not used as a principal residence (i.e. "non-qualifying use"). A period of absence generally counts as qualifying use if it occurs after the home was used as the principal residence.

In effect, the rule prevents the use of the Code Sec. 121 exclusion of gain from the sale of a principal residence of up to $250,000 ($500,000 for joint filers) for appreciation attributable to periods after 2008 that the home was used as a vacation home or rental property before being used as a principal residence.

Traditionally, the IRS was very reluctant to dispense people from the strict home exclusion rules. The IRS could make an exception based on a hardship or an unforeseen circumstance, but the criteria for these exceptions weren't very clear. The exceptions weren't always uniform. Now, the government has clarified the exceptions and significantly expanded them.

Criteria

Health reasons You may exclude gain if you sell your residence because of ill health. If your physician recommends a change in residence, the IRS explained that would be sufficient grounds to qualify for the exclusion. This important exclusion is also available if your spouse, the co-owner of your home or a household member must relocate for health reasons.

Change in employment If you must relocate because of a change in employment, you may be able to exclude gain from the sale of your residence. Your new place of employment must be at least 50 miles farther away. Like the special exception for health reasons, you can qualify for this exception if you, your spouse, another co-owner of your home or a household member must move for this reason.

Unforeseen circumstances This exception is very broad and can be confusing. Before you think you qualify under this exception, seek advice from a tax professional. Here are some events that qualify as an unforeseen circumstance:

--(1) Death;

--(2) Divorce or separation;

--(3) Unemployment;

--(4) Multiple births from the same pregnancy;

--(5) Moving closer to care for a close relative who is ill;

--(6) Condemnation or seizure of your home;

--(7) War or terrorism; and

--(8) Natural or man-made disasters.

In addition to these exceptions, the IRS has discretion to determine other circumstances as unforeseen. Like the health and change in employment exceptions, you may be eligible for an exclusion based on unforeseen circumstances if you, your spouse, the co-owner of your home, or a household member satisfies one of these criteria.

Professional guidance

Before you think you qualify under any of the exceptions, seek advice from a tax professional. For example, to qualify for the unemployment exception, you must be eligible for unemployment compensation. To come under the exception that accommodates moving to take care of a close relative, careful medical records and personal logs should be maintained. By gathering the proper proof in advance, major headaches with the IRS may be avoided.