President Trump on March 27 signed the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The House approved the historically large emergency relief measure by voice vote just hours before Trump’s signature. The CARES Act cleared the Senate unanimously on March 25, by a 96-to-0 vote.

President Trump on March 27 signed the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The House approved the historically large emergency relief measure by voice vote just hours before Trump’s signature. The CARES Act cleared the Senate unanimously on March 25, by a 96-to-0 vote.

Generally, the following individual and business tax-related provisions are included in what lawmakers have dubbed the "phase three" COVID-19 emergency relief package:

• Direct cash payments of up to $1,200 for certain individual taxpayers and $2,400 for certain married couples filing jointly; those amounts would increase by $500 for every eligible child;
• The 10-percent early withdrawal penalty is waived for distributions up to $100,000 from qualified retirement accounts for coronavirus-related purposes;
• Payments delayed for employer-side payroll taxes;
• The taxable income limit is eliminated for certain net operating losses (NOL) and businesses and individuals can carry back NOLs arising in 2018, 2019, and 2020 to the last five tax years;
• Excess business loss rules suspended under section 461(l);
• Refunds accelerated of previously generated corporate AMT credits;
• Forgivable loans to small businesses that retain their employees throughout this crisis;
• Temporarily enact provisions of the bipartisan Employer Participation in Repayment Act, which would allow employers to contribute up to $5,250 tax-free to help pay down their employees’ student loans; and
• Various technical corrections to the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), including the so-called retail glitch.

Wolters Kluwer Special Report CARES Act Tax Briefing
Wolters Kluwer provides a detailed discussion of the tax-related provisions under the CARES Act in the "Special Report CARES Act (COVID-19 Economic Stimulus) Tax Briefing" (at https://engagetax.wolterskluwer.com/Cares-Act.pdf).

Let’s Work Together
Treasury Secretary Steven Mnuchin, who spent many late nights in the U.S. Capitol recently participating in bipartisan negotiations on the Senate’s CARES Act, thanked Republican and Democratic leadership in both the Senate and the House for their bipartisanship. "I am pleased that Congress has passed the CARES Act, the largest economic relief package in history for hardworking Americans and businesses that, through no fault of their own, have been adversely impacted by the coronavirus outbreak," Mnuchin said in a March 27 press release. "President Trump is fully committed to ensuring that American workers and businesses have the resources they need. This legislation provides much-needed relief to help our fellow Americans overcome this difficult but temporary challenge."

Phase Four Economic Relief Package
The CARES Act is considered "phase three" of lawmakers’ and the Trump administration’s collaborative response to the COVID-19 pandemic. Meanwhile, lawmakers on both sides of the aisle, including House Ways and Means Committee Chair Richard Neal, D-Mass., have said they want to see a fourth economic relief measure.

"Our work to help Americans during this emergency won’t stop here. Congress must do more to address the significant public health and economic consequences of the coronavirus," Neal said in a March 27 statement. "In a fourth response package, I want to provide any needed additional support to people who have lost their incomes and to affected patients and health care providers. We should take bold action to improve our country’s economic health too," he added. Additionally, Neal said that he would like to see the Earned Income Tax Credit (EITC) and the Child Tax Credit expanded, as well as infrastructure investments to put people back to work and reinvigorate the economy.

Legislative View – Looking Back and Ahead
"From a legislative view, the CARES Act shares the key characteristics that we’ve seen with other emergency legislation, namely bipartisan willingness to forego typical concerns over cost and take action at unusual speed," John Gimigliano, principal-in-charge of federal legislative and regulatory services in the Washington National Tax practice of KPMG LLP, told Wolters Kluwer in a March 27 emailed statement. "Similar dynamics were apparent in other emergency legislation including bills enacted after the attacks of September 11, Hurricane Katrina, and during the financial crisis," Gimigliano added. "But those precedents also show that each of those three characteristics begins to break down with successive legislative attempts. That made quick passage of the CARES Act key and the development of a ‘coronavirus 4’ package something to watch closely."

Lawmakers are continuing talks on a "phase four" economic relief package in response to the COVID-19 global pandemic. To that end, the House’s "CARES 2" package is currently in the works and could see a floor vote as early as this month.

Lawmakers are continuing talks on a "phase four" economic relief package in response to the COVID-19 global pandemic. To that end, the House’s "CARES 2" package is currently in the works and could see a floor vote as early as this month.

"CARES 2"
President Trump signed into law the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-127) on March 27. The CARES Act is known on Capitol Hill as the third phase of legislation aimed to address the national emergency. However, House Speaker Nancy Pelosi, D-Calif., has said that a House floor vote on a "CARES 2" package could happen later in April.

"The acceleration of the coronavirus crisis demands that we continue to legislate," Pelosi said in a "Dear Colleagues" letter sent out to members during the week of April 6. "We must double down on the down-payment we made in the CARES Act by passing a CARES 2 package, which will extend and expand this bipartisan legislation to meet the needs of the American people," she added. According to Pelosi, the CARES 2 package would (1) go further in assisting small businesses (including farmers), (2) extend and strengthen unemployment benefits, and (3) distribute additional direct payments.

"Our communities cannot afford to wait, and we must move quickly," Pelosi wrote. "It is my hope that we will craft this legislation and bring it to the Floor later this month."

Paycheck Protection Program
Meanwhile, the Trump administration is seeking an increase in funding for the CARES Act’s Paycheck Protection Program. Accordingly, several bipartisan lawmakers have called for congressional action to provide the necessary funding needed for small businesses. The administration is reportedly asking for an additional $250 billion for the largely overrun loan program.

"Through this tax break, workers can get back on payrolls and stay there. By working with their bank, small businesses can get eight weeks of cash-flow assistance through 100 percent federally guaranteed loans," House Ways and Means ranking member Kevin Brady, R-Tex., said on April 7. "If the business [including churches] uses the money to maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven."

Likewise, Senate Majority Leader Mitch McConnell, R-Ky., called for swift action on the matter. "Congress needs to act with speed and total focus to provide more money for this uncontroversial bipartisan program," McConnell said on April 7. "I will work with [Treasury] Secretary Steven Mnuchin and [Senate Minority Leader Chuck] Schumer and hope to approve further funding for the Paycheck Protection Program by unanimous consent or voice vote during the next scheduled Senate session on Thursday."

The IRS announced on March 30 that distribution of economic impact payments in response to the coronavirus (COVID-19) pandemic would begin in the next three weeks. On April 1, the Treasury Department clarified that Social Security and Railroad Retirement benefit recipients who are not required to file a federal tax return will not have to file a return in order to receive their economic impact payment.

The IRS announced on March 30 that distribution of economic impact payments in response to the coronavirus (COVID-19) pandemic would begin in the next three weeks. On April 1, the Treasury Department clarified that Social Security and Railroad Retirement benefit recipients who are not required to file a federal tax return will not have to file a return in order to receive their economic impact payment.

Eligibility Based on Returns, Generally
Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals, $2,400 for married couples, and up to $500 for each qualifying child. The payment amount will be reduced based on adjusted gross income (AGI). The phase-out begins at AGI above $75,000 for single individuals, $150,000 for joint filers, with the payment amount reduced by $5 for each $100 above the thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.

The IRS will generally base the payment amount on information from:

• the 2019 tax return for taxpayers who have filed their 2019 return; or
• the 2018 tax return for taxpayers who have not yet filed the their 2019 return.

1099s Used for Certain Recipients
The IRS will use the information on the Form SSA-1099 or Form RRB-1099 to generate economic impact payments to recipients of benefits reflected in the Form SSA-1099 or Form RRB-1099 who are not required to file a tax return and did not file a return for 2018 or 2019. This includes senior citizens, Social Security recipients and railroad retirees who are not otherwise required to file a tax return.

These recipients will receive these payments as a direct deposit or by paper check, just as they would normally receive their benefits.

No payments for dependents, currently. Since the IRS would not have information regarding any dependents for these recipients, each person would receive $1,200 per person, without the additional amount for any dependents at this time.

Other Details
The IRS has addressed other common queries related to economic impact payments:

• Calculating and depositing the payment: The IRS will calculate and automatically send the economic impact payment to those eligible. The economic impact payment will be deposited directly into the same banking account reflected on the 2019 tax returns filed by taxpayers.
• Direct deposit information: A web-based portal for individuals is being developed to provide the taxpayers’ banking information to the IRS online, so that they can receive payments immediately as opposed to checks in the mail.
• Taxpayers who have not filed their tax return for 2018 or 2019: The IRS urges taxpayers with an outstanding tax filing obligation for 2018 or 2019 to file sooner to receive an economic impact payment. Taxpayers should include direct deposit banking information on their tax returns.
• Availability of economic impact payments: The IRS states that for those concerned about visiting a tax professional or local community organization in person to get help with a tax return, the economic impact payments will be available throughout the rest of 2020.

More Information
Even though it currently has a reduced staff in many of its offices, the IRS assures taxpayers that it remains committed to helping eligible individuals receive their payments expeditiously. The IRS urges taxpayers to visit its Coronavirus Tax Relief webpage ( https://www.irs.gov/coronavirus for updated information related to economic impact payments, rather than calling IRS assistors who are helping process 2019 returns.

For the latest information on the economic impact payments, see the IRS’s "Economic impact payments: What you need to know" webpage ( https://www.irs.gov/newsroom/economic-impact-payments-what-you-need-to-know).

The Treasury Department and IRS have provided a notice with additional relief for taxpayers, postponing until July 15, 2020, a variety of tax form filings and payment obligations that are due between April 1, 2020 and July 15, 2020. Associated interest, additions to tax, and penalties for late filing or late payment will be suspended until July 15, 2020. Additional time to perform certain time-sensitive actions during this period is also provided. The notice also postpones due dates with respect to certain government acts and postpones the application date to participate in the Annual Filing Season Program. This notice expands upon the relief provided in Notice 2020-18, I.R.B. 2020-15, 590, and Notice 2020-20, I.R.B. 2020-16, 660.

The Treasury Department and IRS have provided a notice with additional relief for taxpayers, postponing until July 15, 2020, a variety of tax form filings and payment obligations that are due between April 1, 2020 and July 15, 2020. Associated interest, additions to tax, and penalties for late filing or late payment will be suspended until July 15, 2020. Additional time to perform certain time-sensitive actions during this period is also provided. The notice also postpones due dates with respect to certain government acts and postpones the application date to participate in the Annual Filing Season Program. This notice expands upon the relief provided in Notice 2020-18, I.R.B. 2020-15, 590, and Notice 2020-20, I.R.B. 2020-16, 660.

NOTE: The relief is limited to the relief explicitly provided in Notice 2020-18, Notice 2020-20, and Notice 2020-23, and does not apply for any other type of federal tax, any other type of federal tax return, or any other time-sensitive act.

Relief Measures

• Taxpayers Affected by COVID-19 Emergency. Any person (as defined in Code Sec. 7701(a)(1)) with a federal tax payment obligation specified in the notice, or a federal tax return or other form filing obligation specified in the notice, which is due to be performed (originally or pursuant to a valid extension) on or after April 1, 2020, and before July 15, 2020, is affected by the COVID-19 emergency for purposes of the relief.
• Postponement of Due Dates. For an affected taxpayer, the due date for filing specified forms and making specified payments is automatically postponed to July 15, 2020. This relief is automatic: affected taxpayers do not have to call the IRS or file any extension forms, or send letters or other documents to receive this relief. However, affected taxpayers who need additional time to file may choose to file the appropriate extension form by July 15, 2020, to obtain an extension to file their return, but the extension date may not go beyond the original statutory or regulatory extension date.
• Specified Time-Sensitive Actions. Affected taxpayers also have until July 15, 2020, to perform all specified time-sensitive actions listed in either Reg. §301.7508A-1(c)(1)(iv) - (vi) or Rev. Proc. 2018-58, I.R.B. 2018-50, 990, that are due to be performed on or after April 1, 2020, and before July 15, 2020. This includes the time for filing all petitions with the Tax Court, or for review of a decision rendered by the Tax Court, filing a claim for credit or refund of any tax, and bringing suit upon a claim for credit or refund of any tax.
• Certain Government Acts. The notice also provides the IRS with additional time to perform the time-sensitive actions described in Reg. §301.7508A-1(c)(2). Due to the COVID-19 emergency, IRS employees, taxpayers, and other persons may be unable to access documents, systems, or other resources necessary to perform certain time-sensitive actions due to office closures or state and local government executive orders restricting activities.
• Annual Filing Season Program. Under Rev. Proc. 2014-42, I.R.B. 2014-29, 192, applications to participate in the Annual Filing Season Program for the 2020 calendar year must be received by April 15, 2020. The relief postpones the 2020 calendar year application deadline to July 15, 2020.

Specified Forms and Payments
The filing and payment obligations covered by the relief are the following:

• Individual income tax payments and return filings on Form 1040, Form 1040-SR, Form 1040-NR, Form 1040-NR-EZ, Form 1040-PR, and Form 1040-SS.
• Calendar year or fiscal year corporate income tax payments and return filings on Form 1120, Form 1120-C, Form 1120-F, Form 1120-FSC, Form 1120-H, Form 1120-L, Form 1120-ND, Form 1120-PC, Form 1120-POL, Form 1120-REIT, Form 1120-RIC, Form 1120-S, and Form 1120-SF.
• Calendar year or fiscal year partnership return filings on Form 1065 and Form 1066.
• Estate and trust income tax payments and return filings on Form 1041, Form 1041-N, and Form 1041-QFT.
• Estate and generation-skipping transfer tax payments and return filings on Form 706, Form 706-NA, Form 706-A, Form 706-QDT, Form 706-GS(T), Form 706-GS(D), Form 706-GS(D-1), and Form 8971.
• Gift and generation-skipping transfer tax payments and return filings on Form 709 that are due on the date an estate is required to file Form 706 or Form 706-NA.
• Estate tax payments of principal or interest due as a result of an election made under Code Secs. 6166, 6161, or 6163 and annual recertification requirements under Code Sec. 6166.
• Exempt organization business income tax and other payments and return filings on Form 990-T.
• Excise tax payments on investment income and return filings on Form 990-PF and return filings on Form 4720.
• Quarterly estimated income tax payments calculated on or submitted with Form 990-W, Form 1040-ES, Form 1040-ES (NR), Form 1040-ES (PR), Form 1041-ES, and Form 1120-W.
  Notice 2020-18, I.R.B. 2020-15, 590, and Notice 2020-20, I.R.B. 2020-16 are amplified. Rev. Proc. 2014-42, I.R.B. 2014-29, 192, is modified, applicable for calendar year 2020.

synopsisThe Treasury Department and the IRS have released the "Get My Payment" tool to assist Americans in receiving their “economic impact payments” issued under the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The free tool went live on April 15, and is located at https://www.irs.gov/coronavirus/get-my-payment.

The Treasury Department and the IRS have released the "Get My Payment" tool to assist Americans in receiving their “economic impact payments” issued under the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The free tool went live on April 15, and is located at https://www.irs.gov/coronavirus/get-my-payment.

Get My Payment
The "Get My Payment" tool generally allows consumers to check the status of their payments, and to enter their direct deposit information if the IRS does not already have it.

"Thanks to hard work and long hours by dedicated IRS employees, these payments are going out on schedule, as planned, without delay, to the nation," the IRS said in an April 15 statement emailed to Wolters Kluwer. "The IRS employees are delivering these payments in record time compared to previous stimulus efforts."

Treasury had earlier announced that millions of Americans were already starting to see their economic impact payments. "These payments are being automatically issued to eligible 2019 or 2018 federal tax return filers who received a refund using direct deposit," Treasury said in an April 13 press release.

Non-Filers Option
Americans who did not file a tax return in 2018 or 2019 can use the "Non-Filers: Enter Payment Info Here" option ( https://www.irs.gov/coronavirus/non-filers-enter-payment-info-here) to submit basic personal information to receive their payments.

For those who filed 2018 or 2019 tax returns with direct deposit information or receive Social Security, however, no additional action on their part is needed. These individuals are expected to automatically receive the payment in their bank accounts.

"We are pleased that more than 80 million Americans have already received their Economic Impact Payments by direct deposit in record time," Treasury Secretary Steven Mnuchin said in an April 15 press release. "The free ‘Get My Payment App’ will allow Americans who do not have their direct deposit information on file with the IRS to input it, track the status, and get their money fast."

Status Not Available
Many individuals began voicing complaints on April 15 that the Get My Payment tool was not functional. In response, the IRS on the same day stated: "The Get My Payment site is operating smoothly and effectively. As of mid-day today, more than 6.2 million taxpayers have successfully received their payment status and almost 1.1 million taxpayers have successfully provided banking information, ensuring a direct deposit will be quickly sent. IRS is actively monitoring site volume; if site volume gets too high, users are sent to an online ‘waiting room’ for a brief wait until space becomes available, much like private sector online sites. Media reports saying the tool ‘crashed’ are inaccurate."

The IRS also provided consumers with the following information regarding certain situations in which payment status is deemed unavailable. The IRS listed the following reasons why users may receive the "Status Not Available" notice while using the online tool:

• If you are not eligible for a payment (see IRS.gov on who is eligible and who is not eligible).
• If you are required to file a tax return and have not filed in tax year 2018 or 2019. If you recently filed your return or provided information through Non-Filers: Enter Your Payment Info on IRS.gov. Your payment status will be updated when processing is completed.
• If you are a SSA or RRB Form 1099 recipient, SSI or VA benefit recipient– the IRS is working with your agency to issue your payment; your information is not available in this app yet.

"You can check the app again to see whether there has been an update to your information," the IRS said. "The IRS reminds taxpayers that Get My Payment data is updated once per day, so there’s no need to check back more frequently."

As a result of the retroactive assignment of a 15-year recovery period to qualified improvement property (QIP) placed in service after 2017, QIP generally qualifies for bonus depreciation, and typically at a 100 percent rate. IRS guidance requires taxpayers who previously filed two or more returns using what is now an "incorrect" depreciation period (usually 39 years) to file an accounting method change on Form 3115, Application for Change in Accounting Method, to claim bonus depreciation and/or depreciation based on the 15-year recovery period. The automatic consent procedures apply. If only one return has been filed, a taxpayer may either file Form 3115 or an amended return. No alternatives to filing Form 3115 or an amended return are provided.

As a result of the retroactive assignment of a 15-year recovery period to qualified improvement property (QIP) placed in service after 2017, QIP generally qualifies for bonus depreciation, and typically at a 100 percent rate. IRS guidance requires taxpayers who previously filed two or more returns using what is now an "incorrect" depreciation period (usually 39 years) to file an accounting method change on Form 3115, Application for Change in Accounting Method, to claim bonus depreciation and/or depreciation based on the 15-year recovery period. The automatic consent procedures apply. If only one return has been filed, a taxpayer may either file Form 3115 or an amended return. No alternatives to filing Form 3115 or an amended return are provided.

The guidance also allows taxpayers to make or revoke various elections whether or not directly related to QIP, such as the election out of bonus depreciation. These elections and revocations may be made on an amended return or Form 3115.

The guidance applies to a tax year ending in 2018, 2019, or 2020.

Comment: QIP placed in service in 2018 by a 2017/2018 fiscal-year taxpayer is covered by the guidance, since it applies to tax years ending in 2018.

Amended Return Due Date
When an amended return (including an amended Form 1065, U.S. Return of Partnership Income) is filed for the placed-in-service year to correct the QIP depreciation period and/or claim bonus depreciation, the amended return is due on or before October 15, 2021, but not later than the applicable assessment limitations period. Certain partnerships subject to the centralized audit regime may file an administrative adjustment request (AAR) by October 15, 2021.

Late Elections and Revocations
For a limited time, taxpayers may make a late election or revoke a prior election that was made for depreciable property placed in service during a tax year ending in 2018, 2019, or 2020. The return must have been timely filed and filed before April 17, 2020. These elections and revocations are not limited to QIP. The covered elections are:

• election to use the MACRS alternative depreciation system (ADS) ( Code Sec. 168(g)(7));
• election to claim bonus depreciation on specified plants in the year of planting or grafting ( Code Sec. 168(k)(5));
• election out of bonus depreciation for a class of property ( Code Sec. 168(k)(7)); and
• election to claim bonus depreciation at the 50 percent rate in lieu of the 100 percent rate for all bonus depreciation property placed in service in a tax year that includes September 28, 2017 ( Code Sec. 168(k)(10)).

Generally, making or revoking an election is not considered an accounting method change. However, because of the administrative burden of filing amended returns and AARs, the IRS allows taxpayers to treat the making or revoking of these election as a change in method of accounting with a Code Sec. 481(a) adjustment.

Taxpayers may make or revoke these elections by filing an amended return (including any subsequent affected return) or AAR for the placed-in-service year of the property by October 15, 2021. However, if earlier, the amended return must be filed no later than the expiration of the limitations period for the tax year of the amended return.

For taxpayer choosing not to file an amended return, a Form 3115 to make or revoke these elections must be filed with a timely filed original income tax return (or Form 1065) for the first or second tax year after the tax year in which the property was placed in service, or with a timely filed original income return (or Form 1065) filed on or after April 17, 2020, and on or before October 15, 2021.

Excluded Taxpayers
These procedures do not apply to QIP that was expensed under any provision, including Code Sec. 179 as qualified real property. They also do not apply to an electing real property trade or business or electing farming business that made a late election or withdrew an election related to the business interest deduction limitations ( Code Sec. 163(j)) for the tax year in which QIP was placed in service. (Changes to depreciation affected by the late election or withdrawn election were previously addressed in Rev. Proc. 2020-22.)

Accounting Method Change Lists
Rev. Proc. 2019-43, 2019-48 I.R.B. 1107, which contains all automatic consent accounting method changes, is modified to add new section 6.19 to reflect the rules described in this guidance. Section 6.19 provides that certain "eligibility" rules do not apply. Thus, the automatic procedure will apply even if the change is made in the taxpayer’s last tax year of business or the taxpayer made a change for the same item during any of the five tax years ending with the year of change.

Rev. Proc. 2015-56, 2015-49, I.R.B. 827, relating to the remodel-refresh safe harbor, is also modified to require a taxpayer to substantiate the portion of the property that is qualified improvement property.

The IRS has issued guidance providing administrative relief under the Coronavirus Aid, Relief and Economic Security (CARES) Act ( P.L. 116-136) for taxpayers with net operating losses (NOLs).

The IRS has issued guidance providing administrative relief under the Coronavirus Aid, Relief and Economic Security (CARES) Act ( P.L. 116-136) for taxpayers with net operating losses (NOLs).

The CARES Act provides a five-year carryback for NOLs arising in tax years beginning in 2018, 2019, and 2020. The Tax Cuts and Jobs Act ( P.L. 115-97) had eliminated carryback periods effective for tax years ending after 2017. Some taxpayers have filed 2018 and 2019 returns without using five-year carryback period.

The relief:

• provides procedures for waiving the carryback period in the case of an NOL arising in a tax year beginning after December 31, 2017, and before January 1, 2020; and
• describes how taxpayers with NOLs arising in tax years 2018, 2019, or 2020 can elect to either waive the carryback period for those losses entirely or to exclude from the carryback period for those losses any years in which the taxpayer has an inclusion in income as a result of the Code Sec. 965(a) transition tax.

Six Month Extension for Filing Refund Claims
Taxpayers are granted an extension of time to file refund applications on Form 1045 (individuals, estates, and trusts) or Form 1139 (corporations) with respect to the carryback of an NOL that arose in any tax year that began during calendar year 2018 and that ended on or before June 30, 2019.

2017/2018 Fiscal-Year Taxpayers
Relief is also provided for 2017/2018 fiscal year taxpayer who failed to claim an NOL carryback due to a drafting error in the Tax Cuts and Jobs Act that provided the termination of two-year NOL carryback period applied to NOLs arising in tax years ending after 2017. The CARES Act corrects the effective date error by providing that the termination applies to tax years beginning after 2017. This makes these taxpayers eligible to claim an NOL carryback. The CARES Act allows these taxpayer to file a late application for a tentative refund. An application for a tentative refund is considered timely if filed by July 25, 2020.

The guidance also explains how 2017/2018 fiscal year taxpayer may waive the carryback period, reduce the carryback period (if it is longer than the standard two-year carryback), or revoke an election to waive a carryback period for a tax year that began before January 1, 2018, and ended after December 31, 2017.

Partnerships with NOLs
See the story "BBA Partnerships Can Amend Returns for CARES Benefits" on Rev. Proc. 2020-23, below.

The IRS is allowing taxpayers to file by fax Form 1139, Corporation Application for Tentative Refund, and Form 1045, Application for Tentative Refund, for certain coronavirus relief, a senior IRS official said on April 13. On the same day, the IRS unveiled related procedures for claiming quick refunds of the credit for prior year minimum tax liability of corporations and net operating loss (NOL) deductions ( https://www.irs.gov/newsroom/temporary-procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19).

The IRS is allowing taxpayers to file by fax Form 1139, Corporation Application for Tentative Refund, and Form 1045, Application for Tentative Refund, for certain coronavirus relief, a senior IRS official said on April 13. On the same day, the IRS unveiled related procedures for claiming quick refunds of the credit for prior year minimum tax liability of corporations and net operating loss (NOL) deductions ( https://www.irs.gov/newsroom/temporary-procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19).

Forms 1139, 1045
"Starting on April 17, 2020, and until further notice, the IRS will accept eligible refund claims Form 1139 submitted via fax to 844-249-6236 and eligible refund claims Form 1045 submitted via fax to 844-249-6237," the IRS noted in the Coronavirus Tax Relief FAQ posted on its website on April 13. "Before then, these fax numbers will not be operational. We encourage taxpayers to wait until this procedure is available rather than mail their Forms 1139 and 1045 since mail processing is being impacted by the emergency."

In a tailored effort to implement sections 2303 and 2305 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136), the IRS has opened digital transmission of Form 1139 and Form 1045 until further notice. Most notably, only refund claims made under the CARES Act sections 2303 and 2305 are eligible for the temporary procedures.

Generally, under the CARES Act:

• Section 2303 makes several modifications to NOLs, such as requiring a taxpayer with an NOL arising in a tax year beginning in 2018, 2019, or 2020 to carry that loss back to each of the five preceding years unless the taxpayer elects to waive or reduce the carryback; and providing a carryback for a two-year period of NOLs arising during a tax year that began in 2017 and ended during 2018.
• Section 2305 modifies the credit for prior-year minimum tax liability of corporations, including acceleration of the recovery of remaining minimum tax credits of a corporation for its 2019 tax year from its 2021 tax year, and permitting a corporation to elect instead to recover 100 percent of any of its remaining minimum tax credits in its 2018 tax year.

IRS Accepting Yet Not Processing Mail
Similarly, Sunita Lough, deputy commissioner for services and enforcement at the IRS urged taxpayers and practitioners during an April 13 Tax Policy Center (TPC) webinar not to submit Forms 1139 and 1045 related to the CARES Act by mail. Ordinarily, these forms may be filed only via hard copy delivered through the U.S. Postal Service (USPS) or by a private delivery service.

However, the IRS is currently receiving so much mail that the USPS can no longer hold it, according to Lough, adding that the IRS is "literally holding [mail] in trailers until employees can get back to work." Thus, in an effort to "send a signal" that the IRS will implement the CARES Act without access to its mail, it is both allowing and encouraging the fax option, Lough said.

"Only fax Forms 1139 and 1045 specific to the CARES Act," Lough said, adding that any other forms submitted via fax, even Forms 1139 and 1045 unrelated to the CARES Act, will not be processed. Further, the IRS specifically states on its website that any Form 1120X, Amended U.S. Corporation Income Tax Return, that is faxed to the fax numbers noted above will not be accepted for processing.

Pro Tip
"If you are trying to decide between filing Form 1139 and 1120X, it is usually best to file Form 1139 to get a refund," Kirsten Wielobob, principal, Tax Policy and Controversy, Ernst & Young LLP, said on April 10. "It is colloquially referred to as a ‘quickie refund,’" Wielobob said. Generally, the Form 1139 is not subject to joint committee review as the Form 1120X is, which can be filed electronically but can add a layer of complexity. Additionally, Wielobob cautioned that the delays at the IRS could mean filing Form 1139 by paper through the mail is no longer the "quick" option, which appears in line with both the IRS’s cautioning against submitting the form by mail and its newly announced fax option.

The IRS has released guidance on making the following elections for the business interest deduction limitation:

The IRS has released guidance on making the following elections for the business interest deduction limitation:

• the election out of the 50 percent adjusted taxable income (ATI) limitation for tax years beginning in 2019 and 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136);
• the election to use the taxpayer’s ATI for the last tax year beginning in 2019 to calculate the Code Sec. 163(j) limit for the 2020 tax year under the CARES Act; and
  the election out of deducting 50 percent of excess business interest expense (EBIE) for the 2020 tax year without limitation under the CARES Act.

The guidance also provides transition relief to taxpayers making or revoking the election to be an electing real property trade or business or an electing farming trade or business under Code Sec. 163(j)(7).

Business Interest Limit
A taxpayer’s deduction of business interest expenses paid or incurred for any tax year is generally limited to the sum of business interest income, floor plan financing interest, and 30 percent of ATI. The Code Sec. 163(j) limitation is generally increased from 30 percent to 50 percent of a taxpayer’s ATI for any tax year beginning in 2019 and 2020 under the CARES Act.

A taxpayer may elect not to have the increased limitation apply in 2019 or 2020. In addition, a taxpayer may elect for any tax year beginning in 2020 to use its ATI from the 2019 tax year to calculate its Code Sec. 163(j) limitation. The 50 percent ATI limitation does not apply to partnerships for the 2019 tax year. Instead, a partner treats 50 percent of its allocable share of a partnership’s EBIE for 2019 as an interest deduction in the partner’s 2020 tax year without limitation. The remaining 50 percent of such EBIE remains subject to the Code Sec. 163(j) limit applicable to EBIE carried forward at the partner level. A partner may elect out of the 50 percent EBIE rule.

Election Out of 50 Percent ATI
There is no formal election or statement required to the make the election not to apply the 50 percent ATI limit for the 2019 or 2020 tax year. The election is made simply filing a federal income tax return (or Form 1065 in the case of a partnership for 2020) by the due date for the return, including extensions, using the 30 percent ATI limitation. The election may also be made on an amended return or administrative adjustment request (AAR).

The election must be made for each tax year. For a partnership, the election is made by the partnership and not the partners. It is also made by the agent for a consolidated group and for an applicable controlled foreign corporation (CFC) by each controlling domestic shareholder. The taxpayer is granted consent from the IRS to revoke the election by merely filing an amended return and using the 50 percent limit.

Election to Use 2019 ATI in 2020
There is also no formal election or statement required to the make the election to use 2019 ATI to use in the 2020 tax year. The election is made simply filing a federal income tax return (or Form 1065) by the due date for the return for the 2020 tax year, including extensions, using the taxpayer’s 2019 ATI. The 2019 ATI used for the calculation is pro rated if the taxpayer’s 2020 tax year is a short tax year. The election may also be made on an amended return or AAR.

For partnership, the election is made by the partnership and not the partners. It is also made by the agent for a consolidated group and for an applicable CFC by each controlling domestic shareholder. For a CFC group, the election is not effective for any group member unless made for every tax year of a CFC group member for which the election is available.

Election Out of 50 Percent EBIE Rule
There is also no formal election or statement required by a partner in a partnership to make the election out of the 50 percent EBIE rule. A partner makes the election by filing its federal income tax return (or Form 1065) by the due date for the return for the 2020 tax year, including extensions, by not applying the 50 percent EBIE rule in determining the Code Sec. 163(j) limitation. The election may also be made on an amended return or AAR. The partner is granted consent from the IRS to revoke the election by merely filing an amended return, Form 1065, or AAR applying the 50 percent EBIE rule.

Real Property and Farming
The Code Sec. 163(j) limit applies to all taxpayers with business interest except small businesses with meet an average annual gross receipts test. It also does not apply to certain excepted businesses including an electing real property business and an electing farming business.

Under proposed regulations, a taxpayer must make an election for a real property trade or business, or farming business, with respect to each eligible trade business. The election is made by attaching a statement to the taxpayer’s timely filed original tax return (including extensions). A real property trade or business or farming business that elects out of the business interest deduction limit must depreciate certain property using alternative depreciation system (ADS).

In light of the legislative changes, a taxpayer may make the election or revoke an election to be an electing real property trade or business or an electing farming trade or business for the 2018, 2019, or 2020 tax year by filing an amended federal income tax return, amended Form 1065, or amended AAR. The return must include an election statement or withdrawal statement, and any collateral adjustments to taxable income. This include its depreciation of property affected by making a late election or withdrawing the election. The amended federal income tax return, Form 1065, or AAR generally must be filed by October 15, 2021.

The IRS has set forth rules for BBA partnerships to file amended returns to immediately get benefits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). "BBA partnerships" are those subject to the centralized partnership audit regime established by the Bipartisan Budget Act of 2015 (BBA) ( P.L. 114-74). The procedure allows BBA partnerships the option to file an amended return instead of an Administrative Adjustment Request (AAR) under Code Sec. 6227.

The IRS has set forth rules for BBA partnerships to file amended returns to immediately get benefits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). "BBA partnerships" are those subject to the centralized partnership audit regime established by the Bipartisan Budget Act of 2015 (BBA) ( P.L. 114-74). The procedure allows BBA partnerships the option to file an amended return instead of an Administrative Adjustment Request (AAR) under Code Sec. 6227.

Amendment Option
BBA partnerships that filed Form 1065, U.S. Return of Partnership Income, and gave all partners Schedules K-1, Partner’s Share of Income, Deductions, Credits, for the tax years beginning in 2018 or 2019 before the IRS issued Rev. Proc. 2020-23 can file amended returns and furnish amended K-1s before September 30, 2020. The amended returns can take into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law.

Filing Requirements
To amend a return, a BBA partnership must file a Form 1065, checking the "Amended Return" box and furnish amended Schedules K-1 to partners. The BBA partnership must write "FILED PURSUANT TO REV PROC 2020-23" at the top of the amended return, and attach a statement with each Schedule K-1 sent to its partners with the same notation. The BBA partnership may file electronically or by mail.

There are additional rules for BBA partnerships that are currently under examination for a tax year beginning in 2018 or 2019, or that have previously filed an AAR.

GILTI Regulations
A partnership may continue to apply the rules of Proposed Reg. §1.951A-5 when filing an amended Form 1065 and furnishing amended Schedules K-1 consistent with those proposed regulations. The partnership must notify partners as required by Notice 2019-46, I.R.B. 2019-37, 695.

The IRS has announced that the employment tax credits for paid qualified sick leave and family leave wages required by the Families First Coronavirus Response Act ( P.L. 116-127) will apply to wages and compensation paid for periods beginning on April 1, 2020, and ending on December 31, 2020. Additionally, days beginning on April 1, 2020, and ending on December 31, 2020, will be taken into account for the credits for paid qualified sick leave and family leave equivalents for certain self-employed individuals as provided by the Act.

The IRS has announced that the employment tax credits for paid qualified sick leave and family leave wages required by the Families First Coronavirus Response Act ( P.L. 116-127) will apply to wages and compensation paid for periods beginning on April 1, 2020, and ending on December 31, 2020. Additionally, days beginning on April 1, 2020, and ending on December 31, 2020, will be taken into account for the credits for paid qualified sick leave and family leave equivalents for certain self-employed individuals as provided by the Act.

Expanded Leaves
The Act’s Division C (Emergency Family and Medical Leave Expansion Act) and Division E (Emergency Paid Sick Leave Act) requires employers with fewer than 500 employees to provide expanded paid family leave and paid sick leave to certain employees. These employees are unable to work or telework due to certain circumstances related to the coronavirus (COVID-19).

Tax Credits for Paid Leave
The Act’s Division G provides payroll tax credits to employers that make the required leave payments to their employees. The Act also provides comparable credits for self-employed individuals carrying on any trade or business under Code Sec. 1402, 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 tax credits for most employers with fewer than 500 employees apply to qualified sick leave and family leave wages paid for the period from April 1, 2020, to December 31, 2020. Additionally, the self-employment tax credit will be determined based on days occurring during the period beginning on April 1, 2020, and ending on December 31, 2020.

The Treasury Secretary selected the April 1 date in coordination with the U.S. Department of Labor’s determination of the effective date for employers’ compliance with the Emergency Family and Medical Leave Expansion Act and Emergency Paid Sick Leave Act requirements.

The IRS has provided penalty relief for failure to deposit employment taxes under Code Sec. 6656 to employers entitled to the new refundable tax credits provided under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127), and the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The relief is provided the extent that the amounts not deposited are equal to or less than the amount of refundable tax credits to which the employer is entitled under the Families First Act and the CARES Act.

The IRS has provided penalty relief for failure to deposit employment taxes under Code Sec. 6656 to employers entitled to the new refundable tax credits provided under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127), and the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The relief is provided the extent that the amounts not deposited are equal to or less than the amount of refundable tax credits to which the employer is entitled under the Families First Act and the CARES Act.

The relief applies to deposits of employment taxes reduced in anticipation of the credits for:

• qualified leave wages paid with respect to the period beginning April 1, 2020, and ending December 31, 2020; and
• qualified retention wages paid with respect to the period beginning on March 13, 2020, and ending December 31, 2020.

COVID-19 Refundable Credits
The Families First Act generally requires employers of fewer than 500 employees to provide paid sick leave and expanded family and medical leave, up to specified limits, to employees unable to work or telework due to certain circumstances related to coronavirus disease 2019 (COVID-19). Generally, the Families First Act provides a refundable tax credit against an employer’s share of the Social Security portion of Federal Insurance Contributions Act (FICA) tax and an employer’s share of the Social Security and Medicare portions of the Railroad Retirement Tax Act (RRTA) tax ( "creditable employment taxes") for each calendar quarter. The credit is equal to 100 percent of qualified leave wages paid by the employer, plus qualified health plan expenses with respect to that calendar quarter.

The CARES Act allows certain employers experiencing a full or partial business suspension due to orders from a governmental authority, or a statutorily specified decline in business, due to COVID-19 to claim a refundable tax credit against an employer’s creditable employment taxes. The credit amount is up to 50 percent of the qualified wages (including allocable qualified health expenses), and is limited to $10,000 per employee over all calendar quarters combined.

Employers report these refundable credits on their returns for reporting their liability for FICA tax (or RRTA tax), which for most employers subject to FICA tax is the quarterly Form 941. An employer may claim an advance payment of the refundable tax credits by filing new Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Penalty Relief for Qualified Leave Wages
An employer will not be subject to a penalty for failing to deposit employment taxes relating to qualified leave wages in a calendar quarter if:

• the employer paid qualified leave wages to its employees in the calendar quarter prior to the time of the required deposit;
• the amount of employment taxes that the employer does not timely deposit is less than or equal to the amount of the employer’s anticipated credits under the Families First Act for the calendar quarter as of the time of the required deposit; and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

Thus, an employer may reduce, without penalty, the amount of a deposit of employment taxes by the amount of qualified leave wages and qualified health plan expenses paid by the employer in the calendar quarter prior to the required deposit, plus the amount of the employer’s share of Medicare tax on such qualified leave wages, as long as the employer does not also seek an advance credit for the same amount.

The total amount of any reduction in any required deposit may not exceed the total amount of qualified leave wages and qualified health plan expenses and the employer’s share of Medicare tax on the qualified leave wages in the calendar quarter, minus any amount of qualified leave wages, qualified health plan expenses, and employer’s share of Medicare tax that had been previously used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Penalty Relief for Qualified Retention Wages
An eligible employer will not be subject to a penalty for failing to deposit employment taxes relating to qualified retention wages in a calendar quarter if:

• the employer paid qualified retention wages to its employees in the calendar quarter prior to the time of the required deposit;
• the amount of employment taxes that the employer does not timely deposit, reduced by the amount of employment taxes not deposited in anticipation of the credits claimed for qualified leave wages, qualified health plan expenses, and the employer’s share of Medicare tax on the qualified leave wages, is less than or equal to the amount of the employer’s anticipated credits under the CARES Act for the calendar quarter as of the time of the required deposit; and
• the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.

Thus, after a reduction, if any, of a deposit of employment taxes by the amount of credits anticipated for qualified leave wages, an employer may further reduce, without a penalty, the amount of the deposit of employment taxes by the amount of qualified retention wages paid by the employer in the calendar quarter prior to the required deposit, as long as the employer does not also seek an advance credit for the same amount.

The total amount of any reduction in any required deposit may not exceed the total amount of qualified retention wages in the calendar quarter, minus any amount of qualified retention wages that had been previously used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

The Tax Code contains many taxpayer rights and protections. However, because the Tax Code is so large and complex, many taxpayers, who do not have the advice of a tax professional, are unaware of their rights. To clarify these protections, the IRS recently announced a Taxpayer Bill of Rights, describing 10 rights taxpayers have when dealing with the agency.

The Tax Code contains many taxpayer rights and protections. However, because the Tax Code is so large and complex, many taxpayers, who do not have the advice of a tax professional, are unaware of their rights. To clarify these protections, the IRS recently announced a Taxpayer Bill of Rights, describing 10 rights taxpayers have when dealing with the agency.

Taxpayer education

The idea for a Taxpayer Bill of Rights has been percolating for several years. One of the leading proponents has been National Taxpayer Advocate Nina Olson. In January 2014, Olson told Congress that a Taxpayer Bill of Rights was long overdue. Even though the rights already existed, many taxpayers did not know about them. More taxpayer education was needed, Olson emphasized. Olson proposed that either Congress pass legislation or the IRS take administrative action to set out a Taxpayer Bill of Rights.

Olson proposed that a Taxpayer Bill of Rights be based on the U.S. Bill of Rights. Olson also recommended that the IRS describe taxpayer rights in non-technical language. Olson's proposal won support from IRS Commissioner John Koskinen earlier this year.

Taxpayer Bill of Rights

In June, IRS Commissioner John Koskinen and Olson together unveiled a 10-point Taxpayer Bill of Rights.

The provisions in the Taxpayer Bill of Rights are:

1. The Right to Be Informed
2. The Right to Quality Service
3. The Right to Pay No More than the Correct Amount of Tax
4. The Right to Challenge the IRS's Position and Be Heard
5. The Right to Appeal an IRS Decision in an Independent Forum
6. The Right to Finality
7. The Right to Privacy
8. The Right to Confidentiality
9. The Right to Retain Representation
10. The Right to a Fair and Just Tax System

"The Taxpayer Bill of Rights contains fundamental information to help taxpayers," Koskinen said. "These are core concepts about which taxpayers should be aware. Respecting taxpayer rights continues to be a top priority for IRS employees, and the new Taxpayer Bill of Rights summarizes these important protections in a clearer, more understandable format than ever before."

As the IRS Commissioner noted, the Taxpayer Bill of Rights does not create new rights. Rather, the Taxpayer Bill of Rights is intended to serve an educational purpose to help taxpayers understand better their existing rights.

IRS Publication 1

The Taxpayer Bill of Rights is highlighted prominently in IRS Publication 1, Your Rights as a Taxpayer. The IRS reported that updated Publication 1 will be sent to taxpayers when they receive notices on issues ranging from audits to collections. Updated Publication 1 initially will be available in English and Spanish, and later in Chinese, Korean, Russian and Vietnamese.

Additionally, the IRS created a special page on its website to highlight the Taxpayer Bill of Rights. The Taxpayer Bill of Rights will be displayed in all IRS offices.

If you have any questions about the IRS Taxpayer Bill of Rights, please contact our office.

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Taxpayers who are self-employed must pay self-employment tax on their income from self-employment. The self-employment tax applies in lieu of Federal Insurance Contributions Act (FICA) taxes paid by employees and employers on compensation from employment. Like FICA taxes, the self-employment tax consists of taxes collected for Social Security and for Medicare (hospital insurance or HI).

Taxpayers who are self-employed must pay self-employment tax on their income from self-employment. The self-employment tax applies in lieu of Federal Insurance Contributions Act (FICA) taxes paid by employees and employers on compensation from employment. Like FICA taxes, the self-employment tax consists of taxes collected for Social Security and for Medicare (hospital insurance or HI).

The self-employment tax is levied and collected as part of the income tax. The tax must be taken into account in determining an individual's estimated taxes. The self-employed taxpayer is responsible for the self-employment tax, in effect paying both the employer's and the employee's share of the tax. The tax is calculated on Schedule SE, filed with the individual's income tax return, and is then reported on the Form 1040.

Self-Employment Tax Rate

The self-employment tax rate is 15.3 percent of self-employment income. This is the same overall percentage that applies to an employee's compensation. The rate combines the 12.4 percent Social Security tax and the 2.9 percent Medicare tax. Self-employed individuals can deduct one-half of the self-employment tax. (For 2011 and 2012, the Social Security tax rate was reduced from 12.4 to 10.4 percent.) If the individual's net earnings from self-employment are less than $400 (or $100 for a church employee), the individual does not owe self-employment tax.

Like FICA taxes, the 12.4 percent Social Security tax only applies to earning up to a specified threshold. For 2013, this threshold was $113,700; for 2014, the threshold is $117,000. There is no ceiling for applying the 2.9 percent Medicare tax.

Self-Employment

The tax applies to net earnings from self-employment. This is the taxpayer's gross income for the year from operating a trade or business, minus the deductions allowable to the trade or business, plus the taxpayer's distributive share of income or loss from a partnership.

A person is self-employed if he or she carries on a trade or business as a sole proprietor or independent contractor. A general partner of a partnership that carries on a trade or business is also considered to be self-employed. Self-employment does not include the performance of services by an employee. However, an employee who also carries on a separate business part-time can be self-employed with respect to the business.

Additional Medicare Tax

Effective for 2013 and subsequent years, both employees and self-employed individuals must pay an additional 0.9 percent Medicare tax if their FICA wages or self-employment income exceeds specified thresholds $250,000 for joint filers; $125,000 for married filing separately; and $200,000 for all other taxpayers. This tax is determined on Form 8959.

The simple concept of depreciation can get complicated very quickly when one is trying to determining the proper depreciation deduction for any particular asset. Here’s only a summary of some of what’s involved.

The simple concept of depreciation can get complicated very quickly when one is trying to determine the proper depreciation deduction for any particular asset. Here’s only a summary of some of what’s involved.

Identifying the asset

The modified accelerated cost recovery system (MACRS) is generally, but not always, used to depreciate tangible depreciable property placed in service after 1986. The MACRS deduction is computed on Form 4562, Depreciation and Amortization.

Intangible property may not be depreciated under MACRS, but it may be amortized in certain situations. Real estate may not be depreciated, but buildings situated on it may. Sound recordings, films, and videotapes are specifically excluded from MACRS, but may be depreciated using the income forecast method. Deprecation for financial accounting book purposes is generally not the same as tax depreciation. Under MACRS, property placed in service and disposed of in the same tax year is not depreciable. Property converted from business use to personal use in the tax year of acquisition is not depreciable.

The cost of tangible depreciable property also may be deducted immediately if the business and the asset qualifies for Code Section 179 expensing. Bonus depreciation, in years that Congress makes it available, is also available, taken first before the asset’s remaining value is depreciated under MACRS.

Computing depreciation under MACRS

In order to compute depreciation under MACRS, the asset's MACRS property class must be determined. The asset's recovery period (i.e., its depreciation period), applicable depreciation method, and applicable convention depend on the asset's property class. Under MACRS, an asset's property class is based on either the type of asset or the business activity in which the asset is primarily used. The key resource for determining an asset's property class is the asset classification table contained in Revenue Procedure 87-56.

The cost of property in the 3-, 5-, 7-, and 10-year classes is recovered using the 200-percent declining-balance method (i.e., the applicable depreciation method) over three, five, seven, and ten years, respectively (i.e., the applicable recovery period), and the half-year convention (unless the mid-quarter convention applies), with a switch to the straight-line method in the year that maximizes the deduction.

The cost of 15- and 20-year property is generally recovered using the 150-percent declining-balance method over 15 and 20 years, respectively, and the half-year convention, with a switch to the straight-line method to maximize the deduction. The cost of residential rental and nonresidential real property is recovered using the straight-line method and the mid-month convention over 27.5-  and 39-year recovery periods, respectively.

For more specific information on the amount of depreciation you may take for any business asset you own or plan to purchase, please feel free to contact this office.

Nearly half-way into the year, tax legislation has been hotly debated in Congress but lawmakers have failed to move many bills. Only one bill, legislation to make permanent the research tax credit, has been approved by the House; its fate in the Senate still remains uncertain. Other bills, including legislation to extend many of the now-expired extenders before the 2015 filing season, have stalled. Tax measures could also be attached to other bills, especially as the days wind down to Congress' August recess.

Nearly half-way into the year, tax legislation has been hotly debated in Congress but lawmakers have failed to move many bills. Only one bill, legislation to make permanent the research tax credit, has been approved by the House; its fate in the Senate still remains uncertain. Other bills, including legislation to extend many of the now-expired extenders before the 2015 filing season, have stalled. Tax measures could also be attached to other bills, especially as the days wind down to Congress' August recess.

Tax extenders

Legislation to extend nearly all of the extenders seemed to be almost assured of passage in the Senate after the Senate Finance Committee (SFC) approved the EXPIRE Act in April. The EXPIRE Act would extend through 2015 many of the popular but temporary tax incentives, including the higher education tuition deduction, the state and local sales tax deduction, the deduction for mortgage premiums, research tax credit, Work Opportunity Tax Credit (WOTC), and more. In May, the EXPIRE Act became bogged down in procedural votes in the Senate. Democrats and Republicans could not agree whether amendments would be allowed and if so, how many amendments.

In the meantime, individual lawmakers have introduced bills to extend some of the extenders. The bills must be referred to committees (the SFC or the House Ways and Means Committee) for action. Committee chairs ultimately determine if the bills will be brought before the committee. SFC Chair Ron Wyden, D-Ore., has signaled that the EXPIRE Act is likely his best attempt to move an extenders bill. Wyden has also said that he will not promote another extenders bill after 2015 (hence the name, EXPIRE Act). Ways and Means Chair Dave Camp, R-Mich., has largely kept the committee's focus on the proposals outlined in his proposed Tax Reform Act of 2014.

Lawmakers have roughly eight weeks before their month-long August recess to act on the extenders. Our office will keep you posted of developments.

Research tax credit

The research tax credit is a very popular business tax incentive. Its popularity has pushed it to the front of the line in the House for renewal. One drawback is the credit's cost: estimated at $155 billion over 10 years.

In May, the House approved the American Research and Competitiveness Act of 2014. The bill attracted support from both Democrats and Republicans. The bill makes permanent and enhances the research tax credit. The bill is not offset, which is a stumbling block to winning support from Senate Democrats. In fact, President Obama has said he would veto the bill in its present form if it reaches his desk. There is a possibility, albeit slight, that the Senate could pass its own version of the research tax credit and the House and Senate would try to reach a compromise in conference.

Corporate taxation

President Obama, lawmakers from both parties and many taxpayers agree that the U.S. corporate tax rate should be reduced. They disagree on how to pay, or if to offset, any reduction. President Obama continues to promote the elimination of some business tax preferences, particularly tax incentives for oil, gas and fossil fuel producers, as the way to pay for a corporate tax rate cut. The President also has called for using some of the revenues to fund road and bridge construction.

Democrats in the House and Senate have also honed in on so-called "corporate inversions." These occur when U.S. companies merge with foreign ones for tax purposes. The merged entity is often located in a low-tax jurisdiction, such as Ireland with a corporate tax rate of 12.5 percent, compared to the U.S. corporate tax rate of 35 percent. House and Senate Democrats have introduced companion bills (Stop Corporate Inversions Act of 2014) to curb these mergers. Under current law, a corporate inversion will not be respected for U.S. tax purposes if 80 percent or more of the new combined corporation (incorporated offshore) is owned by historic shareholders of the U.S. corporation. The bill would reduce the threshold to 50 percent. House and Senate Republicans are not expected to support the bill.

Other bills

On July 1, the interest rate on federal subsidized Stafford loans is set to increase from 3.4 to 6.8 percent. Legislation introduced in the Senate, the Bank on Students Loan Fairness Act, would provide a one-year "fix" by setting the rate at the primary interest rate offered through the Federal Reserve discount window. The bill would be paid for by the so-called "Buffett Rule," which generally would disallow certain tax preferences to higher income individuals. Along with the student loan bill, lawmakers have on their agenda legislation to renew federal highway spending, as discussed above. A final highway bill with tax-related provisions could be approved before the August recess. Some lawmakers have proposed a hike in the federal gasoline tax but it is unlikely to be approved.

If you have any questions about tax legislation, please contact our office.

Transit incentives are a popular transportation fringe benefit for many employees. Although the costs of commuting to and from work are not tax-deductible (except in certain relatively rare cases), transportation fringe benefits help to offset some of the costs, including the expenses of riding mass transit or taking a van pool to work. Under current law, the value of qualified transportation fringe benefits provided to an employee is excluded from the employee's gross income and wages for income and payroll tax purposes.

Transit incentives are a popular transportation fringe benefit for many employees. Although the costs of commuting to and from work are not tax-deductible (except in certain relatively rare cases), transportation fringe benefits help to offset some of the costs, including the expenses of riding mass transit or taking a van pool to work. Under current law, the value of qualified transportation fringe benefits provided to an employee is excluded from the employee's gross income and wages for income and payroll tax purposes.

Qualified benefits

Only certain transit benefits qualify for this special tax treatment. They are:

• Transportation in a commuter highway vehicle if the transportation is in connection with travel between the employee's residence and place of employment (for example, van pooling),
• Transit passes,
• Qualified parking, and
• Qualified bicycle commuting reimbursements.

Employers have some latitude regarding which, if any, transit benefits they want to offer. An employer may simultaneously provide an employee with any one or more of the first three qualified transportation fringes. However, an employee may not exclude a bicycle commuting reimbursement for any month in which he or she receives any of the other incentives.

Excluded from gross income

As long as the amount of the transit pass, qualified parking or other benefit does not exceed the statutory monthly limits, the amounts are not wages for purposes of Social Security and Medicare, the Federal Unemployment Tax Act (FUTA), and federal income tax withholding. However, if the amounts do exceed the statutory limits, the excess must be included in the employee's gross income.

Amounts

For 2014, the maximum that may be excluded is $250 per month for qualified parking, but only $130 for transit passes and van pooling. The exclusion for qualified bicycle commuting reimbursement is limited to a per employee limitation of $20 per month multiplied by the number of qualified bicycle commuting months during the calendar year.

At the end of 2013, the monthly cap on the transit passes and van pools of the commuter benefit dropped to $130 per month-from $240 per month-because transit benefits parity expired. The amount of qualified parking, however, increased to $250 per month, from $240 per month, because of an adjustment for inflation required under the Tax Code.

Pending legislation

Parity could be restored and made retroactive to January 1, 2014. In April, the Senate Finance Committee approved the EXPIRE Act, which would restore parity by increasing the transit pass and van pool benefits to $250 per month - the same amount as parking. The EXPIRE Act is not a permanent fix. The bill would extend parity through the end of 2015. On January 1, 2016, parity would again expire.

The EXPIRE Act also includes special treatment for bikeshare costs. In 2013, the IRS announced that bikeshare arrangements would not be treated as a transportation fringe benefit unless Congress makes them so. The EXPIRE Act modifies the definition of qualified bicycle commuting reimbursement to include expenses associated with the use of a bikesharing arrangement.

Both the House and Senate must pass legislation in order to extend transit benefits parity. At this time, transit benefits parity has not moved in the House. One deterrent is the cost of extending parity. According to the Joint Committee on Taxation, a two-year extension of parity (through 2015) would cost $180 million over 10 years.

Retroactive extension

Retroactive extension of transit benefit parity would create some administrative challenges for employers. The last time there was a retroactive extension, the IRS provided special guidance to employers on how to account for the retroactive change when filing employment tax returns and Forms W-2. The IRS would likely do the same if there is a retroactive extension of transit benefit parity to January 1, 2014.

Please contact our office if you have any questions about transportation fringe benefits. Our office will keep you posted of developments.

With the April 15th filing season deadline now behind us, it’s not too early to turn your attention to next year’s deadline for filing your 2014 return. That refocus requires among other things an awareness of the direct impact that many "ordinary," as well as one-time, transactions and events will have on the tax you will eventually be obligated to pay April 15, 2015. To gain this forward-looking perspective, however, taking a moment to look back … at the filing season that has just ended, is particularly worthwhile. This generally involves a two-step process: (1) a look-back at your 2013 tax return to pinpoint new opportunities as well as "lessons learned;" and (2) a look-back at what has happened in the tax world since January 1st that may indicate new challenges to be faced for the first time on your 2014 return.

Your 2013 Form 1040

Examining your 2013 Form 1040 individual tax return can help you identify certain changes that you might want to consider this year, as well encourage you to continue what you’re doing right. These "key ingredients" to your 2014 return may include, among many others considerations, a fresh look at:

Your refund or balance due. While it is nice to get a big refund check from the IRS, it often indicates unnecessary overpayments over the course of the year that has provided the federal government with an interest-free loan in the form of your money. Now’s the time to investigate the reasons behind a refund and whether you need to take steps to lower wage withholding and/or quarterly estimated tax payments.

If on the other hand you had to pay the IRS when filing your return (or requesting an extension), you should consider whether it was due to a sudden windfall of income that will not repeat itself; or because you no longer have the same itemized deductions, you had a change in marital status, or you claimed a one-time tax credit such as for energy savings or education. Likewise, examining anticipated changes between your 2013 and 2014 tax years—marriage, the birth of a child, becoming a homeowner, retiring, etc.—can help warn you whether your're headed for an underpayment or overpayment of your 2014 tax liability.

Investment income. One area that blindsided many taxpayers on their 2013 returns was the increased tax bill applicable to investment income. Because of the "great recession," many investors had carryforward losses that could offset gains realized for a number of years as markets gradually improved. For many, however, 2013 saw not only a significant rise in investment income but also a rise in realized taxable investment gains that were no longer covered by carryforward losses used up during the 2010–2012 period.

Furthermore, dividends and long-term capital gains for the first time in 2013 were taxed at a new, higher 20 percent rate for higher income taxpayers and an additional 3.8 percent net investment income tax surtax for those in the higher income brackets. Short-term capital gains saw the highest rate jump, from 35 percent to 43.4 percent rate, which reflected a new 39.6 percent regular rate and the new 3.8 percent net investment income tax rate. This tax structure remains in place for 2014.

Personal exemption/itemized deductions. Effective January 1, 2013, the American Taxpayer Relief Act (ATRA) revived the personal exemption phaseout (PEP). The applicable threshold levels are $250,000 for unmarried taxpayers; $275,000 for heads of households; $300,000 for married couples filing a joint return (and surviving spouses); and $150,000 for married couples filing separate returns (adjusted for inflation after 2013). Likewise, for it revived the limitation on itemized deductions (known as the "Pease" limitation after the member of Congress who sponsored the original legislation) for those same taxpayers.

Medical and dental expenses. Starting in 2013, the Affordable Care Act (ACA) increased the threshold to claim an itemized deduction for unreimbursed medical expenses from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI. However, there is a temporary exemption for individuals age 65 and older until December 31, 2016. Qualified individuals may continue to deduct total medical expenses that exceed 7.5 percent of adjusted gross income through 2016. If the qualified individual is married and only one spouse is age 65 or older, the taxpayer may still deduct total medical expenses that exceed 7.5 percent of adjusted gross income.

Recordkeeping. If you cannot find the paperwork necessary to prove your right to a deduction or credit, you cannot claim it. An organized tax recordkeeping system—whether on paper or computerized–therefore is an essential component to maximizing tax savings.

Filing Season Developments

So far this year, the IRS, other federal agencies and the courts have issued guidance on individual and business taxation, retirement savings, foreign accounts, the ACA, and much more. Congress has also been busy working up a "tax extenders" bill as well as tax reform proposals. All these developments can impact how you plan to maximize benefits on your 2014 income tax return.

Tax reform. President Obama, the chairs of the House and Senate tax writing committees, and individual lawmakers all made tax reform proposals in early 2014. The proposals range from comprehensive tax reform to more piece-meal approaches. Although only small, piecemeal proposals have the most promising chances for passage this year, taxpayers should not ignore the broader push toward tax reform that will be taking shape in 2015 and 2016.

Tax extenders. The Senate Finance Committee (SFC) approved legislation (EXPIRE Act) in April that would extend nearly all of the tax extenders that expired after 2013. Included in the EXPIRE Act are individual incentives such as the state and local sales tax deduction, the higher education tuition deduction, transit benefits parity, and the classroom teacher’s deduction; along with business incentives such as enhanced Code 179 small business expensing, bonus depreciation, the research tax credit, and more. Congress may now move quickly on an extenders bill or it may not come up with a compromise until after the November mid-term elections. Many of these tax benefits are significant and will directly impact the 2014 tax that taxpayers will pay.

Individual mandate. The Affordable Care Act’s individual mandate took effect January 1, 2014. Individuals failing to carry minimum essential coverage after January 1, 2014 and who are not exempt from the requirement will make an individual shared responsibility payment when they file their 2014 federal income tax returns in 2015. There are some exemptions, including a hardship exemption if the taxpayer experienced problems in signing up with a Health Insurance Marketplace before March 31, 2014. Further guidance is expected before 2014 tax year returns need to be filed, especially on how to calculate the payment and how to report to the IRS that an individual has minimum essential coverage.

Employer mandate. The ACA’s shared responsibility provision for employers (also known as the “employer mandate”) will generally apply to large employers starting in 2015, rather than the original 2014 launch date. Transition relief provided in February final regulations provides additional time to mid-size employers with 50 or more but fewer than 100 employees, generally delaying implementation until 2016. Employers that employ fewer than 50 full-time or full time equivalent employees are permanently exempt from the employer mandate. The final regulations do not change this treatment under the statute.

Other recent tax developments to be aware of for 2014 planning purposes include:

• IRA rollovers. The IRS announced that, starting in 2015, it intends to follow a one-rollover-per-year limitation on Individual Retirement Account (IRA) rollovers as an aggregate limit.
• myRAs. In January, President Obama directed the Treasury Department to create a new retirement savings vehicle, “myRA,” to be rolled out before 2015.
• Same-sex married couples. In April, the IRS released guidance on how the Supreme Court’s Windsor decision, which struck down Section 3 of the Defense of Marriage Act (DOMA), applies to qualified retirement plans, opting not to require recognition before June 26, 2013.
• Passive activity losses. The Tax Court found in March that a trust owning rental real estate could qualify for the rental real estate exception to passive activity loss treatment.
• FATCA deadline. The IRS has indicated that it is holding firm on the July 1, 2014, deadline for foreign financial institutions (FFIs) to comply with the FATCA information reporting requirements or withhold 30 percent from payments of U.S.-source income to their U.S. account holders.
• Vehicle depreciation. The IRS announced that inflation-adjusted limitations on depreciation deductions for business use passenger autos, light trucks and vans first placed in service during calendar year 2014 are relatively unchanged from 2013 (except for first year $8,000 bonus depreciation that may be removed if Congress does not act in time.
• Severance payments. In March, the U.S. Supreme Court held that supplemental unemployment benefits (SUB) payments made to terminated employees and not tied to the receipt of state unemployment benefits are wages for FICA tax purposes.
• Virtual currency. The IRS announced that convertible virtual currencies, such as Bitcoin, would be treated as property and not as currency, thus creating immediate tax consequences for those using Bitcoins to pay for goods.

Please contact this office if you’d like further information on how an examination of your 2013 return, and examination of recent tax developments, may point to revised strategies for lowering your eventual tax bill for 2014.

A new tax applies to certain taxpayers, beginning in 2013—the 3.8 percent Net Investment Income (NII) Tax. This is a surtax that certain higher-income taxpayers may owe in addition to their income tax or alternative minimum tax. The tax applies to individuals, estates, and trusts (but not to corporations). Individuals are subject to the tax if they have NII, and their adjusted gross income exceeds a specified threshold—$250,000 for married taxpayers filing jointly; $200,000 for unmarried individuals.

For trusts, the NII tax applies at a much lower income level—the amount at which the highest tax bracket for a trust begins. This may sound high, but in fact, it is not. For 2014, this bracket begins at $12,150. A trust subject to the NII tax may lower or eliminate its potential liability by distributing NII to its beneficiaries, because the tax applies only to the undistributed NII for the year. The tax may then apply to the recipient, but based on the recipient’s income level.

Exempt and nonexempt trusts

Some trusts are exempt from the NII tax: cemetery perpetual care funds; Alaska Native Settlement Trusts electing to be taxed under Code Sec. 646; wholly charitable trusts; and foreign trusts. However, other trusts are not exempt. These include pooled income funds (where individuals donate remainder interests to charity while retaining an income interest); qualified funeral trusts; electing small business trusts; and charitable remainder trusts.

Passive activity

For individuals, trusts, and estates, the tax applies to income from a trade or business that is a passive activity with respect to the taxpayer. A trade or business is not passive if the taxpayer materially participates in the activity (as determined under Code Sec. 469). There is IRS guidance for determining whether an individual materially participates in an activity.

Material participation

The IRS has never provided guidance on how to determine whether a trust or estate materially participates in a trade or business. When the IRS issued final regulations on the NII tax, it said that the issue was under study, but the IRS has not indicated whether it will issue guidance on the issue.

The IRS regulations conclude that the application of the material participation requirements to trust income potentially subject to the NII tax must be determined at the trust level. The treatment of the income as passive or nonpassive, once determined for the trust, flows through to trust beneficiaries who receive a distribution of NII. Thus, if the trust materially participates in the activity that generated the income, the income is nonpassive to both the trust and its beneficiaries, regardless of the age or involvement of the beneficiaries. If the trust did not materially participate, the income is passive to both the trust and its beneficiaries, even if a beneficiary materially participated in the activity.

As virtual currencies such as Bitcoin rise in prominence and use, the IRS has for the first time described how virtual currency will be treated for tax purposes. The agency concluded in new guidance (Notice 2014–21) that Bitcoin and other virtual currencies like it are not to be treated as currency, but as property.

Definition of virtual currency

Actual (or "real") currency is commonly defined as a system of money in general use in a particular country. The U.S. dollar is an example of actual currency. A single definition of virtual currency, on the other hand, has not yet achieved widespread acceptance. Virtual currency (sometimes referred to as "cryptocurrency") is a medium of exchange that operates like actual currency under some circumstances. Currently, virtual currency does not have legal tender status in any jurisdiction.

How virtual currency works

Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as "convertible" virtual currency. Currently, the most prominent example of a convertible virtual currency is Bitcoin, which can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real currencies.

A Bitcoin is created, or "mined," electronically, according to a purely mathematical process. A complex computer algorithm is applied. As more and more Bitcoins are mined, the difficulty of doing so will increase, as it becomes computationally more difficult to create them. This process was designed to mimic the production rate of a commodity such as gold.

Companies like BitPay or Coinbase act as intermediaries in Bitcoin transactions. According to Adam White, the Director of Business Development and Sales at Coinbase, over a million customers use Coinbase as their "Bitcoin wallet," allowing Coinbase to accept Bitcoin payments on their behalf using its payment tools. This includes over 28,000 merchants.

Fees associated with virtual currency transactions are relatively small in contrast with higher fees charged to businesses accepting credit cards. Credit card companies generally charge businesses a fee per swipe of the card, plus two to four percent of the total transaction. On the other hand, businesses that use a merchant processor pay fees of one percent, or less, for Bitcoin transactions. However, virtual currencies are volatile and involve high risk. For example, the value of a Bitcoin went from pennies to $1,200 in a five-year period, and then back down to around $500, where it rested as on April 22, 2014.

U.S. tax treatment

The IRS acknowledged that virtual currency may be used to pay for goods or services, or held for investment. The IRS issued guidance providing answers to frequently asked questions (FAQs) about virtual currency, offering Bitcoin as an example. The FAQs at present provide only basic information on the tax implications of transactions in, or using, virtual currency.

Property. Notice 2014–21 states that virtual currency will be treated as property for U.S. federal tax purposes. As such, it is governed by the same general principles that apply to property transactions generally. The sale or exchange of convertible virtual currency, or its use to pay for goods or services in a real-world economy transaction, has immediate tax consequences that would not apply if it were considered pure "legal tender."

Conversion required. A taxpayer who receives virtual currency in payment for goods or services is required to include the fair market value of the virtual currency in computing gross income. This value must be measured in U.S. dollars as of the date the virtual currency was received. The basis in virtual currency is its fair market value on the date of receipt, determined by converting the virtual currency to U.S. dollars (or another real currency which can be converted into U.S. dollars) at the applicable exchange rate in a reasonable manner that is consistently applied.

Capital gain or ordinary income. The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer. If the virtual currency is held as inventory, for example, for sale to customers in a trade or business, gain or loss on its disposition will be ordinary gain or loss. If the virtual currency is held as an investment, gain or loss on its disposition will be capital in nature.

It remains unclear whether Bitcoins will be treated as "coins" for purposes of the 28 percent capital gains rate on collectibles; or whether they will be considered a permitted investment within individual retirement accounts or in other, similar circumstances.

A taxpayer who creates, or mines, virtual currency realizes gross income on receipt of the virtual currency resulting from that activity. The fair market value of the virtual currency as of that date is includible in gross income.

Information reporting. A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. Thus, a person who makes a payment of fixed and determinable income using virtual currency with a value in excess of $600 to a U.S. non-exempt recipient is required to report the payment to the IRS and to the payee. This includes payment of rent, salaries, wages, premiums, annuities, and compensation.

Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W–2, and are subject to federal income tax withholding. Also, payments using virtual currency made to independent contractors and other service providers are taxable, and self-employment tax rules generally apply to such payments. Payers using virtual currency must normally issue Form 1099 to the payee.

Penalties. Taxpayers who fail to report their income from virtual currency may potentially be subject to tax penalties. At the April 2 House Committee’s Bitcoin hearing, L. Michael Couvillion, Professor, Plymouth State University, New Hampshire, pointed out that taxpayers who treated virtual currencies inconsistently with IRS Notice 2014–21 before it was issued will not receive penalty relief unless they can establish that their underpayment or failure to properly file information returns was due to reasonable cause. This will require many businesses and individuals to go back and determine the existence of gain or loss on transactions that occurred in the past, perhaps several years in the past.

The applicable federal rates (AFRs) are used for a number of federal tax provisions. For example, Code Sec. 1274 uses AFRs to determine whether a debt instrument has original issue discount (OID or imputed interest). This determination requires the calculation of the present value of payments made on the debt instrument; present value is calculated using a discount rate equal to the AFR, compounded semi-annually.

Determining AFRs

AFRs are based on the average market yield on outstanding marketable obligations of the United States government. Under Code Sec. 1274(d), the AFR includes the federal short-term rate (based on the interest rates for debt instruments of three years or less); the federal mid-term rate (based on the rates for debt instruments of three to nine years); and the federal long-term rate (based on the rates for debt instruments exceeding nine years).

The IRS computes AFRs for each calendar month and publishes them in a revenue ruling. As an example, Rev. Rul. 2014–1, published January 6, 2014, provided the AFRs for January 2014. AFRs may be compounded (and therefore applied) monthly, quarterly, semiannually, or annually. In addition, some amounts are calculated using a higher percentage of the basic AFR. The monthly revenue rulings provide AFRs equal to 110 percent of the base AFR, 120 percent, 130 percent, 150 percent, and 175 percent.

Applying AFRs

The Tax Code uses AFRs to determine appropriate amounts under a multitude of provisions. These include:

• The present value of an annuity, life interest, term of years interest, remainder interest, or reversionary interest under Code Sec. 7520;
• Loans with below-market interest rates, under Code Sec. 7872 (the applicable rate depending on the term of the loan);
• Insurance reserves under Code Sec. 807, as well as insurance provisions under Code Secs. 811 and 812;
• The present value of golden parachute payments under Code Sec. 280G (120 percent of the AFR, compounded semiannually);
• Payments for the use of property or services under Code Sec. 467;
• Unrelated business income and debt-financed income under Code Sec. 514; and
• The recharacterization of gain from straddles under Code Sec. 1058.

The AFR revenue rulings also provide adjusted AFRs, which are used to determine the Code Sec. 382 limits on NOLs following ownership changes, and to determine OID on tax-exempt obligations under Code Sec. 1288.

Code Sec. 162 permits a business to deduct its ordinary and necessary expenses for carrying on the business. However, Code Sec. 274 restricts the deduction of entertainment expenses incurred for business by disallowing expenses of entertainment activities and entertainment facilities. Many expenses are totally disallowed; other amounts, if allowed under Code Sec. 274, are limited to 50 percent of the expense.

The income tax regulations define entertainment as any activity of a type generally considered to be entertainment, amusement, or recreation, such as entertaining at night clubs, lounges, theaters, country clubs, golf and athletic clubs, and sports events, as well as hunting, fishing, vacation and similar trips. There are special rules for the costs of facilities used to entertain the customer, such as a boat or a country club membership. Dues or fees for any social, athletic or sporting club or organization are treated as items involving facilities.

Deduction allowed

Expenses are allowed if the expense was either "directly related" to the active conduct of the taxpayer’s trade or business, or "associated with" the conduct of the trade or business. An activity is "associated with" business if the activity directly precedes or follows a substantial and bona fide business discussion.

Entertainment expenses are not directly related to the business if the activity occurred under circumstances with little or no possibility of engaging in the active conduct of the trade or business. These circumstances include an activity where the distractions are substantial, such as a meeting or discussion at a night club, theater, or sporting event. However, taking a customer to a meal at a restaurant or for drinks at a bar can be considered conducive to a business discussion, if there are no substantial distractions to a discussion.

Substantial business discussion

For expenses that are either directly related to or associated with business, the taxpayer must establish that the he or she conducted a substantial and bona fide business discussion with the customer. The IRS has said that there is no specified length for a discussion to be substantial; all facts and circumstances will be considered. The discussion is substantial if the active conduct of the business was the principal character of the combined business and entertainment activity, but it is not necessary that more time be devoted to business than to entertainment.

For an activity that is associated with, the discussion can directly precede or follow the activity. For a discussion to be directly before or after the activity, it generally must be on the same day as the activity. However, facts and circumstances may allow the entertainment and the discussion to be on consecutive days, for example if the customer is from out of town.

Season tickets

The special rules for facilities do not apply to season tickets. Instead, the taxpayer must allocate the cost of the season tickets to each separate entertainment event. The amount deductible is limited to the face value of the ticket. For a "skybox" or other area leased and used exclusively by the taxpayer and guests, the amount deductible is limited to the face value of non-luxury seats for the area covered by the lease.

Under these rules, it appears that the deductible costs of baseball season tickets must be determined separately for each baseball game. Attendance at a baseball game would involve a "distracting" activity that is not conducive to a business discussion, so the cost of the game would not be directly related to the conduct of the trade or business. However, attendance at a game before or after the conduct of a substantial business discussion could qualify as being associated with the business; in these circumstances, the cost of the event would be deductible.

If the taxpayer provided food to the customer at the baseball game, the cost of the food would be deductible as part of the cost of the event. Some "luxury" seats include food provided by the baseball team to the ticket user. It appears that the taxpayer would have to determine the fair market value of the ticket and the food separately, although the costs of food actually provided to the customer may still be deductible.

The current likelihood that your business will become involved in an employment tax audit or an employment-related income tax audit has increased: the IRS is aggressively attempting to reduce the "tax gap" of uncollected revenues in a time of increasing budget austerity. Employment tax noncompliance is estimated by the IRS to account for approximately $54 billion of the tax gap. Under-reporting of FICA makes up $14 billion; under-reporting of self-employment tax accounts for $39 billion; and under-reporting of unemployment tax accounts for $1 billion in lost revenue. Add to that total amount over $50 billion in estimated employment-associated income tax lost that is the result of missteps in withholding obligations, tip reporting, and proper fringe benefit classification . . . and employers are forewarned. The IRS is stepping up its auditing in these areas and has been conducting studies to maximize the best use of its agents' time to do so.

Latest audit survey

The IRS is conducting an intensive audit of 6,000 employment tax returns to obtain an up-to-date picture of taxpayers' employment tax practices. This will enable the IRS to better devote its compliance resources to the most important areas of noncompliance and to the taxpayers most likely not to be in compliance.

Based on these audits, the IRS's Chief of Employment Tax Policy has spotlighted several areas of concern that the IRS will focus on. These areas include backup withholding, tip reporting, worker classification, and fringe benefit reporting.

Backup withholding. Backup withholding is the number one problem uncovered in the audits. The IRS can impose backup withholding on income reported on Forms 1099 that is not ordinarily subject to withholding, such as interest, dividends, and nonemployee compensation. Failure to provide a taxpayer identification number (TIN) on the Form 1099, an incorrect TIN, or a TIN that does not match the name on the form can trigger backup withholding. A taxpayer's failure to report the income can also trigger backup withholding.

Tip reporting. Tip reporting is a major concern of the IRS. The IRS considers noncompliance a widespread problem, especially for small businesses that are not aware of the issues. The IRS has been focusing on educating employers, and is not auditing employment tax returns filed before 2014. An important issue is the failure to differentiate between service charges and tips. A payment that is automatically added to a bill may be a service charge. A service charge is characterized as Social Security wages, rather than Social Security tips. The distinction is important, because employers can claim a Social Security credit for FICA obligations attributable to tips that exceed the minimum wage, but cannot claim a credit for taxes paid on service charges.

Worker misclassification. To avoid FICA and FUTA taxes and income tax withholding, some employers intentionally classify employees as independent contractors. This has been a longstanding concern for the IRS, and the recent audits have shown that the problem continues. The agency regularly conducts employment tax audits to reclassify workers as employees. To facilitate reclassification to employee status, the IRS has two settlement programs for employers: the Classification Settlement Program (CSP) for taxpayers under audit, and the Voluntary Classification Settlement Program (VCSP) for companies that are not under an employment tax audit and meet other requirements. The IRS has received 1,550 applications under the VCSP and has reclassified approximately 25,000 workers. Companies that agree to prospectively treat workers as employees generally pay reduced taxes and may get audit protection for past years.

Fringe benefit reporting. Fringe benefits can be cash or noncash benefits provided in addition to regular wages. As a compliance matter, fringe benefits are taxable and must be included in the recipient's income, unless the Tax Code specifically excludes the benefit from taxable income. Moreover, if the recipient is an employee, the value of the benefit is additional compensation subject to employment taxes. Fringe benefits can be a particular problem for small companies, where owners seek to reduce their taxable income by taking noncash benefits, such as the use of company vehicles. A bargain sale of a house to an employee could also generate taxable income subject to employment taxes.

Conclusions

Employment taxes present an increasing risk to employers as the IRS steps up focuses on what it suspects is a heretofore largely untapped source of revenue. The IRS is certain to use the data now being harvested through its latest audit surveys. Many employers may do well to review how their employment tax compliance now measures up to this new degree of scrutiny.

In response to the economic downturn that has affected the retirement portfolios of millions of individuals across the country, Congress has been considering a variety of alternatives to offer relief to those who face financial emergencies and need immediate access to their funds. Two of the most significant proposals that have been recommended include: (1) significant broadening of the suspension of the 10 percent penalty tax on early withdrawals from IRAs and defined contribution plans, and (2) extending the temporary suspension of the penalty tax imposed on individuals age 70 1/2 or older who do not take required minimum distributions (RMDs) from certain retirement plans.

Early withdrawal penalty

To discourage individuals from using money set aside in retirement accounts for expenses incurred outside of retirement, a 10 percent tax is imposed on the amount that is withdrawn, in addition to this amount being included in the individual's gross income and subject to federal (and often, state) income tax. The 10 percent penalty will not apply to distributions made in the following circumstances:

• After the individual has reached age 59 1/2;
• The distribution is made to an individual who is a beneficiary of a deceased IRA owner;
• The individual is disabled;
• For higher education expenses (from IRAs only);
• The distributions are made as part of substantially equal payments over the account holder's life expectancy;
• The individual retires after age 55;
• For unreimbursed medical expenses exceeding 7.5 percent of the individual's adjusted gross income (AGI);
• For medical insurance premiums in the case of unemployment;
• To buy, build, or rebuild a first home (from IRAs only, and subject to a $10,000 withdrawal limit); and
• If the individual is a reservist called to active duty after September 11, 2001.

Caution: The extent to which a withdrawal may be made from an employer-sponsored qualified retirement plan, even with respect to amounts that you contributed, depends upon what is allowed under the written plan itself. Some plans only allow you to withdraw after retirement. Others allow withdrawals for "hardships," which may include medical expenses or other financial crisis. Still other withdrawals, such as withdrawals for higher education or a first home purchase, are never allowed under IRS rules from an employer-sponsored plan.

The 10 percent penalty and, for that matter, the underlying taxable income generated from a withdrawal, do not apply if the funds are properly rolled over within a 60-day period from an employer-sponsored plan to an IRA or from one qualified plan or IRA to another.

Hardship withdrawals. Individuals who take a hardship withdrawal from their defined contribution plan must also pay the 10 percent penalty tax. A hardship is defined as an immediate and heavy financial need. Certain expenses are deemed to meet this definition, but even so, the penalty still applies.

Proposals to suspend the 10 percent penalty

Several proposals have been advanced by policymakers to eliminate or suspend the 10 percent early withdrawal penalty in certain situations. The proposals would generally add a paragraph to Internal Revenue Code Sec. 72(t) to eliminate the penalty in specific circumstances. Proposals include eliminating or suspending the 10 percent early withdrawal penalty for:

• Public safety employees who retire before the age of 55;
• Workers who are unemployed;
• Individuals affected by natural disasters;
• Homeowners at risk of having their mortgage foreclosed;
• Individuals who receive a hardship distribution from a retirement plan; and
• Individuals who have qualified adoption expenses.

RMDs

Individuals with certain qualified retirement plans, as well as traditional IRAs and 403(b) plans, are required to withdraw a certain amount ( a "required minimum distribution" or RMD) from the account each year after reaching age 70 1/2 (Roth IRAs are not subject to the RMD rules). The annual RMD is based on the account balance as of December 31 of the prior year and the account holder's life expectancy. Generally, RMDs must begin no later than April 1 of the year after you reach age 70 1/2.

Proposals to suspend RMDs

RMDs were suspended for 2009 only. RMDs must be taken for 2010 and beyond, unless Congress acts to suspend the RMD rules again. However policymakers have put forth various proposals to eliminate or suspend altogether the RMD requirements. The proposals include:

• Suspending the RMD requirement through 2010;
• Suspending the RMD requirement through 2012;
• Eliminating the RMD requirement; or
• Postponing the required starting date, which would raise the age at which individuals must start taking their RMDs.

When contemplating whether to implement any of these proposals, Congress and Treasury officials must balance a number of considerations, including the immediate financial needs of individuals with the policies behind the penalty taxes; namely, providing funds for retirement and not allowing the money to be used for pre-retirement expenses.

Our office will keep you posted on any legislative proposals that may affect your retirement planning. We also can help you navigate the current rules that would apply should you need to make a withdrawal soon from your retirement savings.