Avoid the Surprise!  In the world of Income tax, 2018 saw many changes as a result of the Tax Cuts and Jobs Act (TCJA) that was passed in 2017.  To that end, what follows in this memo is a highlight of the most relevant changes and some recurring “standard” advice around which meaningful year-end planning can occur.

December 2018 Tax Planning   -   Avoid The Surprise!

Clients & Friends:

While the end of the year involves a lot of hustle and bustle, it also presents an opportunity to reflect on all that has unfolded over the past several months. We hope that among the many things you take the time to reflect on, tax reform and planning is atop that list.

In the world of Income tax, 2018 saw many changes as a result of the Tax Cuts and Jobs Act (TCJA) that was passed in 2017. We have been busy working hard to stay current on the new regulations so that we can provide effective tax planning as we wind down the year. To that end, what follows in this memo is a highlight of the most relevant changes and some recurring “standard” advice around which meaningful year-end planning can occur.

The new tax law resulted in changes/decreases to the tax tables for withholding on your paychecks. We have found that this decrease in federal tax withholding may result in the tax withheld being significantly too low and could result in a balance due on the 2018 tax return. This situation can be particularly problematic when both spouses are wage earners. It is important that you check your withholding rates now. We are happy to help with this so that you avoid any surprises come April. Simply send us over a copy of your YTD pay advice(s) and we can take a look.

Individuals are also impacted by the removal of personal exemptions and limitations on itemized deductions.

• Beginning in 2018, the itemized deduction for all state and local taxes (income and real estate) is limited to $10,000.

• Miscellaneous Itemized deductions subject to the 2% floor are suspended. The most common examples include unreimbursed business expenses, safe deposit boxes, investment advisory fees, and tax preparation fees.

Many filers who previously took itemized deductions on their return will now likely take the standard deduction as a result of these changes. The 2018 standard deduction amounts are $24,000 for joint filers and $12,000 for single filers. The standard deduction amounts above are increased for persons over 65 by $1,600 for single or Head of household filers and by $1,300 each or $2,600 for joint returns.

Beginning in 2019, the deduction for medical expenses is limited by an even higher threshold of 10%. If you expect to qualify for medical deductions in 2018 consider, to the extent possible, accelerating the payment of any discretionary medical expenses to 2018 while the threshold still remains at 7.5%. 

With the standard deduction under the new TCJA increased to $24,000, another strategy for taking advantage of itemized deductions is to consider bunching the payment of any charitable contributions. Consider making two years’ worth of contributions in 2018 or in 2019 if it will help to push your itemized deductions above the amount of the new standard deduction. In this strategy you might itemize your deductions every other year and take the higher standard deduction in the off years.

One method for achieving this strategy is through the use of a Donor Advised Fund. These allow for efficient bunching of contributions because they allow you to donate cash or appreciated securities into the fund and take the tax deduction in 2018 all while deferring payment to your selected charities until 2019.

Another very tax efficient way to make charitable contributions, for those over 70 ½, is to earmark up to $100,000 of you annual Required Minimum Distribution (RMD) from your IRA account to be paid to a qualified charity. You do not get a tax deduction BUT the amount designated is excluded from your taxable income. This can be more beneficial than a deduction, as it satisfies both your annual RMD and charitable inclinations.

On the topic of securities, we advise that the donation of appreciated securities is a highly tax effective means of making contributions. You get a deduction for the full market value of the stock and do not pay the tax on any gain! If you happen to hold stocks that are losers do NOT donate those. Sell them and take the loss on your tax return. Be careful when considering the purchase of mutual funds at this time in the year. You may essentially be “buying a capital gain”, as most all mutual funds pay out gains come year end.

There are several other areas of the new tax law that provide individuals with opportunities to make the law “work for them”:

• The annual gift tax exclusion has been increased for 2018. Up from $14,000 in 2017, individuals may now gift up to $15,000 ($30,000 per beneficiary from a married couple filing jointly).We usually suggest that these gifts be given as early in the year as possible. Even with the new higher Estate tax exemption amounts this gifting routine still can result in decreased “death” taxes. 
• Federal tax law now allows for 529 Plan withdrawals up to $10,000 a year to be used for qualified education expenses for each child from Kindergarten through the 12^th grade.
  • No longer only applicable to higher education costs, you may want to consider making these payments through a 529 plan to secure the PA tax deduction for these contributions and expenses. For example if you are making these payments anyway for your children or grandchildren and there are three of them, the $30,000 PA deduction will save you $921 in PA taxes!

TCJA also made notable changes to the following areas of tax law affecting Individuals:

• The Kiddie Tax has been modified, resulting in the net unearned income of children under the age of 19 (or full-time students under 24) being taxed according to the brackets applicable to trusts and estates.
• The Child Tax Credit has increased in 2018 to $2,000 per qualified child. The income thresholds for taking the credit have also substantially increased. More filers will qualify for this credit. 
• The deduction for home mortgage interest is limited to underlying indebtedness of up to $750,000 beginning with purchases made on or after December 15, 2017. The interest deduction related to home equity indebtedness is suspended in 2018 unless used to make improvements to the home.
• Alimony is not deductible by the Payor spouse and is not included in the income of the Payee spouse for any divorce or separation agreement executed after December 31, 2018.
• Business/client meals are still limited by 50%. There is no longer an entertainment expense deduction, though employee Holiday parties are 100% deductible.

Though the focus of our memo thus far has been on year-end planning for Individual Income Tax, the TCJA has also resulted in substantial changes to tax law for business income and pass through income that is taxed on the individual return.

• Corporate tax rates have been drastically cut to 21% and corporate AMT is no longer applicable. (AMT will apply to substantially less individuals than it has in the past.) 
• New tax law allows for enhanced bonus depreciation and Section 179 deductions.
  • Bonus depreciation now currently allows for 100% expensing of both new and used acquisitions.
  • Maximum deductions for Section 179 property has been increased to $1 million.
  • The phase-out threshold has increased, and the definition of 179 property has expanded to include certain nonresidential real property improvements. 
• The Section 199A deduction is a new and complex deduction intended for individuals and for pass-through entity income on the individual return. It could result in up to a 20% deduction on qualified business income.
  • One consideration related to this deduction is the establishment of a retirement plan on your business income. Doing so will reduce your taxable income for the purposes of qualifying for the deduction while simultaneously helping you save for retirement.
  • If you think this deduction may be applicable to you, we urge you to give us a call. 
• Speaking of retirement plans, if you are eligible to fund one strongly consider that option AND be reminded that some plans, especially those with a 401( k) feature (like a Solo 401(k)) need to be established before December 31st.

We would be remiss if we did not remind you to revisit your estate plan. Some advisors are suggesting, if you are financially situated, you make significant gifts to your heirs before there is a change in Congress that might result in a decrease to the current estate tax exemption amount which is now at $11,180,000 each. If your will is over 5 years old it may need a review.

Please also look at the beneficiary designations on your life insurance policies and your retirement plans. If a prior beneficiary has left us and a new one is not named, the asset may be administered through your estate which is NOT usually the best tax or economic answer.

That’s it for now. These are challenging tax times. PLEASE contact us if you want to discuss or implement any of the items in this memo or if you have any questions that we can help with. 

As always, we hope you find plentiful reasons to give thanks and that the happiness and peace of this season is abundant in your heart and home. Have a great Holiday Season and a happy and healthy 2019!

Thank you for being our friends and clients and allowing our firm to provide your tax and accounting needs. 

Siana Carr O’Connor & Lynam, LLP

Please read about the various changes in payroll withholding and related tax filing requirments for 2019.

The following is a summary of the various changes in payroll withholding and related filing requirements for 2019.  As always, contact us if you have any questions on these matters.

On December 22, 2017, the most significant overhaul of the tax code in over three decades was signed into law. The Tax Cuts and Jobs Act (TCJA) impacts individuals through the introduction of new tax rates and brackets, increased standard deduction, changes to allowable itemized deductions, elimination of personal exemptions, plus many other changes. 

Under the new law, various deductions and certain tax-favored fringe benefits have been eliminated or modified. These changes include the suspension of the deductions for moving expenses and certain qualified transportation expenses. The tax-free reimbursement of employment-related moving expenses has been suspended. The Act also suspends an employee's deduction for unreimbursed business expenses (previously deductible as a miscellaneous itemized deduction). For tax years 2018 and 2019, a credit for Paid Family and Medical Leave may apply to some larger employers who are subject to the Family Medical Leave Act (FMLA). 

The Act reduces the federal corporate (C-Corp) tax rate to 21%, while also providing a new deduction from pass-through income generated by most S-Corps, Partnerships, Sole Proprietors, etc. These provisions have many business owners reconsidering their current entity structure and evaluating the methods for paying themselves and their employees. Please note that the issues of reasonable compensation to owners, and the classification of workers as employees vs. independent contractors remain the focus of Internal Revenue Service scrutiny. Numerous other provisions exist which may impact your employees, you and/or your business, but a more in-depth analysis of the complete Act is beyond the scope of this newsletter focusing on employment taxes. Please contact our office should you desire a more in-depth explanation of this legislation.

 A.         FEDERAL TAX DEPOSITS

Most taxpayers are required to make federal tax deposits for payroll taxes, corporate income tax, and backup withhlding electronically through use of the electronic federal tax payment system.  Paper coupons are discontinued as the paper coupon system is no longer maintained by the Treasury Department.  The primary exemption is for employers that have $2,500 or less in quarterly payroll tax liability, who may pay this liability when filing the quarterly employment tax return.

Officers and/or employees of a corporation or partnership can become personally liable for failure to withhold and remit federal employment taxes.  If you are using a payroll service to make your deposits, you should ensure that the payments are timely made.  Penalties can equal the amount of the tax due (100% penalty).  If you are having difficulty paying your employment taxes timely, please call us.

 The net FUTA rate for most Pennsylvania and New Jersey employers is 0.6% for 2018.  The 2019 net FUTA tax rates are likely to approximate the same.  FUTA tax continues to be assessed on the first $7,000 of wages paid to each worker during a calendar year.

The Internal Revenue Service deadline for submitting government copies of 2018 Form W-2 to the Social Security Administration is January 31, 2019.  This is the same as the deadline to furnish employees with their forms.

B.         SOCIAL SECURITY & MEDICARE TAXES

For 2019, the taxable social security wage base limit is $132,900. The employee and employer tax rate for social security is 6.2%. In 2019, all wages are taxable for the Medicare portion of the tax which is 1.45% for both employees and employers. The self-employment tax rate will be 15.3% on the first $132,900 of net earnings.   

The Patient Protection and Affordable Care Act (ACA) imposes an additional 0.9% Medicare tax on wages, compensation, or self-employment income exceeding the threshold amount $250,000 for married taxpayers filing jointly, $125,000 for married taxpayers filing separately, and $200,000 for other taxpayers. There is no corresponding amount owed by the employer. Employers must withhold Additional Medicare tax from wages it pays to an individual in excess of $200,000 in a calendar year. If individuals anticipate owing more Additional Medicare tax than the amount withheld, they should request additional income tax withholding using Form W-4 and/or should make estimated tax payments. Taxpayers will calculate Additional Medicare tax liabilities on their individual income tax returns (Form 1040), and will apply any Additional Medicare tax withheld against all taxes shown on this return.

 C.         PENNSYLVANIA PERSONAL INCOME TAXES

The withholding rate remains at 3.07%. The PA Dept. of Revenue no longer provides paper coupon booklets. Instead, employer returns and payments should be filed using three electronic options: Internet, Tele file or third-party software. If you have not yet registered under one of these methods, we encourage you to do so. If you want our help in using these filing methods, please call us. More information can be obtained via the internet at www.revenue.state.pa.us and www.etides.state.pa.us. Employers may still file using paper returns and checks, however, we recommend that you switch to the D.O.R. mandated methods.

 D.         PENNSYLVANIA UNEMPLOYMENT COMPENSATION

The first $10,000 of wages paid to each worker in calendar year 2019 is taxed at the employer’s standard rate, as provided by the State. In addition, employers are required to withhold unemployment taxes from employees’ gross wages at a rate of 0.06%. The amount of compensation subject to employee withholding is not limited. Pennsylvania employers are required to electronically file quarterly UC tax and wage reports through the Unemployment Compensation Management System (UCMS). The Department of Labor is no longer mailing paper UC-2 forms to employers. Additional information is available at www.dli.state.pa.us.

E.          PENNSYLVANIA NEW ELECTRONIC FILING REQUIREMENT

The Pennsylvania Department of Revenue recently changed the electronic filing requirement threshold for W-2 forms. Employers who file 10 or more W-2 forms with the Department are now required to file those forms electronically. The change is in effect for tax year 2018 filings. Employers should visit e-TIDES, the Department’s online system for business taxes, at www.etides.state.pa.us to file their Annual Withholding Reconciliation Statement (REV-1667). The REV-1667 must be filed by January 31. Copies of the Individual Wage Statement (W-2) must also be filed electronically with the form REV-1667. 

            Employers should know that the Department will grant a waiver for the 2018 tax filing season with regard to the electronic filing requirement. Additional information regarding the electronic filing requirement is available through the Department’s Business Taxes e-Services Center by accessing its website www.revenue.pa.gov or calling 717-787-7635.

 F.         PHILADELPHIA CITY WAGE TAX

Employers must withhold city wage taxes for residents at the rate of 3.8809% (.038809) and nonresidents who work in the city at the rate of 3.4567% (.034567). Every Pennsylvania employer who employs a Philadelphia resident must register with the Philadelphia City Revenue Commissioner and withhold the city wage tax.  Please note that Philadelphia commonly changes these rates in July each year.

G.         LOCAL PAYROLL TAXES

PA Act 32 - Local Earned Income Tax Law

The Pennsylvania law known as “Act 32” requires every business that employs individuals who work within Pennsylvania, either at a worksite or from their homes to withhold the applicable local earned income tax amount from employees’ wages and to remit this timely to the appropriate tax collection agency. The employer must withhold the greater of the employee’s resident tax rate for where they live or nonresident tax rate for where they work. Each employee must complete a Residency Certification Form, to identify the proper subdivision where they live and work. Additional information regarding Act 32 is available through the PA Department of Community and Economic Development by accessing its website www.newPA.com or calling 1-866-466-3972.

 Philadelphia is not regulated by Act 32, so the present system administered by the Philadelphia Department of Revenue remains in effect.

 Local Services Tax (LST)

 The Local Services Tax (LST) allows local governments to levy a tax of $10 to $52 per employee per year.  If the locality levies a tax of $10, then the employer should withhold the tax from the first paycheck of the employee unless the employee qualifies for an exemption.  The LST exempts employees who make less than $12,000 annually from the tax.  The LST also exempts disabled veterans and reservists who are called to active duty at any time during the year from the tax.  The employer must obtain and retain exemption certificates from such employees to document the non-withholding exemption.  The LST (if more than $10) is not collected at one time, but must be withheld pro rata during the year with each payroll.

 H.        NEW HIRE REPORTING

 Federal regulation mandates all employers to report information about any new employee within 20 DAYS of their hire date.  Penalties for noncompliance can be up to $500 per employee.  Mandatory information to report for all Pennsylvania employers includes: employee’s name, address, social security number, date of birth and hire date, also employer’s name, address, federal identification number, contact and phone number.  Employers may report their new hire information by either manual or electronic means.  Multi state employers must report employees either by magnetic tape or electronically.  Additional information can be obtained at www.cwds.pa.gov or call 1-888-PAHIRES.

I.          RETIREMENT PLANS

• The limitation on the exclusion for elective deferrals under 401(k) and other plans is increased from $18,500 in 2018 to $19,000 in 2019. Taxpayers who are age 50 and older (during 2019) can make an additional catch-up contribution in the amount of $6,000 in 2019.
• 401(k) and 403(b) plans may offer qualified Roth contributions that allow employees to elect to make all or a portion of their 401(k) contributions on an after-tax basis. Similar to Roth IRA’s, earnings grow tax free and, in most circumstances, distributions are free from tax when withdrawn. Your plan documents must explicitly allow designated Roth contributions.
• The annual compensation limit taken into account for qualified plan purposes is increased from $275,000 in 2018 to $280,000 in 2019. 
• The maximum annual amount of salary reduction contributions to a SIMPLE retirement plan is increased from $12,500 in 2018 to $13,000 in 2019. Taxpayers who are age 50 and older (during 2019) can make an additional contribution of $3,000 in 2019.
• The limitation on the annual benefit under a defined benefit plan is increased from $220,000 in 2018 to $225,000 in 2019. The limitation for defined contribution plans is increased from $55,000 in 2018 to $56,000 in 2019.
• The amount used to identify highly compensated employees for non-discrimination testing purposes is increased from $120,000 in 2018 to $125,000 in 2019.

J.         MINIMUM WAGE RATE

 The minimum wage rate for Pennsylvania remains at $7.25 per hour in 2019.

K.         STANDARD MILEAGE RATES

 The standard mileage rate for business automobile usage is 58 cents per mile in 2019.  The optional mileage allowance deduction may be used for both leased and purchased autos.  If you elect the standard mileage rate for a leased auto, that method must be used for the entire lease period of that auto.

L.        NON-CASH FRINGE BENEFITS

As noted above, the Tax Cuts and Jobs Act modifies or eliminates the tax-favored treatment of certain fringe benefits such as moving expenses. The rules regarding the taxation and reporting of other fringe benefits still apply. Taxable fringe benefits include the following: the cost of nondiscriminatory group-term life insurance provided to employees in excess of $50,000; personal use of an employer provided vehicle; the cost of life insurance (other than group-term) provided to employees where the employee may determine the beneficiary; and discriminatory payments to key employees under educational assistance plans, self-insured medical reimbursement plans, dependent care assistance programs and group legal service plans.

 M.         1099 REQUIREMENTS

Form 1099-MISC must be issued to persons and unincorporated entities (including partnerships and LLCs not taxed as corporations) receiving at least $600 for: 1) services rendered other than as an employee; 2) rent; 3) prizes; 4) medical and health care payments; or 5) other payments. Form 1099-MISC is not required to be filed for payments for merchandise, payments made via credit card, nor most payments to corporations, subject to some exceptions. You must also file Form 1099-MISC for each person from whom you have withheld any federal income tax under the backup withholding rules regardless of the amount of payment. Form 1099-INT should be filed to report interest payments of at least $10. 

The filing deadline for Form 1099-MISC to report non-employee compensation in Box 7 and the related Form 1096 is January 31, 2019. For all other reported payments, file Form 1099 by February 28, 2019. The forms generally should be provided to recipients by January 31, 2019. Penalties for late filing, non-filing, or filing incorrect information range from $50 per information return to the greater of $540 or 10% of the aggregate dollar amount of the items required to be reported correctly. In certain instances, these penalties may be higher. Should you require our assistance in preparing these forms, please submit all information to us as soon as possible to allow for timely filing and to avoid the assessment of significant penalties. We recommend that you collect names, addresses and taxpayer identification numbers for every payee and vendor with whom you transact business. Forms W-9 should be used for this purpose and may be obtained via the internet at www.irs.gov or from our website.

Companies paying non-employee compensation for Pennsylvania based work must submit copies of federal forms 1099-MISC to the Pennsylvania Department of Revenue at the same time they are due to the Internal Revenue Service. Beginning January 1, 2018, payors of $5,000 or more for Pennsylvania-sourced work to nonresident individuals or to disregarded entities owned by nonresident individuals are required to withhold Pennsylvania personal income tax from such payments at a rate of 3.07%. Similarly, a business making rent or royalty payments exceeding $5,000 to nonresidents with regard to Pennsylvania property is required to withhold Pennsylvania personal income tax on such payments. These new withholding rules require electronically filed copies of IRS Form 1099-MISC with the Pennsylvania Department of Revenue, as well as quarterly withholding returns and annual reconciliations.

The issue of whether workers should be classified as employees or as independent contractors remains the focus of Internal Revenue Service scrutiny. In determining appropriate worker classification, businesses must weigh a variety of factors. Some will dictate in favor of employee status while others will be indicative of independent contractor status. No single factor establishes the outcome, and all must be carefully considered within the context of the relationship. Improper reporting of workers can result in a requirement to pay back taxes plus interest and punitive penalties. Additional guidance with regard to this complex and important determination may be found at www.irs.gov (search “worker classification”). Should you have any questions, please call us. 

 N.        HEALTH FLEXIBLE SPENDING ARRANGEMENT

 The maximum salary reduction contribution to a health flexible spending arrangement (health FSA) is $2,700 for 2019.  Any salary reductions in excess of this amount will be subject to tax on distributions from the health FSA.

 O.         THE PATIENT PROTECTION AND AFFORDABLE CARE ACT (ACA)

Beginning in 2019, the TCJA eliminates the individual mandate imposing a penalty on those individuals failing to have health insurance coverage required under ACA; however, other provisions of the ACA are still in effect. Generally, ACA requires employers with at least 100 full-time equivalent employees (FTE) to provide health coverage, or risk paying a penalty. ACA also requires employers and insurers to report certain information to the Internal Revenue Service. 

In addition, ACA requires certain employers to report on Form W-2 the aggregate cost of applicable employer sponsored health coverage paid during the calendar year. The aggregate reportable cost is reported on Form W-2 in Box 12, using Code DD. Pending further guidance from the IRS, transition relief of this disclosure requirement may apply to certain small employers who issue less than 250 W-2 Forms each year. A detailed analysis for implementing these provisions is beyond the scope of this newsletter, but please contact us if further guidance is needed in regard to the Affordable Care Act.

 P.         EMPLOYEE BUSINESS EXPENSE REIMBURSEMENTS

If an employee is reimbursed for business expenses under an “accountable plan”, the reimbursements are not treated as taxable income to the employee. An accountable plan must require the employee to: 1) substantiate the nature and amount of the expenses, and 2) repay to the employer any reimbursements in excess of the business expenses incurred. Please contact us if you need assistance in designing an accountable plan.

 Q.        ANNUAL LEASE VALUE AMOUNTS FOR PERSONAL USE OF COMPANY CARS

The “Annual Lease Value” (ALV) table, as issued by the Internal Revenue Service (www.irs.gov), shows the annual value to employees for the personal use of a company car.  This ALV amount of the auto is includible in the employee’s income, unless the car is used exclusively for business purposes.  If the car is used partly for personal driving, a percentage of the ALV (based on the percentage of personal use) is reported on the employee’s W-2.  Note that the ALV does not change each year.  Instead, it is treated as constant for each of the first four years of use.  If the company car is still in use after four years, it is revalued at the beginning of the fifth year, and the ALV based on this new fair market value is used for the next four years of employee use.  The ALV includes the value of auto insurance, registration fees and repairs paid by the company.  It does not include the cost of fuel.  If the company pays for fuel, the cost consumed in personal driving is additional W-2 income to the employee.  A standard rate of 5½ cents per mile may be used in computing income attributable to personal fuel costs paid by the employer.

 R.       PROPOSED OVERTIME REGULATIONS HALTED BY FEDERAL DISTRICT COURT

In 2016, the Department of Labor issued revised overtime rules under the Fair Labor Standards Act. These changes were scheduled to go into effect on December 1, 2016 but have since been halted by subsequent litigation. We recommend that employers remain informed as to the status of this matter.

DISCLOSURE

 The above synopses are brief reviews of general payroll tax issues.  They are not intended to be complete explanations or to provide tax advice for specific fact patterns.  Please discuss any decision concerning specific situations with a tax advisor qualified on such issues.

New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.

New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.

Final Regulations

The final regulations in T.D. 98xx_1 largely adopt the proposed regulations in NPRM REG-107892-18 (August 16, 2018), but with substantial modifications.

Taxpayers are likely to be disappointed in one thing that did not change: all items treated as capital gain or loss, including Section 1231 gains and losses, are still excluded from qualified business income (QBI). Taxpayers should continue to apply the Section 1231 netting and recapture rules when calculating the Code Sec. 199A deduction.

However, the final regulations drop the rule that treated an incidental non-specified services trade or business (SSTB) as part of an SSTB if the businesses were commonly owned and shared expenses, and the non-SSTB’s gross receipts were no more than five percent of the business’s combined gross receipts.

The final regulations make several adjustments to the proposed regulations for estates and trusts. Most significantly, the final regulations remove the definition of "principal purpose" under the anti-abuse rule that allows the IRS to aggregate multiple trusts. The IRS is taking this issue under advisement. Also, in determining if a trust or estate has taxable income that exceeds the threshold amount, distributions are no longer excluded. Instead, the entity’s taxable income is determined after taking into account any distribution deduction under Code Sec. 651 or Code Sec. 661.

The final regulations retain the presumption that an employee continues to be an employee while doing the same work for the same employer. However, the regulations provide a new three-year look back rule, and allow the worker to rebut the presumption by showing records (such as contracts or partnership agreements) that corroborate the individual’s status as a non-employee.

Other changes of note include:

• Disallowed, limited or suspended losses must be used in order from the oldest to the newest, on a FIFO (first in, first out) basis.
• A relevant passthrough entity (RPE) can aggregate businesses.
• If an RPE fails to report an item, only that item is presumed to be zero; the missing information may be reported on an amended return.
• The S portion and non-S portion of an electing small business trust (ESBT) are treated as a single trust for purposes of determining the threshold amounts.

Proposed Regs for QBI, RICs, Trusts, Estates

Taxpayers may rely on the proposed regulations in NPRM REG-134652-18, which cover three broad topics.

First, in calculating QBI, previously disallowed losses are treated as losses from a separate trade or business. If the losses relate to a publicly traded partnership (PTP), they must be treated as losses from a separate PTP. Attributes of the disallowed loss are determined in the year the loss is incurred.

Second, a RIC that receives qualified REIT dividends may pay Section 199A dividends. The IRS continues to consider permitting conduit treatment for qualified PTP income received by a RIC, and seeks public comment on this issue.

Finally, the proposed regulations also provide rules for charitable remainder unitrusts (and their beneficiaries), split-interest trusts, and separate shares.

Rental Real Estate Enterprise

The proposed revenue procedure set forth in Notice 2019-7 provides a safe harbor for a rental real estate enterprise to be treated as a trade or business for purposes of Section 199A. RPEs can also use the safe harbor.

A rental real estate enterprise must satisfy three conditions to qualify for the safe harbor:

• Separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise.
• At least 250 or more hours of rental services must be performed per year with respect to the rental enterprise. For tax years beginning after December 31, 2022, this test can be satisfied in any three of the five consecutive tax years that end with the tax year.
• The taxpayer must maintain contemporaneous records of relevant items, including time reports, logs, or similar documents. (This requirement does not apply to tax years beginning in 2018.)

Relevant items include hours of all services performed, description of all services performed, dates on which such services were performed, and who performed the services.

W-2 Wages

Rev. Proc. 2019-11 allows taxpayers to use one of three methods to calculate W-2 wages for the passthrough deduction:

• the unmodified Box method;
• the modified Box 1 method; or
• the tracking wages method.

These methods were proposed in Notice 2018-64, I.R.B. 2018-35, 347. The unmodified Box method is simplest, but the other two methods are more accurate.

Comments Requested

The IRS requests comments on the proposed regulations and the proposed safe harbor. The IRS must receive the comments and any requests for public hearing within 60 days after the proposed regulations are published in the Federal Register.

The IRS has issued interim guidance on the excise tax payable by exempt organizations on remuneration in excess of $1 million and any excess parachute payments made to certain highly compensated current and former employees in the tax year. The excise tax imposed by Code Sec. 4960 is equal to the maximum corporate tax rate on income (currently 21 percent).

The IRS has issued interim guidance on the excise tax payable by exempt organizations on remuneration in excess of $1 million and any excess parachute payments made to certain highly compensated current and former employees in the tax year. The excise tax imposed by Code Sec. 4960 is equal to the maximum corporate tax rate on income (currently 21 percent).

Q&A on Section 4960

The current guidance is contained in a Question-and-Answer format. The interim guidance addresses:

• general application of Code Sec. 4960;
• applicable tax-exempt organizations and related organizations;
• covered employees;
• excess remuneration;
• medical and veterinary services;
• excess parachute payments;
• three-times-base-amount test for parachute payments;
• computation of excess parachute payments;
• reporting liability under Section 4960;
• miscellaneous issues; and
• the effective date.

Reliance

The IRS intends to issue proposed regulations under Code Sec. 4960 which will incorporate the interim guidance. Until future guidance is issued, taxpayers may rely on the rules in the interim guidance from December 22, 2017. Any future guidance will be prospective and will not apply to tax years beginning before the guidance is issued. Until additional guidance is issued, taxpayers may base their positions upon a good faith, reasonable interpretation of the statute and legislative history, where appropriate. Specifically, the positions reflected in the guidance constitute a good faith and reasonable interpretation.

Comments Requested

The IRS and Treasury Department request comments on the topics addressed in the interim guidance and any other issues arising under Code Sec. 4960. Comments should be submitted no later than April 2, 2019.

The IRS has provided safe harbors for business entities to deduct certain payments made to a charitable organization in exchange for a state or local tax (SALT) credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose. Proposed regulations that limit the charitable contribution deduction do not affect the deduction as a business expense.

The IRS has provided safe harbors for business entities to deduct certain payments made to a charitable organization in exchange for a state or local tax (SALT) credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose. Proposed regulations that limit the charitable contribution deduction do not affect the deduction as a business expense.

Charitable Contributions and SALT Limit

An individual’s itemized deduction of SALT is limited to $10,000 ($5,000 if married filing separately). Some states and local governments have adopted or considered adopting laws that allowed individuals to receive a tax credit for contributions to funds controlled by the state and local government.

Under proposed regulations, however, an individual, estate, and trust generally must reduce the amount of any charitable contribution deduction by the amount of any SALT credit he or she receives or expects to receive for the transfer. A de minimis exception allows a taxpayer to disregard up to 15 percent of the payment or transfer to the charitable organization.

C Corporations

If a C corporation makes the charitable payment in exchange for a state and local tax credit, it may deduct the payment as an ordinary and necessary business expense to the extent of any SALT credit received or expected to receive.

Specified Pass-Through Entity

A specified pass-through entity may also deduct the payment as an ordinary and necessary business expense, but only if the SALT credit applies or is expected to apply to offset a SALT other than an income tax. A specified pass-through entity for this purpose is any business entity other than a C corporation that is regarded as separate from its owner for all federal income tax purposes (i.e., disregarded entity). The entity also must operate a trade or business within the meaning of Code Sec. 162 and be subject to SALT incurred in carrying on that trade or business that is imposed directly on the entity.

Effective Date

The safe harbors apply to any payments made to a charitable organization in exchange for a SALT credit paid on or after January 1, 2018.

The Treasury and IRS have issued final regulations for determining the inclusion under Code Sec. 965 of a U.S. shareholder of a foreign corporation with post-1986 accumulated deferred foreign income. Code Sec. 965 imposes a "transition tax" on the inclusion. The final regulations retain the basic approach and structure of the proposed regulations, with certain changes.

The Treasury and IRS have issued final regulations for determining the inclusion under Code Sec. 965 of a U.S. shareholder of a foreign corporation with post-1986 accumulated deferred foreign income. Code Sec. 965 imposes a "transition tax" on the inclusion. The final regulations retain the basic approach and structure of the proposed regulations, with certain changes.

The final regulations generally apply beginning the last tax year of the foreign corporation that begins before January 1, 2018, and with respect to a U.S. person, beginning the tax year in or with which such tax year of the foreign corporation ends.

Note: The final regulations were published without a T.D. number. According to the IRS, a T.D. number will be assigned after the IRS resumes normal operations.

Controlled Domestic Partnerships

Certain controlled domestic partnerships may be treated as foreign partnerships for determining the section 958(a) U.S. shareholders of a specified foreign corporation owned by the controlled domestic partnership and the section 958(a) stock owned by the shareholders. The definition of controlled domestic partnership is revised to not be defined only with respect to a U.S. shareholder, so that the controlled foreign partnership is clearly treated as a foreign partnership for all partners if the rule applies.

Pro Rata Share

The definitions of pro rata share and section 958(a) U.S. shareholder inclusion year are modified. The final regulations will require a section 965(a)inclusion by a section 958(a) U.S. shareholder if the specified foreign corporation, whether or not it is a CFC, ceases to be a specified foreign corporation during its inclusion year.

Downward Attribution Rule

A special rule applies when determining downward attribution from a partner to a partnership where the partner has a de minimis interest in the partnership. The threshold for applying the special attribution rule for partnerships is increased from five to 10 percent, and is extended to trusts.

Basis Election Rules

The final regulations allow a taxpayer elect to increase its basis in the stock of its deferred foreign income corporations (DFICs) by the lesser of its section 965(b) previously taxed earnings and profits or the amount it can reduce the stock basis of its E&P deficit foreign corporations without recognizing gain. Within limits, a taxpayer may designate which stock of a DFIC is increased and by how much.

Exception from Anti-Abuse Rules

The final regulations provide an exception from the anti-abuse rules for certain incorporation transactions. The rules will not apply to disregard a transfer of stock of a specified foreign corporation by U.S. shareholder of a domestic corporation, if certain requirements are met. The section 965(a) inclusion amount with respect to the transferred stock of the specified foreign corporation must not be reduced, and the aggregate foreign cash position of both the transferor and the transferee is determined as if each had held the transferred stock of the specified foreign corporation owned by the other on each of the cash measurement dates.

Cash Position

Code Sec. 965 taxes foreign earnings of a domestic corporate U.S. shareholder at a 15.5-percent rate if held in cash, but only an 8-percent rate if held otherwise. Cash includes cash and cash equivalents. The final regulations provide a narrow exception from the definition of cash position for certain commodities held by a specified foreign corporation in the ordinary course of its trade or business, as well as for certain privately negotiated contracts to buy and sell these assets.

Election and Payment Rules

Under the final regulations, the signature requirement on an election statement is satisfied if the unsigned copy is attached to a timely-filed return of the person making the election, provided that the person retains the signed original in the manner specified.

Transition rules for filing transfer agreements have also been updated. If a triggering event or acceleration event occurs on or before December 31, 2018, the transfer agreement must be filed by January 31, 2019. Rules are added to address the death of an S corporation shareholder transferor. The final regulations also include modifications to certain requirements for the terms of a transfer agreement.

The final regulations provide that in the case of an additional liability reported on a return or amended return, any amount that is prorated to an installment, the due date of which has already passed, will be due with the return reporting the additional amount. The rule on deficiencies remains the same, and payment for a deficiency prorated to an installment, the due date of which has already passed, is due on notice and demand.

Total Net Tax Liability

A taxpayer may elect to defer the payment of its total net tax liability under Code Sec. 965(h) and (i). Total net tax liability under Code Sec. 965, which defines the portion of a taxpayer’s income tax eligible for deferral, is equal to the difference between a taxpayer’s net income tax with and without the application of Code Sec. 965. The final regulations will disregard effective repatriations taxed similarly to dividends under Code Sec. 951(a)(1)(B) resulting from investments in U.S. property under Code Sec. 956 when determining net income tax liability without the application of Code Sec. 965.

Consolidated Groups

The consolidated group aggregate foreign cash position is determined under the final regulations as if all members of the consolidated group that are section 958(a) U.S. shareholders of a specified foreign corporation are a single section 958(a) U.S. shareholder.

Obsolete Guidance

The following previous guidance is obsolete:

• Notice 2018-7, I.R.B. 2018-4, 317;
• Notice 2018-13, I.R.B. 2018-6 341, Secs. 1-4, 6;
• Notice 2018-26, I.R.B. 2018-16, 480, Secs. 1-5, 7; and
• Notice 2018-78, I.R.B. 2018-42, 604, Secs. 1-3, 5.

The IRS has issued its annual revisions to the general procedures for ruling requests, technical memoranda, determination letters, and user fees, as well as areas on which the Associate Chief Counsel offices will not rule. The revised procedures are generally effective January 2, 2019.

The IRS has issued its annual revisions to the general procedures for ruling requests, technical memoranda, determination letters, and user fees, as well as areas on which the Associate Chief Counsel offices will not rule. The revised procedures are generally effective January 2, 2019.

Rev. Proc. 2019-1

This procedure explains how the IRS provides advice to taxpayers in the form of letter rulings, closing agreements, determination letters and information letters, and orally on issues under the jurisdiction of the various Associate Chief Counsel offices. It supersedes Rev. Proc. 2018-1, I.R.B. 2018-1, 1. In addition to changes made throughout the guidance, significant changes in the new procedure include:

• Sections 1, 1.01, 3.07, 5.12, 5.14, 5.15, 6.08, 9.23, 10.07, 15.11, Appendix A, Appendix B, Appendix C, Appendix D, and Appendix E have been amended to reflect the name change from "Associate Chief Counsel (Tax Exempt and Government Entities)" to "Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes)."
• Section 5.15(3) has been removed to reflect the transfer of authority to waive excise tax under Code Sec. 4980F to the Commissioner, Tax Exempt and Government Entities Division, Employee Plans Rulings and Agreements.
• Section 8.02 has been amended to remove the exception for changes in accounting methods or accounting periods from the 21-day notification rule.
  Appendix A (Schedule of User Fees) has been amended with increased user fees to match the increase in costs incurred by the IRS. The new user fee schedule is effective February 2, 2019.
• Appendix E (Church Plan Checklist) has been amended to add a new item 11 to reflect the requirement that an applicant include a representation as to whether an election under Reg. §1.410(d)-1 to apply certain provisions of the Code and the Employee Retirement Income Security Act of 1974 (ERISA) to the plan has ever been made.

Rev. Proc. 2019-2

This procedure explains when and how an Associate Office provides technical advice conveyed in a technical advice memorandum (TAM), as well as a taxpayer’s rights when a field office requests a TAM regarding a tax matter. It supersedes Rev. Proc. 2018-2, I.R.B. 2018-1, 106. Significant changes in the new procedure include:

• All references to Associate Chief Counsel (Tax Exempt and Government Entities) have been revised to read “Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes).” All references to “Appeals Policy” have been revised to read “Appeals Policy Planning Quality & Analysis.”
• Section 3.04 has been amended to delete the mandatory TAM requirement in qualified retirement plan matters in cases concerning proposed adverse letters or proposed revocation letters on collectively bargained plans.
• Section 14.02 has been amended to clarify that requests for relief under Code Sec. 7805(b) on the revocation or modification of determination letters and letter rulings issued by TE/GE are handled under the procedures in sections 23 and 29 of Rev. Proc. 2019-4, and section 12 of Rev. Proc. 2019-5.

Rev. Proc. 2019-3

This procedure provides a revised list of areas under the jurisdiction of certain Associate Chief Counsel offices for which letter rulings or determination letters will not be issued. (Lists of areas of nonissuance under the jurisdiction of the Associate Chief Counsel (International) and the Commissioner, Tax Exempt and Government Entities Division (relating to plans or plan amendments) are presented in separate revenue procedures.) It supersedes Rev. Proc. 2018-3, I.R.B. 2019-1, 130.

The following have been added to the list of issues for which advance rulings will not be issued:

• Gross Income. Whether an amount is not included in a taxpayer’s gross income under Code Sec. 61 because the taxpayer receives the amount subject to an unconditional obligation to repay the amount.
• Trade or Business Expenses. Whether a taxpayer is engaged in a trade or business. This area does not include a request for a ruling that relies on a representation from a taxpayer that the taxpayer is or is not engaged in a trade or business, or a request for a ruling that relies on factual information provided by the taxpayer evidencing the active conduct of a trade or business.
• Losses; Carryovers in Certain Corporate Acquisitions; Regulations. In determining whether a loss for worthless securities is subject to Code Sec. 165(g)(3), (i) whether the source of any gross receipts may be determined by reference to the source of gross receipts of a counter party to an intercompany transaction, as defined in Reg. §1.1502-13(b)(1) (e.g., an intercompany distribution to which Reg. §1.1502-13(f)(2) applies), other than an intercompany transaction to which Code Sec. 381(a) applies, and (ii) in an intercompany transaction to which Code Sec. 381(a) applies, whether the acquiring corporation takes into account historic gross receipts of the distributor or transferor corporation, if the intercompany transaction is part of a plan to claim a deduction for worthless securities under Code Sec. 165(g)(3).
• Treatment of multiple trusts. Whether two or more trusts shall be treated as one trust for purposes of subchapter J of chapter 1.
• Returns Relating to the Cancellation of Indebtedness by Certain Entities. Requests for a ruling that the creditor is not required to report a discharge that include as grounds for the request a dispute regarding the underlying liability.

The following issues have been modified:

• Special Rules for Exchanges Between Related Persons. Except in the case of (i) a transaction involving an exchange of undivided interests in different properties that results in each taxpayer holding either the entire interest in a single property or a larger undivided interest in any of the properties or (ii) a disposition of property in a nonrecognition transaction in which the taxpayer or the related party receives no cash or other property that results in gain recognition, whether a Code Sec. 1031(f) exchange involving related parties, or a subsequent disposition of property involved in the exchange, has as one of its principal purposes the avoidance of federal income tax, or is part of a transaction (or series of transactions) structured to avoid the purposes of Code Sec. 1031(f).

Rev. Proc. 2019-4

This procedure explains how the IRS provides advice to taxpayers on issues under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division (TE/GE) Employee Plans Rulings and Agreements Office, and details the types of advice available to taxpayers, and the manner in which the advice is requested and provided. The new procedure supersedes Rev. Proc. 2018-4, I.R.B. 2018-1, 146. In addition to minor non-substantive changes, the following changes are made:

• Modifications to reflect Employee Plans Rulings and Agreement’s current practice of considering voluntary requests for closing agreements to resolve certain income or excise tax issues that are ineligible for resolution under the Employee Plans Compliance Resolution System (EPCRS).
• Letter ruling requests may not be submitted via facsimile transmission.
• A new category called "Other Circumstances" for which determination letters can be requested has been added.
• Code Secs. 414(b), (c) and (m) have been added to the list of sections for which a determination is not made when a determination letter is issued in accordance with the revenue procedure.
• For a plan to be reviewed for, and a determination letter relied upon with respect to, whether the terms of the plan satisfy one of the design-based safe harbors, the plan document must provide a definition of compensation that satisfies Reg. §1.414(s)-1(c).
• Employee Plans Rulings and Agreements will consider a request for an extension of time for making an election under Reg. §301.9100-3 to recharacterize annual contributions made to a Roth IRA. Employee Plans Rulings and Agreements will also consider recharacterization requests that relate to a conversion or rollover contribution to a Roth IRA but only if the rollover or conversion was made prior to January 1, 2018.
• SB/SE Exam will be notified if a request for an extension of time for making an election or other application for relief under Reg. §301.9100-3 is submitted when the return is under examination.
• Beginning April 1, 2019, VCP submissions and the applicable user fees must be made using www.pay.gov. Further, the payment of user fees for pre-approved plan submissions and letter ruling requests may not be made using www.pay.gov and such requests must still be accompanied by a check in the amount of the applicable user fee.
• Clarification has been provided regarding which forms must be submitted for VCP submissions made prior to April 1, 2019.
• User fee for Form 5310 will increase from $2,300 to $3,000 for submissions postmarked on or after July 1, 2019.

Rev. Proc. 2019-5

This procedure updates the procedures for organizations applying for, and the issuing of determination letters on, exempt status under Code Secs. 501and 521. These apply to exempt organizations other than those relating to pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans. The procedures also apply to revocation or modification of determination letters. In addition, the procedure provides guidance on the exhaustion of administrative remedies for declaratory judgment under Code Sec. 7428. Finally, new procedure provides guidance on applicable user fees for requesting determination letters. The new procedure supersedes Rev. Proc. 2018-5, I.R.B. 2018-1, 233. Notable changes include:

• "Tax Exempt and Government Entities" was changed to "Employee Benefits, Exempt Organizations, and Employment Taxes" throughout the document to reflect the office’s name change.
• Section 2.02 was amended to add (6), which discusses Rev. Proc. 2018-15, I.R.B. 2018-9, 379.
• Section 2.03(1) was amended to clarify that a Code Sec. 501(c)(4) organization must submit a user fee along with its completed Form 8976.
• Section 3.02(4) was amended to clarify that the section only applies to an organization seeking to qualify under Code Sec. 501(c)(6).
• Sections 4, 15, and 18 were amended to reflect the new Form 1024-A.
• Section 4.09 was amended to clarify that a request for expedited handling of a determination letter will not be forwarded to the appropriate group for action unless the application is complete.
• Section 13 was amended throughout because Rev. Proc. 2018-32, I.R.B. 2018-23, 739, superseded Rev. Proc. 81-7, 1981-1 CB 621.
• Appendix A was amended to reflect the single user fee for non-1023-EZ exemption applications, and to reflect a change in the user fee for submissions postmarked on or after July 1, 2019, for advance approval of Code Sec. 4942(g)(2) set asides, Code Sec. 4945 advance approval of an organization’s grant making procedures, and Code Sec. 4945(f) advance approval of voter registration activities.

Rev. Proc. 2019-7

This procedure provides an updated list of subject areas under the jurisdiction of the Associate Chief Counsel (International) for which it will not issue advance letter rulings or determination letters, or will issue letters only if justified by unique and compelling circumstances. Section 4.01(01) related to Code Sec. 367(a) has been removed as obsolete. There are no other changes except renumbering to reflect the foregoing and updates to cross references and citations. The new procedure supersedes Rev. Proc. 2018-7, I.R.B. 2018-1, 271