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 12th 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.
On July 1, President Trump signed into law a sweeping, bipartisan IRS reform bill called the Taxpayer First Act ( P.L. 116-25). This legislation aims to broadly redesign the IRS for the first time in over 20 years.
On July 1, President Trump signed into law a sweeping, bipartisan IRS reform bill called the Taxpayer First Act ( P.L. 116-25). This legislation aims to broadly redesign the IRS for the first time in over 20 years.
Reworked IRS Reform Bill
The Senate approved the Taxpayer First Act by voice vote on June 13. The measure was unanimously approved in the House on June 10.
The reworked IRS reform bill, originally introduced in the last Congress, was revised in early June after the House passed a prior version in April. However, the original House-approved bill (HR 1957) was quickly doomed in the Senate because of controversy surrounding the IRS’s Free File program.
The provision codifying the IRS’s Free File program was removed from the original bill, and the measure was reintroduced as HR 3151. Congress then quickly sent it to the president’s desk.
Taxpayer First Act Provisions
The Taxpayer First Act aims to reform the IRS into a more taxpayer-friendly agency. It requires the IRS to develop a comprehensive customer service strategy, as well as a plan to redesign the IRS’s structure, modernize its technology, and enhance its cyber security.
The measure also:
- codifies and enhances an independent Office of Appeals within the IRS;
- waives the application fee for an offer in compromise (OIC) by a low-income taxpayer;
- sets new electronic filing requirements;
- clarifies information available about low-income taxpayer clinics (LITCs);
- codifies the Volunteer Income Tax Assistance (VITA) Program;
- requires notice regarding the closure of taxpayer assistance centers (TACs);
- improves the IRS whistleblower program;
- modifies the private debt collection program;
- clarifies procedures for equitable relief from joint liability;
- establishes new safeguards on seizing funds believed to be structured to avoid the $10,000 financial reporting requirement; and
- modifies procedures for the issuance of summons and notice of third-party contacts by the IRS.
Hill Reaction
"This signing is the culmination of a lengthy, bipartisan process undertaken by the [House] Ways and Means Committee to implement pro-taxpayer reforms at the IRS for the first time in more than 20 years," Senate Finance Committee (SFC) Ron Wyden, D-Ore., said in a July 1 statement. "New protections for low-income taxpayers, practical enforcement reforms, and upgraded assistance for taxpayers and small businesses will all now go into place."
Additionally, the House’s top Republican tax writer issued a statement after Trump signed the IRS reform legislation. "I’m proud that after three years of thoughtful bipartisan work, our bold package of reforms to the Internal Revenue Service are the law of the land," Ways and Means ranking member Kevin Brady, R-Tex., said on July 1. "Thank you to President Trump for signing this historic legislation, which is the biggest and boldest step in over 20 years to redesign and restructure the IRS into an agency with a singular mission – quality taxpayer service."
The House has approved a bipartisan repeal of the Affordable Care Act’s (ACA) so-called "Cadillac"excise tax on certain high-cost insurance plans.
The House has approved a bipartisan repeal of the Affordable Care Act’s (ACA) so-called "Cadillac"excise tax on certain high-cost insurance plans.
ACA Cadillac Tax Repeal
The Middle Class Health Benefits Tax Repeal Bill (HR 748) cleared the House on the evening of July 17 by a 419-to-6 vote. The bipartisan bill would repeal the 40 percent excise tax under the ACA known as the "Cadillac tax" on certain high-cost employer-sponsored health care plans.
Congress has repeatedly delayed the ACA’s "Cadillac" tax, which is currently set to go into effect in 2022. However, HR 748 would fully repeal the tax.
Although the measure has bipartisan support in the Senate, as for when it will get its legs in the upper chamber remains to be seen. Lately, Senate Majority Leader Mitch McConnell, R-KY., has been viewed on Capitol Hill as focusing more on moving nominations than considering tax bills.
HR 748’s Large Price Tag May Signal Hope for Tax Extenders
Notably, HR 748 dodged House Democrats’ "pay as you go" rules for tax legislation, thus carrying with it a large price tag with no offsets. The nonpartisan Congressional Budget Office (CBO) has estimated that the bill would cost the federal government more than $196 billion over 10 years.
Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, has signaled that Democrats’ support for repealing the ACA’s "Cadillac"tax without pay-fors may signal a newly opened door for tax extenders. Grassley has consistently expressed that he is focused on addressing the previously and soon to be expired tax breaks known as tax extenders but has been waiting for the Democratic controlled House to send such a bill, noting that tax legislation must originate in the House.
However, House Democrats’ tax extenders bill, the Taxpayer Certainty and Disaster Tax Relief Bill of 2019 (HR 3301) would offset its costs by causing the GOP tax law’s increase in estate tax exemption amounts to sunset early at the beginning of 2023. Under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), the estate tax provisions would expire at the start of 2026.
The bill cleared the House Ways and Means Committee last month but has not yet reached the House floor. Senate Republicans have called any proposal to repeal provisions under the TCJA a "nonstarter."
The IRS has released final regulations that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity.
The IRS has released final regulations that clarify the employment tax treatment of partners in a partnership that owns a disregarded entity.
The Treasury Department and the IRS had issued the temporary regulations ( T.D. 9766) to clarify that the rule that a disregarded entity is treated as a corporation for employment tax purposes does not apply to the self-employment tax treatment of any individuals who are partners in a partnership that owns a disregarded entity. The temporary regulations continued to explicitly provide that the owner of a disregarded entity who is treated as a sole proprietor for income tax purposes is subject to self-employment taxes. A notice of proposed rulemaking ( REG-114307-15) cross-referencing T.D. 9766was published on the same day.
The final regulations adopt the proposed regulations as amended. The corresponding temporary regulations are removed.
Disregarded Entity
These regulations affect partners in a partnership that owns a disregarded entity, and contain amendments to 26 CFR part 301. Generally, under Reg. §301.7701-2(c)(2)(i) and except as otherwise provided, a business entity that has a single owner and is not a corporation under Reg. §301.7701-2(b)is disregarded as an entity separate from its owner (a disregarded entity). However, Reg. §301.7701-2(c)(2)(iv)(B) treats a disregarded entity as a corporation for purposes of employment taxes imposed under Subtitle C of the Internal Revenue Code. This exception to the treatment of disregarded entities does not apply to taxes imposed under Subtitle A of the Code, including self-employment taxes.
Effective Date
These regulations are effective on July 2, 2019.
Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.
Final regulations allow employers to voluntarily truncate employees’ social security numbers (SSNs) on copies of Forms W-2, Wage and Tax Statement, furnished to employees. The truncated SSNs appear on the forms as IRS truncated taxpayer identification numbers (TTINs). The regulations also clarify and provide an example of how the truncation rules apply to Forms W-2.
Why Truncate?
The Protecting Americans from Tax Hikes (PATH) Act of 2015 ( P.L. 114-113) amended Code Sec. 6051(a)(2) by replacing the requirement that employers include employees’ SSNs on copies of Forms W-2 furnished to employees with a requirement to use an "identifying number for the employee."Because the SSN was no longer required to appear on Forms W-2 furnished to employees, the IRS published proposed regulations in 2017 to allow employers to truncate employees’ SSNs on those Forms W-2 ( REG-105004-16). The amendments were intended to aid employers’ efforts to protect employees from identity theft.
The final regulations adopt the proposed regulations without substantive changes to the content of the rules.
SSN Truncation on Forms W-2
The final regulations permit employers to truncate employees’ SSNs on copies of:
- Forms W-2 furnished to employees to report wages paid, employment taxes withheld, etc.;
- Forms W-2 furnished to employees to report wages paid in the form of group-term life insurance;
- Forms W-2 furnished to payees to report third-party sick pay; and
- Forms W-2c furnished to correct errors on Forms W-2.
The regulations do not apply to any other forms. Also, truncation is not mandatory; the regulations permit truncation but do not require it.
Under the general truncation rules, a TTIN cannot be used on a statement or document if a statute, regulation, other guidance published in the Internal Revenue Bulletin, form, or instructions:
- specifically requires use of an SSN, IRS individual taxpayer identification number (ITIN), IRS adoption taxpayer identification number (ATIN), or IRS employer identification number (EIN); and
- does not specifically permit truncation.
For instance, an employer cannot truncate an employee’s SSN on copies of Forms W-2 filed with the Social Security Administration.
The IRS intends to incorporate the revised regulations into forms and instructions.
Effective Date; Applicability Date
The final regulations are effective on July 3, 2019, but when they apply varies. Reg. §31.6051-1, Reg. §31.6051-3, and Reg. §1.6052-2, as amended, apply for statements required to be filed and furnished under Code Sec. 6051 and Code Sec. 6052 after December 31, 2020. Reg. §31.6051-2, as amended, applies on July 3, 2019. Reg. §301.6109-4, as amended, applies to returns, statements, and other documents required to be filed or furnished after December 31, 2020.
IRS final regulations provide rules that apply when the lessor of investment tax credit property elects to pass the credit through to a lessee. If this election is made, the lessee is generally required to include the credit amount in income (50 percent of the energy investment credit). The income is included in income ratably over the shortest MACRS depreciation period that applies to the investment credit property. No basis reduction is made to the investment credit property.
IRS final regulations provide rules that apply when the lessor of investment tax credit property elects to pass the credit through to a lessee. If this election is made, the lessee is generally required to include the credit amount in income (50 percent of the energy investment credit). The income is included in income ratably over the shortest MACRS depreciation period that applies to the investment credit property. No basis reduction is made to the investment credit property.
Partners and S shareholders who receive the credit (i.e., are the ultimate credit claimants) must make income inclusions in proportion to their share of the credit.
No Basis Increase for Partners and S Shareholders
The regulations resolve a contentious issue against taxpayers. They provide that a partner’s income inclusions are not treated as an item of partnership income under subchapter K. A similar rule applies to S corporations. Therefore, basis adjustment rules that would increase a partner’s outside basis or S shareholder’stock basis if the income inclusion amounts were treated as items of income do not apply. The IRS says its interpretation is appropriate because the investment credit and limitations on the investment credit are determined at the partner and S shareholder level.
Coordination With Recapture Rules
If a recapture event occurs an adjustment is made to the lessee’s (or ultimate claimant’s) gross income to account for any difference between the amounts that were included in income and the credit that is allowed after recapture. Special rules are provided when the amount of the unrecaptured credit exceeds the income inclusions and when the income inclusions exceed the unrecaptured credit.
Election to Accelerate Income Inclusion Upon Lease Termination
The lessee (or ultimate claimant) may make an irrevocable election to include in gross income any remaining income inclusion amounts in the tax year in which a lease terminates or is otherwise disposed of. If a partner or S shareholder disposes of its partnership or S corporation interest, the partner or S shareholder may also make an irrevocable election to include remaining inclusion amounts in income in the year of disposition. These elections may only be made if the recapture period has expired and a recapture event had not occurred during the recapture period.
Effective Date
The final regulations are effective on July 17, 2019 and apply to investment credit property placed in service on or after September 19, 2016.
Effective July 17, 2019, the list of preventive care benefits that can be provided by a high deductible health plan (HDHP) without a deductible or with a deductible below the applicable minimum deductible is expanded. The list now includes certain cost effective medical care services and prescription drugs for certain chronic conditions.
Effective July 17, 2019, the list of preventive care benefits that can be provided by a high deductible health plan (HDHP) without a deductible or with a deductible below the applicable minimum deductible is expanded. The list now includes certain cost effective medical care services and prescription drugs for certain chronic conditions.
HDHPs and Health Savings Accounts
Individuals covered by an HDHP generally may establish and deduct contributions to a Health Savings Account (HSA). To qualify as an HDHP, a plan may not provide benefits for any year until the minimum deductible for that year is satisfied. However, an HDHP is not required to have a deductible for preventive care.
Current Rule for Chronic Conditions
Under the existing rule, preventive care generally does not include any service or benefit intended to treat an existing illness, injury, or condition. As a result, the cost barriers for care have resulted in some individuals diagnosed with certain chronic conditions failing to get effective and necessary care that would prevent making the chronic condition worse. Failure to address chronic conditions can lead to amputation, blindness, heart attacks, and strokes that require considerably more extensive medical intervention.
Treatments for Chronic Care as Preventive Care
The following medical care services are now classified as preventive care for someone with that chronic condition:
- angiotensin converting enzyme (ACE) inhibitors for individuals diagnosed with congestive heart failure, diabetes, or coronary artery disease;
- anti-resorptive therapy for individuals diagnosed with osteoporosis or osteopenia;
- blood pressure monitor for individuals diagnosed with hypertension;
- peak flow meter for individuals diagnosed with asthma;
- inhaled corticosteroids for individuals diagnosed with asthma;
- glucometer for individuals diagnosed with diabetes;
- hemoglobin A1c testing for individuals diagnosed with diabetes;
- insulin and other glucose lowering agents for individuals diagnosed with diabetes;
- retinopathy screening for individuals diagnosed with diabetes; and
- statins for individuals diagnosed with heart disease and/or diabetes.
The continuity safe harbor placed-in-service date deadlines for the investment tax energy credit (Code Sec. 48) and the renewable electricity production credit (Code Sec. 45(a)) may be tolled if a construction delay is caused by national security concerns raised by the Department of Defense (DOD).
The continuity safe harbor placed-in-service date deadlines for the investment tax energy credit (Code Sec. 48) and the renewable electricity production credit (Code Sec. 45(a)) may be tolled if a construction delay is caused by national security concerns raised by the Department of Defense (DOD).
Background
In general, the energy credit may only be claimed if construction on a qualified facility begins before January 1, 2022. In the case of the production credit, construction must begin before January 1, 2017 (January 1, 2020 for a wind facility). Once construction begins, taxpayers are required to make continuous progress toward completion under either a continuous construction test or a continuous efforts test. These tests are deemed satisfied under the continuity safe harbor if the facility is placed in service within four calendar years after the calendar year in which construction begins.
Tolling Requirements
A construction deadline in the continuity safe harbor is tolled if all of the following requirements are satisfied:
- one or more necessary government permits or approvals for construction have been issued;
- construction has begun;
- the DOD provides written notice that the construction plan should be modified in the interest of national security;
- the plan is modified in a way that is acceptable to the DOD to mitigate the national security concerns; and
- as a result of the plan modification, new or additional permits or licenses must be obtained which will delay the placed-in-service date of the facility or energy property.
Tolling Period
The tolling period of the continuity safe harbor begins on the day the DOD provides written notice that the plan of construction requires modification to meet national security concerns.
The tolling period ends when one of the following events occurs:
- all new or additional permits or licenses are obtained;
- written confirmation is received that all of the required new or additional permits or licenses will not be issued; or
- the relevant federal or state authorities are notified in writing that the modification to the plan will no longer be pursued.
The maximum length of the tolling period is four years.
No Rulings
The IRS will not issue private letter rulings or determination letters regarding the application of the tolling provision or the beginning of construction requirement.
Modified Rulings
Notice 2013-29, 2013-1 C.B. 1085, Notice 2013-60, 2013-2 C.B. 431, Notice 2014-46, 2014-2 C.B. 520, Notice 2015-25, 2015-13 I.R.B. 814, Notice 2016-31, 2016-23 I.R.B. 1025, Notice 2017-4, 2017-4 I.R.B. 541, and Notice 2018-59, 2018-28 I.R.B. 196, are modified.
The Treasury and IRS have issued proposed regulations on provisions dealing with passive foreign investment companies (PFICs). Proposed regulations published on April 25, 2015, also have been withdrawn ( NPRM REG-108214-15).
The Treasury and IRS have issued proposed regulations on provisions dealing with passive foreign investment companies (PFICs). Proposed regulations published on April 25, 2015, also have been withdrawn ( NPRM REG-108214-15).
U.S. persons who own interests in PFICs are subject to rules that limit deferral on passive income earned by foreign corporations ( Code Sec. 1291– Code Sec. 1298). In general, a PFIC is a foreign corporation that in any given year:
- has income that is 75 percent or more passive income (income test); or
- owns, on average, assets that are 50 percent or more passive-income-producing (asset test).
The proposed regulations provide general guidance regarding PFICs, and guidance on the PFIC insurance exception. Specifically, the proposed regulations cover:
- the determination of ownership in a PFIC, and the treatment of certain income received or accrued by a foreign corporation and assets held by a foreign corporation under Code Sec. 1297;
- rules for determining whether a U.S. person that directly or indirectly holds stock in a PFIC is treated as a PFIC shareholder, and whether a foreign corporation is a PFIC; and
- whether a foreign insurance company is a qualifying insurance company (QIC) under Code Sec. 1297(f), and the amounts of income and assets that a QIC can exclude under the PFIC insurance exception.
General Guidance
The proposed regulations specify that, in applying the asset test, the period over which the average percentage is calculated is at least quarterly. However, taxpayers are allowed to use a shorter period, such as a monthly of daily measurement of asset values.
The proposed regulations address attribution of ownership under the look-through subsidiary rules of Code Sec. 1297(c) for determining PFIC status. These rules treat a foreign corporation (FC1) that owns 25 percent or more of another foreign corporation (FC2) as owning and earning a proportional amount of the other foreign corporation’s income and assets. The proposed regulations allow attribution from FC2 to FC1, if FC1 has a greater than 50 percent ownership interest in FC2.
The proposed regulation also provide a partnership look-through rule for the treatment of a partnership interest owned by a foreign corporation, for purposes of determining whether the foreign corporation is a PFIC. Under the rule, the same 25 percent ownership threshold applies to partnership interests as is applied to interests in corporations.
PFIC Insurance Exception
The income of a QIC derived in the active conduct of a trade or business is not treated as passive income for purposes of determining whether a corporation is a PFIC. The QIC test is based on the ratio of the foreign insurance company’s "applicable insurance liabilities" to total assets. Applicable insurance liabilities are the smallest of:
- insurance liabilities on the company’s most recent applicable financial statement (AFS);
- liabilities required by local law or regulation; or
- as provided under Treasury regulations.
Current law allows a foreign corporation to use a local AFS if it does not do financial reporting based on the rigorous and widely-accepted U.S. generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS).
The proposed regulations provide a special rule for foreign corporations that change their method of preparing their AFS by ceasing to prepare this statement under either U.S. GAAP or IFRS without a non-federal tax business purpose for the change. The foreign corporation must continue to prepare its AFS under either U.S. GAAP or IFRS. Failing to do so will mean the foreign corporation has no applicable insurance liabilities for the QIC test.
Additionally, if an AFS is prepared under local accounting standards that do not require discounting unpaid losses and other loss reserves on an economically reasonable basis, AFS insurance liabilities must be reduced under U.S. GAAP or IFRS discounting principles.
Applicability Date
The proposed regulations are proposed to apply to tax years of U.S. persons that are shareholders in certain foreign corporations beginning on or after the date of publication of the Treasury Decision adopting these regulations as final regulations in the Federal Register.
Until the regulations are final:
- taxpayers may choose to apply the proposed regulations (other than Proposed Reg. §1.1297-4and Proposed Reg. §1.1297-5) for open tax years;
- U.S persons and shareholders in certain foreign corporations may apply Proposed Reg. §1.1297-4 and Proposed Reg. §1.1297-5, for tax years beginning after December 31, 2017; and
- taxpayers may rely on Notice 88-22, 1988-1 CB 489, providing guidance on the income and asset tests.
Comments
Written or electronic comments and requests for public hearing must be received by September 9, 2019. Send submissions to: CC:PA:LPD:PR (REG-105474-18), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR (REG-105474-18), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-105474-18).
Proposed regulations would provide an exception to the unified plan rule for multiple employer plans (MEPs). The purpose is to reduce the risk of plan disqualification due to noncompliance by other participating employers. The regulations would apply on or after the publication date of final regulations in the Federal Register. They cannot be relied upon until then. Comments and requests for a public hearing must be received by October 1, 2019.
Proposed regulations would provide an exception to the unified plan rule for multiple employer plans (MEPs). The purpose is to reduce the risk of plan disqualification due to noncompliance by other participating employers. The regulations would apply on or after the publication date of final regulations in the Federal Register. They cannot be relied upon until then. Comments and requests for a public hearing must be received by October 1, 2019.
Multiple Employer Plans
A MEP is a single plan with adopted by multiple unrelated employers. Multiple employer plans under Code Sec. 413(c) can be structured either as:
- an open MEP where an organization with employees takes the lead by establishing the plan for its own employees, and has other unrelated employers join the plan as co-sponsors;
- a closed MEP in which a group or association of employers that meets a commonality requirement takes the lead in establishing the plan, and members are free to adopt it.
Open MEPs are often established by organizations that specialize in providing benefits for smaller employers (typically, 401(k) plans). Note that MEPs are distinct from union multiemployer plans governed by Code Sec. 413(b), but share some of the same rules.
Under the unified plan rule in the current regulations for both MEPs and multiemployer plans, a qualification or operational failure by one employer can result in a total plan failure for all participating employers. The administration is trying to change that, to encourage MEP participation.
Proposed Exception
Under the proposed regulations, an eligible defined contribution MEP would qualify for an exception to the unified plan rule. The exception turns on the ability of the MEP plan administrator under the terms of the plan to spin off the assets and account balances attributable to employees of a noncompliant participating employer into a separate plan and then termination of that plan. A spinoff could be either a spinoff initiated by the unresponsive participating employer and implemented by the plan administrator, or a spinoff-termination implemented by the plan administrator.
The exception would be available if the participating employer is responsible for a qualification failure that it is unable or unwilling to correct. It would also be available if the participating employer is nonresponsive to the plan administrator’s reasonable and timely requests for information or for action.
Exception Requirements
Under the proposed exception, a defined contribution MEP would not be disqualified on account of a participating employer failure if the following conditions are satisfied:
- the MEP satisfies certain eligibility requirements, including established practices and procedures to promote compliance and a requirement to adopt relevant plan language;
- the MEP plan administrator provides notice and an opportunity for the unresponsive participating employer to take remedial action;
- the administrator implements a spinoff in the event the unresponsive participating employer fails to take appropriate remedial action; and
- the administrator complies with any information request by the IRS or a representative of the spun-off plan made in connection with an IRS examination of the spun-off plan, including an information request related to the unresponsive participating employer’s participation in the MEP for years prior to the spinoff.
Participating employer failures would include known compliance failures, as well as failure to provide information to the MEP plan administrator so that the administrator can determine whether there is an actual plan or operational failure.
