Congress recently passed—and the President signed into law—the SECURE Act, landmark legislation that may affect how you plan for your retirement. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement-planning situation.

Congress recently passed—and the President signed into law—the SECURE Act, landmark legislation that may affect how you plan for your retirement. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement-planning situation.

Here is a look at some of the more important elements of the SECURE Act that have an impact on individuals. The changes in the law might provide you and your family with tax-savings opportunities. However, not all of the changes are favorable, and there may be steps you could take to minimize their impact. Please give me a call if you would like to discuss these matters.

Sincerely,

Setting Every Community Up for Retirement Enhancement Act (SECURE Act)

Key provisions affecting individuals:

Repeal of the maximum age for traditional IRA contributions.

Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.

Required minimum distribution age raised from 70½ to 72.

Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.

For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.

Partial elimination of stretch IRAs.

For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary s life or life expectancy (in the IRA context, this is sometimes referred to as a “stretch IRA”).

However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most nonspouse beneficiaries are generally required to be distributed within ten years following the plan participant s or IRA owner s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.

Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).

Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans.

A Section 529 education savings plan (a 529 plan, also known as a qualified tuition program) is a tax-exempt program established and maintained by a state, or one or more eligible educational institutions (public or private). Any person can make nondeductible cash contributions to a 529 plan on behalf of a designated beneficiary. The earnings on the contributions accumulate tax-free. Distributions from a 529 plan are excludable up to the amount of the designated beneficiary's qualified higher education expenses.

Before 2019, qualified higher education expenses didn't include the expenses of registered apprenticeships or student loan repayments.

But for distributions made after Dec. 31, 2018 (the effective date is retroactive), tax-free distributions from 529 plans can be used to pay for fees, books, supplies, and equipment required for the designated beneficiary s participation in an apprenticeship program. In addition, tax-free distributions (up to $10,000) are allowed to pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.

Kiddie tax changes for gold star children and others.

In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), which made changes to the so-called “kiddie tax,” which is a tax on the unearned income of certain children. Before enactment of the TCJA, the net unearned income of a child was taxed at the parents' tax rates if the parents' tax rates were higher than the tax rates of the child.

Under the TCJA, for tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. Children to whom the kiddie tax rules apply and who have net unearned income also have a reduced exemption amount under the alternative minimum tax (AMT) rules.

There had been concern that the TCJA changes unfairly increased the tax on certain children, including those who were receiving government payments (i.e., unearned income) because they were survivors of deceased military personnel (“gold star children”), first responders, and emergency medical workers.

The new rules enacted on Dec. 20, 2019, repeal the kiddie tax measures that were added by the TCJA. So, starting in 2020 (with the option to start retroactively in 2018 and/or 2019), the unearned income of children is taxed under the pre-TCJA rules, and not at trust/estate rates. And starting retroactively in 2018, the new rules also eliminate the reduced AMT exemption amount for children to whom the kiddie tax rules apply and who have net unearned income.

Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.

Generally, a distribution from a retirement plan must be included in income. And, unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59-1/2 is subject to a 10% early withdrawal penalty on the amount includible in income.

Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.

Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes, and so could not be used as the basis for making IRA contributions.

Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes. This change will enable these students to begin saving for retirement without delay.

Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement contribution limits.

Many home healthcare workers do not have taxable income because their only compensation comes from “difficulty-of-care” payments that are exempt from taxation. Because those workers do not have taxable income, they were not able to save for retirement in a qualified retirement plan or IRA.

For IRA contributions made after Dec. 20, 2019 (and retroactively starting in 2016 for contributions made to certain qualified retirement plans), the new rules allow home healthcare workers to contribute to a retirement plan or IRA by providing that tax-exempt difficulty-of-care payments are treated as compensation for purposes of calculating the contribution limits to certain qualified plans and IRAs.

Reference: Thomson Reuters\Checkpoint

Avoid the Surprise!  In the world of Income tax, 2018 and 2019 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 2019 Tax Planning Letter

Clients & Friends:

Yes it is that time again. Black Friday sales way before "Black Friday", holiday décor at stores, holiday songs redone for political correctness, holiday party invites and the time for some TAX PLANNING AND YEAR END FINANCIAL REVIEWS. 

Our purpose in this communication is to encourage you to give a little attention to your tax and economic situations. Action taken after New Year's Eve may be too late to impact 2019. 

The 2017 tax reform, which mostly became effective for 2018 tax return filing, gave us some new perspectives on tax filings and the related planning. We are sure a lot of you were surprised when your 2018 individual returns reflected the new increased standard deduction amounts rather than the itemized deductions to which we had all become accustomed. For 2019, those standard deduction amounts are $12,200 for single filers, $18,350 for head of household status and $24,400 for married joint filers. If you are over 65, the standard amounts are increased by $1,650 in the single or head of household status and by $1,300 per person over 65 on a joint return (e.g. the standard deduction for a joint return with both over age 65 is $27,000). 

With the increased standard deduction in place, it gives you the opportunity/incentive to time and manage your deductions including mostly "elective" medical expenses (starting in 2019 medical expenses must exceed 10% of your adjusted gross income (AGI) to be deductible) and charitable contributions. A popular strategy is to bunch these deductions every other year and take advantage of the high standard deductions in the intervening years. A way to "manage" your charitable contributions is to use a donor advised fund (DAF) to make and deduct a large contribution amount in 2019 and pay amounts to your favorite charities in succeeding years from the fund. If the DAF strategy is cumbersome or will not work for you, make two years' worth of donations in 2019 and skip the payments to the charities of your choice in 2020. 

If your itemized deductions still will not meet the standard deduction amount and you are over 70½, consider sending your required minimum distribution (RMD) amount from your IRA account directly to the charity of your choice. You will not have to pay tax on the distribution and "in effect" get the qualified charitable deduction for the payment. This contribution distribution is limited to payments of $100,000 or less. 

Remember, itemized deductions from tax reform limited the TOTAL amount of all personal tax deductions (income and real estate tax) to $10,000, so there is very limited tax planning available in this area and usually no benefit in accelerating the final state estimated tax payments due 1/15/2020. 

Mortgage rates are favorable again. If you are purchasing a home or considering refinancing, remember the new mortgage limit for tax deduction is $750,000. You can, however, refi your old mortgage and apply the $1M limit as long as you do not receive "proceeds" from the refi. 

Last year at this time we warned of surprises because of changes in the federal income tax withholding tables that occurred early in 2018 and left many taxpayers short on their 2018 tax returns. If you were one that owed tax with the 2018 federal return because of this AND did not adjust your tax withholding in 2019, we encourage you to revisit the withholding NOW to avoid or at least be prepared for that unpleasant conversation with us in early 2020 about tax due. We will be happy to assist you in this assessment if needed. We dislike these surprise moments as much as you do! 

A few other tax adjustments we became more knowledgeable and familiar with in the 2018 returns include the new Qualified Business Income (or QBI) deduction under Sec. 199(A) which resulted in a deduction from your taxable income of 20% of your QBI. This deduction which is subject to various complex limitations was beneficial to many with business income on schedule "C" or business income passed through from partnerships or "S" corporations. We also dealt with limitations on business interest deductions under new section 163(j) and the overall limitations on business losses. These changes among others made for a challenging filing season! 

We are a bit "thankful" at this time that Congress has other "issues" to consider and it appears that no further tax "simplification" will occur in 2019! 

As of this writing, the stock market is on a bit of a roll. That means this is a good time to review your portfolio and balance any 2019 gains by selling positions that will result in capital losses. Remember when considering the 2019 gains to factor-in any capital gain distributions from mutual funds that will be reported to you and taxable in 2019. Most mutual funds will post on their websites the approximate amounts of capital gain distributions late in November or early December. 

Recent tax law allows for tax on certain qualified long-term gains to be deferred if they are reinvested in a qualified opportunity fund. If you have significant gains and are interested in this concept, please contact us. 

Do not be reluctant to realize net capital losses in 2019. The losses will offset 2019 gains including mutual fund distributions and the balance can be carried over to offset gains in 2020 and succeeding years! You may also find that 2019 is not a bad year to realize capital gains. Again the market is at an all-time high and you know the maximum capital gain rate is 20% or 23.8% if the net investment income tax applies. One should never feel bad about taking some gains off the table! As always in this area, be sure the economic considerations in any decision outweigh the possible tax benefits or costs. 

While we are talking of your portfolio and if you are charitably inclined, or want to fund the DAF mentioned earlier, giving appreciated securities to a charity is a very effective method of donation. You get a full fair market value deduction for the donated stock or fund held over one year, and do not pay capital gain tax on the gain in the position. 

If you are making gifts to family members it may also be efficient to give long-term appreciated positions. It is possible the donee could sell the stock or fund and take advantage of the ZERO% tax rate on the gain. That rate exists if taxable income is below $39,385 for singles and $52,750 and $78,750 for head of household or joint filers, respectively. If the donee is under age 24, Kiddie tax rules could impact the tax calculation. One last note here, if you have loser positions, DO NOT give them away. Sell the position and take the loss on your return where it is probably more valuable. 

If for some reason you find yourself in a low income tax bracket in 2019 AND have funds in an IRA account, one option to consider is converting all or a portion of that account to a ROTH IRA to take advantage of a low rate in 2019. The future distributions from the ROTH will not be subject to tax as long as it is in place for 5 years. 

While this letter is aimed primarily at our individual filers, those who have or own business entities should consider taking advantage of the very generous depreciation tax breaks and Section 179 deductions for the purchase of equipment and other business property. Some of these deduction limits decrease or phase-out in the future. As a result, investing now may be a wise choice. 

Also consider implementing or enhancing your retirement plans. For example, a solo 401(k) is a particularly popular plan design for a sole proprietor with no employees to take advantage of higher deduction limits. 

This is also a good time to review the designated beneficiaries on your retirement plans and life insurance policies as well as who you may have named as an executor of your will, power of attorney or trustee. Changes due to death or divorce sometimes occur in our lives and these designations go unchanged. These are relatively easy to change when you are in charge and often very difficult or impossible to alter after a disability or death. 

The year end is also a good time to revisit your estate planning and the related documents. Consider taking advantage NOW of the annual gift tax exclusion which is $15,000 per year per donee. As an example, dad and mom can gift as much as $60,000 to son and spouse by December 31 with no gift tax issue or filing requirement. These annual exclusion gifts DO NOT reduce your current lifetime gift/estate tax exemption of $11.4 million for each spouse and is portable. A married couple NOW enjoys a total exclusion of $22.8 million. With these exclusions in place we are not filing very many "taxable" gift or estate tax returns at this time. It is important to remember that these enhanced exclusion amounts are scheduled to sunset in 2026. While that may or may not happen, you may want to take advantage while we know they are available. 

Please keep our firm in mind as you gather with friends and family over the next few months. Our best referrals often come from existing clients who are able to speak highly on our behalf. We greatly appreciate the opportunity to do business with new individuals and businesses each year. 

Reminder: our firm continues to be very involved in estate administration including the preparation and filing of PA Inheritance tax returns and federal estate and gift tax returns. Please do not hesitate to contact us if you unfortunately have a need in these areas. 

One Final Reminder: do not hesitate to contact us to discuss and/or help implement any tax or economic planning or any other matter if you feel we can be of assistance. We are a more valuable asset to you when we have the opportunity in advance to consider and comment on the economic transactions which impact your tax matters. 

Finally, we hope you have a joyous and peaceful Holiday Season and find plentiful reasons to give thanks for 2019 and wish you all the best for a Happy and Healthy 2020!!! 

Thank you for being our clients and friends 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 2020.

The following is a summary of the various changes in payroll withholding and related filing requirements for 2020. As always, if you have any questions on these matters please contact us.

 The Tax Cuts and Jobs Act (TCJA), passed in December 2017, impacted individuals through the introduction of new tax rates and brackets, increased standard deduction, changes to allowable itemized deductions, elimination of personal exemptions, among many other changes.

 Under TCJA, various deductions and certain tax-favored fringe benefits were eliminated or modified. These changes included the suspension of the deductions for moving expenses and certain qualified transportation expenses. The tax-free reimbursement of employment-related moving expenses was suspended. The Act also suspended an employee's deduction for unreimbursed business expenses (previously deductible as a miscellaneous itemized deduction).

 The Act reduced 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.

 FEDERAL TAX DEPOSITS

 Most taxpayers are required to make federal tax deposits for payroll taxes, corporate income tax, and back-up withholding electronically through use of the electronic federal tax payment system (EFTPS). Paper coupons are discontinued as the paper coupon system is no longer maintained by the Treasury Department. The primary exception 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 made timely. 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 2019. The 2020 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’s deadline for submitting government copies of the 2019 Form W-2 to the Social Security Administration is January 31, 2020. This is the same as the deadline to furnish employees with their forms.

 SOCIAL SECURITY & MEDICARE TAXES

 For 2020, the taxable social security wage base limit is $137,700. The employee and employer tax rate for social security is 6.2%. In 2020, 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 $137,700 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.

 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.pa.gov 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.

 PENNSYLVANIA UNEMPLOYMENT COMPENSATION

The first $10,000 of wages paid to each worker in calendar year 2020 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.

 PENNSYLVANIA ELECTRONIC FILING REQUIREMENT

             Employers who file 10 or more W-2 forms with the Department are now required to file those forms electronically. 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, 2020. Copies of the Individual Wage Statement (W-2) must also be filed electronically with the form REV-1667.

             The PA Department of Revenue has expanded the EFW2 and CSV format specifications to include corrections for filing the W-2/1099 information for tax year 2019. Corrected W-2/1099 information can only be submitted for original filings done through e-TIDES.

             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 717-787-8326.

 PHILADELPHIA CITY WAGE TAX

 Employers must withhold city wage taxes for residents at the rate of 3.8712% (.038712) and nonresidents who work in the city at the rate of 3.4481% (.034481). 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.

 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.dced.PA.gov 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.

 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.

 RETIREMENT PLANS

 *     The limitation on the exclusion for elective deferrals under 401(k) and other plans is increased from $19,000 in 2019 to $19,500 in 2020. Taxpayers who are age 50 and older (during 2020) can make an additional catch-up contribution in the amount of $6,500 in 2020.

 *     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 $280,000 in 2019 to $285,000 in 2020.

 *     The maximum annual amount of salary reduction contributions to a SIMPLE retirement plan is increased from $13,000 in 2019 to $13,500 in 2020. Taxpayers who are age 50 and older (during 2020) can make an additional contribution of $3,000 in 2020.

 *     The limitation on the annual benefit under a defined benefit plan is increased from $225,000 in 2019 to $230,000 in 2020. The limitation for defined contribution plans is increased from $56,000 in 2019 to $57,000 in 2020.

 *     The amount used to identify highly compensated employees for non-discrimination testing purposes is increased from $125,000 in 2019 to $130,000 in 2020.

 MINIMUM WAGE RATE

            The minimum wage rate for Pennsylvania is currently set at $7.25 per hour. A proposal to raise the minimum wage by $2.25 over the next three years is advancing in the state legislature.

 STANDARD MILEAGE RATES

 The standard mileage rate for business automobile usage is 57½ cents per mile in 2020, down from 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.

 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.

 1099 REPORTING

             Report on Form 1099-MISC payments made in the course of your business. Personal payments are not reportable. 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. In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment. 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, 2020. For all other reported payments, file Form 1099 by February 28, 2020. The forms generally should be provided to recipients by January 31, 2020. Penalties for late filing, non-filing, or filing incorrect information range from $50 per information return to the greater of $550 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. 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.

             Rental property owners may benefit from the Qualified Business Income (QBI) Deduction under Sec. 199A of the Tax Cuts and Jobs Act. The 20% QBI deduction is available only for activities that qualify as a trade or business. The regulations are complex in determining whether a rental real estate activity qualifies as a trade or business for purposes of this deduction. The issuance of Forms 1099-MISC, where applicable, may be helpful in establishing this trade or business motive.

 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.

 HEALTH FLEXIBLE SPENDING ARRANGEMENT

 The maximum salary reduction contribution to a health flexible spending arrangement (health FSA) is $2,750 for 2020. Any salary reductions in excess of this amount will be subject to tax on distributions from the health FSA.

 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 50 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.

 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.

 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 (based on 2019 rates) may be used in computing income attributable to personal fuel costs paid by the employer.

 OVERTIME UPDATE

             The U.S. Department of Labor has finalized a rule expanding overtime pay eligibility for certain American workers. This rule increases the minimum salary requirement to be considered exempt from overtime under the Fair Labor Standards Act and is scheduled to take effect on January 1, 2020. Please contact us for the specifics of these regulations.

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.

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2021 and the lease inclusion amounts for business vehicles first leased in 2021.

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2021 and the lease inclusion amounts for business vehicles first leased in 2021.

Luxury Passenger Car Depreciation Caps
The luxury car depreciation caps for a passenger car placed in service in 2021 limit annual depreciation deductions to:

• $10,200 for the first year without bonus depreciation
• $18,200 for the first year with bonus depreciation
• $16,400 for the second year
• $9,800 for the third year
• $5,860 for the fourth through sixth year

Depreciation Caps for SUVs, Trucks and Vans
The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2021 are:

• $10,200 for the first year without bonus depreciation
• $18,200 for the first year with bonus depreciation
• $16,400 for the second year
• $9,800 for the third year
• $5,860 for the fourth through sixth year

Excess Depreciation on Luxury Vehicles
If depreciation exceeds the annual cap, the excess depreciation is deducted beginning in the year after the vehicle’s regular depreciation period ends.

The annual cap for this excess depreciation is:

• $5,860 for passenger cars and
• $5,860 for SUVS, trucks, and vans.

Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans
If a vehicle is first leased in 2021, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:

• $51,000 for a passenger car, or
• $51,000 for an SUV, truck or van.

The 2021 lease inclusion tables provide the lease inclusion amounts for each year of the lease.

The lease inclusion amount results in a permanent reduction in the taxpayer’s deduction for the lease payments.

Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts
The depreciation caps and lease inclusion amounts do not apply to:

• cars with an unloaded gross vehicle weight of more than 6,000 pounds; or
• SUVs, trucks and vans with a gross vehicle weight rating (GVWR) of more than 6,000 pounds.

So taxpayers who want to avoid these limits should "think big."

The IRS has issued guidance for employers claiming the employee retention credit under Code Sec. 3134, enacted by section 9651 of the American Rescue Plan Act of 2021 (ARP), P.L. 117-2, which provides a credit for wages paid after June 30, 2021, and before January 1, 2022. The guidance amplifies previous notices which addressed the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P.L. 116-136, as amended by sections 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, P.L. 116-260.

The IRS has issued guidance for employers claiming the employee retention credit under Code Sec. 3134, enacted by section 9651 of the American Rescue Plan Act of 2021 (ARP), P.L. 117-2, which provides a credit for wages paid after June 30, 2021, and before January 1, 2022. The guidance amplifies previous notices which addressed the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P.L. 116-136, as amended by sections 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, P.L. 116-260.

In general, eligible employers can claim a refundable employee retention credit against the employer share of Social Security tax equal to 70 percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021. Under Code Secs. 3134(a) and (b)(1)(A), these limits continue to apply in the third and fourth calendar quarters in 2021.

The guidance explains changes made to the employee retention credit for the third and fourth calendar quarters of 2021, including:

• making the credit available to eligible employers that pay qualified wages after June 30, 2021, and before January 1, 2022;
• expanding the definition of eligible employer to include "recovery startup businesses";
• modifying the definition of qualified wages for "severely financially distressed employers"; and
• providing that the credit does not apply to qualified wages taken into account as payroll costs in connection with a shuttered venue grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or a restaurant revitalization grant under section 5003 of the ARP.

The guidance also provides guidance on several miscellaneous issues with respect to the employee retention credit for both 2020 and 2021, including:

• the definition of full-time employee and whether that definition includes full-time equivalents;
• the treatment of tips as qualified wages and the interaction with the Code Sec. 45B credit;
• the timing of the qualified wages deduction disallowance and whether taxpayers that already filed an income tax return must amend that return after claiming the credit on an adjusted employment tax return; and
• whether wages paid to majority owners and their spouses may be treated as qualified wages.

Highlights of some of the items addressed in the guidance are summarized below.

Recovery Startup Businesses
A separate credit limit under Code Sec. 3134(b)(1)(B) applies to "recovery startup businesses." A "recovery startup business" is an employer (i) that began carrying on any trade or business after February 15, 2020; (ii) for which the average annual gross receipts of the employer for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined does not exceed $1,000,000; and (iii) that is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts. For an eligible employer that is a recovery startup business, the amount of the credit allowed under Code Sec. 3134(a) (after application of the limit under Code Sec. 3134(b)(1)(A)) for each of the third and fourth calendar quarters of 2021 cannot exceed $50,000.

The determination of when a recovery startup business "began carrying on a trade or business" is made in the same manner as for purposes of Code Sec. 162. It is appropriate for the term "qualified wages" to include wages paid by a recovery startup business. In the third and fourth calendar quarters of 2021, a recovery startup business that is a small eligible employer may treat all wages paid with respect to an employee during the quarter as qualified wages. Whether an employer is a recovery startup business is determined separately for each calendar quarter.

Qualified Wages
The rules in Notice 2021-20 for determining the average number of full-time employees continue to apply in the third and fourth calendar quarters of 2021. However, Code Sec. 3134(c)(3)(C) provides a different rule for qualified wages paid by "severely financially distressed employers." For the third and fourth calendar quarters of 2021, an eligible employer with gross receipts that are less than 10 percent of the gross receipts for the same calendar quarter in calendar year 2019 (or 2020, if the employer was not in existence in 2019) is a severely financially distressed employer.

Further, the rules for determining whether an employer is an eligible employer based on a decline in gross receipts also apply, in the third and fourth calendar quarters of 2021, for determining whether an eligible employer is a severely financially distressed employer based on the 10 percent threshold. For the third and fourth calendar quarters of 2021, a severely financially distressed employer that is a large eligible employer may treat all wages paid to its employees during the quarter in which the employer is considered severely financially distressed as qualified wages.

Claiming the Credit
Notice 2021-20 and Notice 2021-23 set forth the rules for claiming the employee retention credit in 2020 and the first and second calendar quarters in 2021, respectively. These rules, including the rules pertaining to claiming an advance and relevant limitations, continue to apply for the third and fourth quarters in 2021.

Reporting
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns (Form 941) for the applicable period. If a reduction in the employer's employment tax deposits is not sufficient to cover the credit, certain employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Effect on Other Documents
Notice 2021-20, I.R.B. 2021-11, 922 and Notice 2021-23, I.R.B. 2021-16, 1113, are amplified.

The Treasury and IRS have provided an optional safe harbor allowing employers to exclude the following amounts from their gross receipts solely for determining eligibility for the employee retention credit.

The Treasury and IRS have provided an optional safe harbor allowing employers to exclude the following amounts from their gross receipts solely for determining eligibility for the employee retention credit:

• the amount of the forgiveness of a Paycheck Protection Program (PPP) Loan;
• the amount of any Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act; and
• the amount of any Restaurant Revitalization Grants under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2).

Certain employers may be eligible for an employee retention credit against applicable federal employment taxes if their gross receipts for a calendar quarter decline by a certain percentage as compared to a prior calendar quarter. For most employers, gross receipts are defined by Code Sec. 448(c). For tax-exempt employers, gross receipts are defined by Code Sec. 6033.

Applying Safe Harbor Consistently
Employers must apply the safe harbor consistently in order to exclude these amounts from gross receipts for determining employee retention credit eligibility. An employer consistently applies the safe harbor by:

• excluding these amounts from its gross receipts for each calendar quarter in which gross receipts are relevant to determining eligibility to claim the employee retention credit; and
• applying the safe harbor to all employers treated as a single employer under the aggregation rules.

An employer must also retain in its records substantiating support for the credit claimed, including the use of the safe harbor.

If an employer revokes its safe harbor election, it must adjust all employment tax returns affected by the revocation.

Claiming the Employee Retention Credit
Employers claim the employee retention credit on their employment tax return, generally Form 941, Employers Quarterly Federal Tax Return, or on an adjusted employment tax return, generally Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. An employer is not required to apply the safe harbor.

The safe harbor does not permit the exclusion of these amounts from gross receipts for any other federal tax purpose.

Effect on Other Documents
This guidance updates and amplifies Notice 2021-20, I.R.B. 2021-11, 922, Notice 2021-23, I.R.B. 2021-16, 1113, and Notice 2021-49, I.R.B. 2021-34.

The IRS issued transition relief for certain employers claiming the Work Opportunity Tax Credit (WOTC) under Code Sec. 51. This would apply for certain employees beginning work after December 31, 2020, in response to legislation permitting the designation of an Empowerment Zone under Code Sec. 1393(b) to be extended from December 31, 2020, through December 31, 2025. Specifically, section IV of this notice provides transition relief by extending the 28-day deadline for employers to request certification from a designated local agency that an individual who begins work on or after January 1, 2021, and before October 9, 2021, is a member of the Designated Community Resident targeted group or the Qualified Summer Youth Employee targeted group.

The IRS issued transition relief for certain employers claiming the Work Opportunity Tax Credit (WOTC) under Code Sec. 51. This would apply for certain employees beginning work after December 31, 2020, in response to legislation permitting the designation of an Empowerment Zone under Code Sec. 1393(b) to be extended from December 31, 2020, through December 31, 2025. Specifically, section IV of this notice provides transition relief by extending the 28-day deadline for employers to request certification from a designated local agency that an individual who begins work on or after January 1, 2021, and before October 9, 2021, is a member of the Designated Community Resident targeted group or the Qualified Summer Youth Employee targeted group.

Additional Time to Submit Form 8850
The IRS stated that employers may need additional time to comply with the certification requirements of Code Sec. 51(d)(13)(A)(ii). Because the termination dates designated in Empowerment Zone nominations are not automatically extended until after the deadline in Rev. Proc. 2021-18, I.R.B. 2021-15 for submitting a written declination has passed, employers that hired an individual who is a Designated Community Resident or a Qualified Summer Youth Employee and who began work for that employer on or after January 1, 2021, may not have submitted Form 8850 to the designated local agency within 28 days of the individual beginning work. To be eligible for the relief provided by this notice, an employer that did not submit Form 8850 to the DLA within 28 days of an individual beginning work must submit the completed Form 8850 to the DLA.

An employer that hires an individual who is a Designated Community Resident or a Qualified Summer Youth Employee and who begins work for the employer on or after October 9, 2021, is not eligible for the transition relief described in this notice with respect to that new employee.

Effective Date
The effective date of this notice is August 10, 2021

The U.S. Small Business Administration ( SBA) is launching a streamlined application portal to allow certain borrowers to apply for Paycheck Protection Program (PPP) Loan forgiveness directly through the SBA. The SBA also is explaining why it discontinued use of Loan Necessity Questionnaires for PPP borrowers.

The U.S. Small Business Administration ( SBA) is launching a streamlined application portal to allow certain borrowers to apply for Paycheck Protection Program (PPP) Loan forgiveness directly through the SBA. The SBA also is explaining why it discontinued use of Loan Necessity Questionnaires for PPP borrowers.

PPP Direct Forgiveness Portal
The SBA announced that it is launching a streamlined application portal to allow borrowers with PPP loans $150,000 or less through participating lenders to apply for forgiveness directly through the SBA. The new forgiveness platform will begin accepting applications from borrowers on August 4th, 2021.

In addition to the technology platform, the SBA is setting up a PPP customer service team to answer questions and directly assist borrowers with their forgiveness applications. Borrowers that need assistance or have questions should call (877) 552-2692, Monday to Friday, 8 a.m.-8 p.m. EST. More information on the PPP direct forgiveness portal is available at https://www.sba.gov/article/2021/jul/28/sba-announces-opening-paycheck-protection-program-direct-forgiveness-portal.

Loan Necessity Questionnaires
In updated FAQs, the SBA has explained why it discontinued use of the Loan Necessity Questionnaire. According to Treasury, based on the results of loan reviews that it has completed thus far, the SBA believes audit resources will be more efficiently deployed across all loans if the loan necessity questionnaire is discontinued. The loan necessity reviews, including the review of the borrower’s completed Loan Necessity Questionnaire, are lengthy and have caused delays beyond the 90-day statutory timeline for forgiveness, thus negatively impacting those borrowers that made their loan necessity certification in good faith. For these reasons, SBA is discontinuing any reliance on the Loan Necessity Questionnaires.

The Loan Necessity Questionnaires (SBA Forms 3509 and 3510) were used to facilitate the collection of supplemental information that would be used by SBA loan reviewers to evaluate the good faith certification made by PPP borrowers on their loan application that economic uncertainty made the loan request necessary to support ongoing operations. Each borrower, that together with its affiliates, received PPP loans with an original principal amount of $2 million or greater was required to complete the form. In July, the SBA said it would no longer request either version of the Loan Necessity Questionnaire. In addition, Loan Necessity Questionnaires previously requested by the SBA are no longer required to be submitted.

The IRS stated that families should use the Child Tax Credit (CTC) Update Portal to confirm their eligibility for the payments. If eligible, the tool also indicates whether taxpayers are enrolled to receive their payments by direct deposit. More information can be found at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.

The IRS stated that families should use the Child Tax Credit (CTC) Update Portal to confirm their eligibility for the payments. If eligible, the tool also indicates whether taxpayers are enrolled to receive their payments by direct deposit. More information can be found at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.

Direct Deposit
For taxpayers currently using direct deposit, the tool will list the full bank routing number and the last four digits of their account number. This account is where the IRS sent their payments so far and will continue to do so. If necessary, the account can now be changed starting with the September 15 payment.

Monthly Payments
Eligible families for monthly payments include those who (1) filed either a 2019 or 2020 federal income tax return; (2) used the Non-Filers tool on IRS.gov in 2020 to register for an Economic Impact Payment; and (3) registered for the advance CTC this year using the new Non-Filer Sign-Up Tool on IRS.gov. The new maximum credit is available to taxpayers with a modified adjusted gross income (AGI) of (1) $75,000 or less for singles; (2) $112,500 or less for heads of household; and (3) $150,000 or less for married couples filing a joint return and qualified widows and widowers.

The American Rescue Plan (ARP) ( P.L. 117-2) raised the maximum Child Tax Credit in 2021 to $3,600 for children under the age of 6 and to $3,000 per child for children ages 6 through 17. Before 2021, the credit was worth up to $2,000 per eligible child.

The IRS provided additional guidance on the application of the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2) relating to temporary premium assistance for Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage. This notice supplements Notice 2021-31, I.R.B. 2021-23, and addresses additional issues.

The IRS provided additional guidance on the application of the American Rescue Plan Act of 2021 (ARP) (P.L. 117-2) relating to temporary premium assistance for Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage. This notice supplements Notice 2021-31, I.R.B. 2021-23, and addresses additional issues.

Eligibility
The IRS noted that if the original qualifying event was a reduction in hours or an involuntary termination of employment, COBRA premium assistance is available to an individual entitled to elect COBRA continuation coverage for an extended period due to a disability determination, second qualifying event, or an extension under State mini-COBRA. This should fall under the extended period of coverage between April 1, 2021 and September 30, 2021, even if the taxpayer had not notified the plan or insurer of the intent to elect extended COBRA continuation coverage before the start of that period.

Next, the eligibility ends when the taxpayer becomes eligible for coverage under any other disqualifying group health plan or Medicare. This includes the other coverage not including all of the benefits provided by the previously elected COBRA continuation coverage.

Finally, if a plan (other than a multiemployer plan) subject to Federal COBRA covers employees of two or more members of a controlled group, each common law employer that is a member of the controlled group is the premium payee entitled to claim the COBRA premium assistance credit with respect to its employees or former employees.

The foreign tax credit did not apply against the net investment income tax (NIIT). The structure of the Internal Revenue Code made the credit inapplicable to the NIIT, and tax treaties did not override that fact.

The foreign tax credit did not apply against the net investment income tax (NIIT). The structure of the Internal Revenue Code made the credit inapplicable to the NIIT, and tax treaties did not override that fact.

Under Code, Foreign Tax Credit Did Not Apply to NIIT
The foreign tax credit is in chapter 1, subtitle A of the Code, and it expressly applies only against taxes imposed by chapter 1. However, the NIIT is in chapter 2A. Thus, the credit does not apply against the NIIT. Although Reg. §1.1411-1(a) provides that all Code provisions that apply to the determination of taxable income under chapter 1 also apply to the NIIT, tax credits are not taken into account in determining taxable income. In fact, Reg. §1.1411-1(e) explicitly provides that credits against the tax imposed by chapter 1, including the foreign tax credit, are not allowed against the NIIT unless specifically provided by the Code.

Tax Treaties Did Not Override Code
Provisions in the U.S.-France and U.S.-Italy tax treaties that provided a foreign tax credit against U.S. income tax also did not provide an independent foreign tax credit against the NIIT. Although the treaties were intended to limit double taxation, they were expressly subject to the provisions and limitations of the Code. Thus, any allowable foreign tax credit had to be determined in accordance with the Code, and was limited by the Code’s provision of a credit. Although the taxpayer claimed that the Code was silent as to whether there was a foreign tax credit against the NIIT, the placement of the NIIT in chapter 2A made the foreign tax credit inapplicable. The creation of a new chapter for the NIIT was not happenstance or a mere clerical choice; rather, it was a deliberate decision by Congress and part of the Code’s fundamental structure.

No Summary Judgment on Penalty
Finally, issues of material fact precluded summary judgement as to the taxpayer’s liability for the penalty for failing to pay tax shown due on a return. She reported zero tax due on her Form 1040, though she did show the correct amount of the NIIT on her attached Form 8060, Net Investment Income Tax. Even if her Form 8960 constituted a return, the taxpayer argued that she had reasonable cause for her failure to pay because when she filed her return, she included a disclosure that she was claiming the foreign tax credit against the NIIT.

A missing or unknown federal gift tax return could constitute reasonable cause for the late filing of an estate tax return.

A missing or unknown federal gift tax return could constitute reasonable cause for the late filing of an estate tax return.

To understand the appropriate steps to take after the decedent’s death, the executor was in contact with the decedent’s tax preparer, a family office service, and an attorney. Several months after the decedent’s death, the attorney advised that no estate tax return needed to be filed because the gross estate was below the basic exclusion amount for the year of death. Nearly two years after the decedent’s death, the decedent’s son, who had not been involved in the estate preparation and administration, indicated that various trusts might have been created. The attorney asked the tax preparer about the trusts and the tax preparer provided a gift tax return reporting gifts to the trusts. The amount of the gifts put the estate over the threshold amount for an estate tax return.

Complaint Established Reasonable Cause
Calling the government’s argument circular, the court concluded that it would not dismiss the complaint based on the position that the attorney’s advice on whether to file an estate tax return was objectively unreasonable. If the court sided with the government on this point, missing information could never constitute reasonable cause because the advice would never be based on all pertinent facts and circumstances. Relying on the complaint alone, the court could not decide whether the attorney’s investigation constituted reasonable due diligence.

The executor is ultimately responsible for providing all of the information available to prepare a tax return. In this case, the question of whether the executor acted reasonably was dependent on the availability of the missing gift tax return. Absent more information from the tax preparer about the gift tax return, the complaint could not be dismissed.