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

December 2018 Tax Planning   -   Avoid The Surprise!

Clients & Friends:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Siana Carr O’Connor & Lynam, LLP

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

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

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

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

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

 A.         FEDERAL TAX DEPOSITS

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

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

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

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

B.         SOCIAL SECURITY & MEDICARE TAXES

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

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

 C.         PENNSYLVANIA PERSONAL INCOME TAXES

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

 D.         PENNSYLVANIA UNEMPLOYMENT COMPENSATION

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

E.          PENNSYLVANIA NEW ELECTRONIC FILING REQUIREMENT

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

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

 F.         PHILADELPHIA CITY WAGE TAX

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

G.         LOCAL PAYROLL TAXES

PA Act 32 - Local Earned Income Tax Law

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

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

 Local Services Tax (LST)

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

 H.        NEW HIRE REPORTING

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

I.          RETIREMENT PLANS

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

J.         MINIMUM WAGE RATE

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

K.         STANDARD MILEAGE RATES

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

L.        NON-CASH FRINGE BENEFITS

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

 M.         1099 REQUIREMENTS

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

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

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

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

 N.        HEALTH FLEXIBLE SPENDING ARRANGEMENT

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

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

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

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

 P.         EMPLOYEE BUSINESS EXPENSE REIMBURSEMENTS

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

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

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

 R.       PROPOSED OVERTIME REGULATIONS HALTED BY FEDERAL DISTRICT COURT

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

DISCLOSURE

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

Final regulations relating to the low-income housing tax credit revise and clarify requirements that low-income housing agencies must follow when conducting physical inspections of low-income units and reviewing low-income certifications and other documentation. The regulations finalize previously issued temporary regulations (T.D. 9753, February 25, 2016).

Final regulations relating to the low-income housing tax credit revise and clarify requirements that low-income housing agencies must follow when conducting physical inspections of low-income units and reviewing low-income certifications and other documentation. The regulations finalize previously issued temporary regulations (T.D. 9753, February 25, 2016).

Sample Inspection Size

The final regulations require the agency to inspect no fewer units than the number specified in the "Low-Income Housing Credit Minimum Unit Sample Size Reference Chart." The reference chart can be found in Rev. Proc. 2016-15, I.R.B. 2016-11, 435, and is borrowed from the U.S. Housing and Urban Development (HUD) Real Estate Assessment Center Protocol (the REAC protocol). Previously, an agency was permitted to inspect 20 percent of the low-income housing units in the project if this was lesser than the number required by the reference chart. This change addresses a concern that limiting physical inspections to 20 percent of units in small projects is not sufficient to ensure overall compliance with habitability and low-income requirements.

All-Buildings Requirement

No change is made to the requirement that an agency must inspect all buildings in a low-income housing project by the end of the second calendar year after the year in which the last building in the project is placed in service unless a project inspection is conducted under the REAC protocol. Suggestions that the IRS dispense with the all-buildings requirement for agencies not using the REAC protocol were not adopted.

Reasonable Notice Time Frame Shortened

A building owner and tenants are allowed a maximum 15 day advance notice that a project will be inspected. The temporary regulations allowed a 30-day notice period. The particular units to be inspected may only be identified on the day of the inspection. The 15 day advance notice limit will also apply to reviews of low-income certifications.

Amendment of Agency’s Qualified Allocation Plan

The final regulations are effective on February 26, 2019. However, an agency only needs to amend it qualified allocation plan by December 31, 2020, to reflect the requirements in the final regulations.

Rev. Proc. 2016-15 is obsolete with respect to an agency as of the date that on which the agency amends its qualified allocation plan.

The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).

The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).

Underpayment Penalty

The IRS announced in IRS News Release IR-2019-3 that it would waive the underpayment penalty for any taxpayer who paid at least 85 percent of their total tax liability during the 2018 tax year. The usual threshold is 90 percent. However, Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., has said that the IRS should "do more."

"Instead of penalizing those who paid less than 90 percent of what they owed in 2018, now they’re penalizing those who paid less than 85 percent," Wyden said on February 7 from the Senate floor. "That was one small step in the right direction," he added.

Before the IRS’s news release, Wyden wrote to Treasury and the IRS urging the waiver of underpayment penalties for withholding errors related to the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Although the IRS did lower the penalty threshold for the 2018 tax year, Wyden stated on February 7 that "nobody should be penalized for the Trump administration’s mistakes on tax withholding."

Democrats are largely opposed to the TCJA as a whole, and claim that Republicans’ tax code overhaul was rushed. Thus, significant tax withholding errors and underpayments are expected to be incurred. "Change the penalty thresholds. Extend safe harbors. Whatever needs to happen," Wyden said.

Additionally, several Republicans have also voiced their concern about the expected increase in underpayment related to withholding. SFC Chairman Chuck Grassley, R-Iowa, recently urged the IRS to be "lenient" on underpayment penalties for 2018, as it is the first tax year since tax reform implementation.

AICPA

The American Institute of Certified Public Accountants (AICPA) has likewise urged Treasury and the IRS to provide more extensive penalty relief. "The substantial uncertainty surrounding the implementation of the TCJA and the updated federal tax withholding tables presented a challenge for many taxpayers in understanding and accounting for their tax liability," Annette Nellen, chair of the AICPA’s Tax Executive Committee said in a recent letter to Treasury and the IRS. The AICPA has recommended an 80 percent threshold for the underpayment penalty waiver.

Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.

Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.

Craft Beverage Tax Reform

The Craft Beverage Modernization and Tax Reform Bill of 2019 was introduced on February 6 by Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., and Sen. Roy Blunt, R-Mo.

"By modernizing burdensome rules and taxes for craft beverage producers, this legislation will level the playing field and allow these innovators to further grow and thrive," Wyden said in a press release. The comprehensive measure is supported by the entire craft beverage industry, according to a summary of the bill.

Generally, the Craft Beverage Modernization and Tax Reform Bill of 2019 would implement the following provisions:

For Brewers:

• Reduce excise taxes to provide more cash flow to reinvest in personal business growth.
• Simplify rules for ingredient approval and brewery collaboration.

For Vintners:

• Expand the wine producer tax credit.
• Expand allowances for tax purposes on carbonation and alcohol content for certain wines.

For Distillers:

• Establish reduced excise taxes for small craft distilleries.
• Reduce restrictions on tax-free transfers of spirits between distillers.

The bill would also exempt beverage producers from certain capitalization rules for aged products.

"The craft beverage industry is driven by small businesses that support thousands of jobs and contribute billions in economic output," Blunt said in the press release.

As of February 6, the bill has 10 bipartisan cosponsors.

The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.

The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.

50-Percent Locational Rule

Many stakeholders have urged the IRS to reconsider its proposed rule requiring that at least 50-percent of gross income of a Qualified Opportunity Zone (QOZ) business is derived from the active conduct of a trade or business within the QOZ. The IRS heard from several of these stakeholders at a full house public hearing on the proposed regulations held last week at IRS headquarters in Washington, D.C.

"[W]e’re concerned that manufacturing businesses, e-commerce enterprises, and others that have the potential to spur significant economic activity could be excluded inadvertently because of this rule," Stefan Pryor, Rhode Island Secretary of Commerce said at the hearing. Additionally, other stakeholders commented that the proposed rule would go against congressional intent.

Comment. There is no locational-related rule for gross income of QOZ businesses included in the law’s statutory language. However, the statutory language does provide a tangible property test to ensure qualifying businesses are predominantly located within the QOZ.

QOZ Business Congressional Intent

To that end, the bipartisan, bicameral tax writers who drafted the original QOZ bill language, too, have urged the IRS to remove the 50-percent gross income locational requirement.

The Opportunity Zone program was enacted under the Tax Cuts and Jobs Act ( P.L. 115-97) in 2017. The program is housed under new Code Secs. 1400Z-1 and 1400Z-2. Although not a single Democrat voted for the TCJA, the Opportunity Zone program was based on a bicameral measure sponsored by a group of bipartisan tax writers.

"Since many businesses derive income from the sale of goods and services outside of a single census tract, this would significantly limit the ability for local operating businesses to qualify for Opportunity Fund investment, contrary to congressional intent," the lawmakers wrote in a recent letter to Treasury Secretary Steven Mnuchin. "Even for those businesses who might qualify under this rule, it would impose immense new administrative burdens to track and report the location of each source of business income," they added.

Second Round of Proposed Regulations

Currently, the IRS is working on a second batch of proposed regulations for Opportunity Zones. Those proposed rules "hopefully will see the light of day shortly," Scott Dinwiddie, an IRS official in the Income Tax and Accounting division said at last week’s hearing.

The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.

The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.

IRS Cybersecurity

The IRS announced in IRS News Release IR-2018-256 last December that it would stop its tax transcript faxing service for individuals and businesses on February 4, 2019. The IRS cited to reasons of taxpayer security for the change in procedure. To that end, ceasing the IRS’s transcript faxing service would better prohibit cybercriminals from obtaining taxpayer data, according to the IRS.

Grassley, Wyden Urge Delay

SFC Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., sent IRS Commissioner Charles Rettig a letter earlier this week expressing concern with the IRS’s original timeline for discontinuing the tax transcript faxing service. The bipartisan leaders did not ask the IRS to eliminate its plan to discontinue the particular service. However, they did encourage the IRS to extend the date of discontinuation for the sake of taxpayers and practitioners in light of the recent partial government shutdown, which included the IRS.

"[W]e encourage the IRS to delay its planned discontinuation of faxing taxpayer information until such time that the agency can reasonably resolve the legitimate concerns of the tax-practitioner community about alternatives to the IRS faxing taxpayer information," Grassley and Wyden wrote. "Of course, such a delay should not compromise the security or privacy of taxpayer information."

IRS Extends Transcript Faxing Service

The IRS’s Wage & Investment Division issued a January 30 statement stating that the IRS will extend its transcript faxing service beyond February 4. Additionally, the IRS said it is reviewing options for a new timeline and will provide taxpayers and practitioners advance notice of the new date.