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.

President Trump signed into law the first two phases of the House’s coronavirus economic response package. Meanwhile, the Senate has been developing and negotiating "much bolder" phase three legislation.

President Trump signed into law the first two phases of the House’s coronavirus economic response package. Meanwhile, the Senate has been developing and negotiating "much bolder" phase three legislation.

Families First Coronavirus Response Act
The House had sent its Families First Coronavirus Response bill (HR 6201) and accompanying technical corrections resolution to the Senate on the evening of March 16. "I have decided we are going to vote…on the bill that came over from the House, and send it to the president for his signature," Senate Majority Leader Mitch McConnell, R-Ky., told reporters during a March 17 press briefing. "A number of my members think there are a number of shortcomings in the bill, and I counsel them to gag and vote for it anyway… and address those shortcomings in the next measure."

Senate Democrats were largely pleased with leadership’s decision to pass the House bill without amending it, while moving forward on additional legislation. "We will have other opportunities to legislate," Senate Minority Leader Chuck Schumer, R-N.Y., said from the Senate floor on the morning of March 17.

President Trump signed the Families First Coronavirus Response Act ( P.L. 116-127) into law on the evening of March 18.

Paid Leave Credits
The Families First Coronavirus Response Act increases funding for COVID-19 testing, and extends paid sick leave to employees all over the country affected by the pandemic. Under the new law, employers with fewer than 500 employees and government employers must provide paid sick leave to employees who are forced to stay home due to illness, quarantining, or caring for a family member because of COVID-19, or to care for a son or daughter if the school or place of care is closed due to COVID-19.

The new law compensates non-governmental employers for the required paid leave with refundable credits against the employer’s portion of the Old-Age, Survivors, and Disability Insurance (OASDI) payroll tax or the Railroad Retirement Tax Act (RRTA) Tier 1 payroll tax, as appropriate. It also provides similar credits for paid leave "equivalent amounts" to self-employed individuals affected by COVID-19.

Paid sick leave credit. For an employee who is unable to work because of a COVID-19 quarantine or self-quarantine, or who has COVID-19 symptoms and is seeking a medical diagnosis, eligible employers may receive a refundable sick leave credit for sick leave at the employee's regular rate of pay, up to $511 per day and $5,110 in total, for a total of 10 days. For an employee who is caring for someone with COVID-19, or is caring for a child because the child's school or child care facility is closed, or the child care provider is unavailable, due to the COVID-19, eligible employers may claim a credit for two-thirds of the employee's regular rate of pay, up to $200 per day and $2,000 in total, for up to 10 days.

Paid family care (child care) leave credit. For an employee who is unable to work because of a need to care for a child whose school or child care facility is closed, or whose child care provider is unavailable, due to the COVID-19, eligible employers may receive a refundable family care (child care) leave credit. This credit is equal to two-thirds of the employee's regular pay, up to $200 per day and $10,000 in total. Up to 10 weeks of qualifying leave can be counted towards the child care leave credit.

Phase Three
"That legislation [the Families First Coronavirus Response Act] was hardly perfect. It imposes new costs and uncertainty on small businesses at precisely the most challenging moment for small businesses in living memory," Senate Majority Leader McConnell said from the Senate floor on March 19. "So the Senate is even more determined that our legislation cannot leave small business behind."

The phase three measure under consideration includes several key components, such as:

• new federally-guaranteed loans for small businesses;
• direct financial help/emergency tax relief;
• targeted lending to industries of national importance; and
• health resources for those working on the front lines of combating COVID-19.

"The small business relief will help. And so will a number of additional tax relief measures, which will be designed to help employers maintain cash flow and keep making payroll," McConnell said. He also highlighted Republicans’ focus of putting "cash in the hands of the American people…from the middle class on down."

To that end, Treasury Secretary Steven Mnuchin reportedly said on March 19 that the forthcoming economic stimulus package would deliver $1,000 to every U.S. adult and $500 for every child. Further a second round of checks in the same amount would go out to individuals six weeks later, Mnuchin added.

"Americans need cash now and the president wants to get cash now. And I mean now, in the next two weeks," Mnuchin said at the White House.

Meanwhile, Senate Minority Leader Schumer has continued discussions with Senate Republicans and the Trump administration. As this Issue went to press, it still remained unclear how quickly Democrats and Republicans will reach consensus on the phase three measure.

"We don’t want bailouts unless they are used for workers, unless the industries keep all their employees, unless they don’t cut salaries of their employees, and unless they are not allowed to buy back their own stocks or raise corporate salaries," Schumer said in a March 19 tweet.

"At President Trump’s direction, we are moving Tax Day from April 15 to July 15," Treasury Secretary Steven Mnuchin said in a March 20 tweet. "All taxpayers and businesses will have this additional time to file and make payments without interest or penalties."

"At President Trump’s direction, we are moving Tax Day from April 15 to July 15," Treasury Secretary Steven Mnuchin said in a March 20 tweet. "All taxpayers and businesses will have this additional time to file and make payments without interest or penalties."

The Treasury and IRS officially announced the extension on March 21 (IR-2020-58; more details can be found in Notice 2020-18).

The move to extend this year’s tax filing deadline to July 15 follows the IRS’s formal announcement that certain 2019 tax year payments could be deferred without interest or penalties (see "Due Date for Federal Income Tax Payments Extended to July 15" in this Issue).

File as Usual if a Refund is Expected
"Working with our members, state societies, and tax professionals everywhere, AICPA scored a victory in the extension of the tax filing deadline to July 15, 2020," the American Institute of CPAs (AICPA) said in a March 20 tweet. However, the AICPA noted that it still encourages taxpayers to file their returns as soon as possible so that refunds can stimulate the economy.

"The AICPA understands the need for economic stimulus and, if possible, those who can file and get refunds should do so now," AICPA president and CEO Barry Melancon said in a statement.

Similarly, Mnuchin also encouraged taxpayers to file their returns, if possible. "While I still encourage taxpayers who expect to get a refund to file their taxes, this deadline extension will give everyone maximum flexibility to do what is best for them."

See Tax Filing and Tax Payment Relief for Coronavirus/COVID-19 Pandemic for a summary of filing and payment delays allowed by the federal and state governments.

The Treasury Department and IRS have extended the due date for the payment of federal income taxes otherwise due on April 15, 2020, until July 15, 2020, as a result of the ongoing coronavirus (COVID-19) emergency. The extension is available to all taxpayers, and is automatic. Taxpayers do not need to file any additional forms or contact the IRS to qualify for the extension. The relief only applies to the payment of federal income taxes. Penalties and interest on any remaining unpaid balance will begin to accrue on July 16, 2020.

The Treasury Department and IRS have extended the due date for the payment of federal income taxes otherwise due on April 15, 2020, until July 15, 2020, as a result of the ongoing coronavirus (COVID-19) emergency. The extension is available to all taxpayers, and is automatic. Taxpayers do not need to file any additional forms or contact the IRS to qualify for the extension. The relief only applies to the payment of federal income taxes. Penalties and interest on any remaining unpaid balance will begin to accrue on July 16, 2020.

Dollar Limits
The due date for making federal income tax payments otherwise due on April 15, 2020, for any taxpayer is automatically extended until July 15, 2020. The extension is limited to a maximum amount:

• up to $1 million for individuals, regardless of filing status, and other unincorporated entities such as trust and estates; and
• up to $10 million for each C corporation that does not join in filing a consolidated return or for each consolidated group.

Federal Income Tax Payments Only
The relief is available for federal income tax payments, including payments of tax on self-employment income, otherwise due on April 15, 2020. Thus, it applies to the payment of federal income taxes for the 2019 tax year, as well estimated income tax payments for the 2020 tax year that are due on April 15, 2020. The extension is not available for the payment or deposit of any other type of federal tax.

Taxpayers are urged to check with their state tax agencies for details on any delays in filing and payment state taxes.

Penalties and Interest
Any interest, penalty, or addition to tax for failure to pay federal income taxes postponed will not begin to accrue until July 16, 2020. The period from April 15, 2020, to July 15, 2020, will be disregarded but only for interest, penalties, or additions to tax up to maximum dollar amounts ($1 million or $10 million as applicable).

Interest, penalties, and additions to tax will continue to accrue from April 15, 2020, on the amount of any federal income tax in excess of the maximum dollar amounts. Taxpayers subject to penalties or additions to tax that are not suspended may seek reasonable cause under Code Sec. 6651 for failure to pay tax.

Individuals and certain trusts and estates may also seek a waiver to a penalty under Code Sec. 6654 for failure to pay estimated income taxes. Similar relief is not available for estimated tax payments by corporations or tax-exempt organizations for the penalty under Code Sec. 6655.

The IRS has provided emergency relief for health savings accounts (HSAs) and COVID-19 health plans costs. Under this relief, health plans that otherwise qualify as high-deductible health plans (HDHPs) will not lose that status merely because they cover the cost of testing for or treatment of COVID-19 before plan deductibles have been met. In addition, any vaccination costs will count as preventive care and can be paid for by an HDHP.

The IRS has provided emergency relief for health savings accounts (HSAs) and COVID-19 health plans costs. Under this relief, health plans that otherwise qualify as high-deductible health plans (HDHPs) will not lose that status merely because they cover the cost of testing for or treatment of COVID-19 before plan deductibles have been met. In addition, any vaccination costs will count as preventive care and can be paid for by an HDHP.

HSAs and HDHPs
Eligible individuals can deduct contributions to HSAs. One requirement to qualify as an individual is to be covered under an HDHP and have no disqualifying health coverage. An HDHP is a health plan that satisfies certain requirements, including requirements with respect to minimum deductibles and maximum out-of-pocket expenses.

COVID-19 Relief
A health plan that otherwise satisfies the HDHP requirements will not fail to be an HDHP merely because it provides medical care services and items purchased related to testing for and treatment of COVID-19 prior to satisfaction of the applicable minimum deductible. As a result, the individuals covered by such a plan will not fail to be eligible individuals merely because of the provision of health benefits for testing and treatment of COVID-19.

This relief provides flexibility to HDHPs to provide health benefits for COVID-19 testing and treatment without application of a deductible or cost sharing. Individuals participating in HDHPs or any other type of health plan should consult their particular health plan regarding health benefits for COVID-19 testing and treatment provided by the plan, including the potential application of any deductible or cost sharing.

Caution. The IRS states that this relief applies only to HSA-eligible HDHPs. Employees and other taxpayers in any other type of health plan should contact their plan with specific questions about what their plan covers.

The American Institute of CPAs (AICPA) has requested additional guidance on tax reform’s Code Sec. 199A qualified business income (QBI) deduction.

The American Institute of CPAs (AICPA) has requested additional guidance on tax reform’s Code Sec. 199A qualified business income (QBI) deduction.

199A Deduction Guidance
The IRS issued final and proposed regulations in February 2019 on the Code Sec. 199A QBI deduction enacted in 2017 under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Additionally, the IRS later issued Frequently Asked Questions (FAQs) on the computation of QBI and instructions to Form 8995, Qualified Business Income Deduction Simplified Computation, and Form 8995-A, Qualified Business Income Deduction.

However, taxpayers and practitioners need additional related guidance, according to the AICPA. "We urge that you provide additional certainty regarding which deductions are not reductions for QBI," the AICPA wrote in a March 4 letter addressed to David Kautter, Treasury’s assistant secretary for tax policy, and Michael J. Desmond, IRS chief counsel. The letter was released by AICPA on March 6.

In brief, the AICPA recommends that Treasury and the IRS confirm that the deductible portion of self-employment tax under Code Sec. 164(f), the deduction for self-employed health insurance under Code Sec. 162(l), and the deduction for contributions to qualified retirement plans under Code Sec. 404 are not automatically reductions of QBI. Additionally, it recommends that the IRS update form instructions to reflect the same treatment for a charitable deduction under Code Sec. 170.

199A Rules Under Review
Meanwhile, the White House’s Office of Information and Regulatory Affairs (OIRA) is currently reviewing Code Sec. 199A rules as related to guidance on computations for shareholders of real estate investment trusts (REIT). OIRA received the rules from Treasury on March 5, according to its website.

The IRS has issued guidance that:

• exempts certain U.S. citizens and residents from Code Sec. 6048 information reporting requirements for their transactions with, and ownership of, certain tax-favored foreign retirement trusts and foreign nonretirement savings trusts; and
• establishes procedures for these individuals to request abatement or refund of penalties assessed or paid under Code Sec. 6677 for failing to comply with the information reporting requirements.

The IRS has issued guidance that:

• exempts certain U.S. citizens and residents from Code Sec. 6048 information reporting requirements for their transactions with, and ownership of, certain tax-favored foreign retirement trusts and foreign nonretirement savings trusts; and
• establishes procedures for these individuals to request abatement or refund of penalties assessed or paid under Code Sec. 6677 for failing to comply with the information reporting requirements.

The guidance is effective as of the date the revenue procedure is published in the Internal Revenue Bulletin, and applies to all prior open tax years, subject to the limitations under Code Sec. 6511.

Reporting on Foreign Trusts
Code Sec. 6048 generally requires annual information reporting of a U.S. person’s transfers of money or other property to, ownership of, and distributions from, foreign trusts. Reporting is not required, however, for transactions with foreign compensatory trusts described in Code Secs. 402(b), 404(a)(4), or 404A. Further, the IRS is authorized to suspend or modify any Code Sec. 6048 reporting requirement if the United States has no significant tax interest in obtaining the required information.

Reporting Relief
The Treasury and IRS have determined that U.S. individuals should be exempt from the Code Sec. 6048 reporting requirement for certain tax-favored foreign trusts because:

• the trusts are generally subject to written restrictions (e.g., contribution limitations, conditions for withdrawal, and information reporting) by the laws of the country where the trust is established; and
• U.S. individuals with an interest in these trusts may be required by Code Sec. 6038D to separately report information about their interests in accounts held by or through the trusts.

A foreign trust covered by this guidance is a trust established under a foreign jurisdiction’s law to operate exclusively or almost exclusively to provide, or earn income for the provision of, either pension or retirement benefits and ancillary or incidental benefits, or medical, disability, or educational benefits. To be eligible for coverage, the foreign trust must meet other requirements listed in the guidance that have been established by the laws of the trust’s jurisdiction.

An eligible individual:

• must be compliant with all requirements for filing a U.S. federal income tax return for the period he or she was a U.S. citizen or resident; and
• to the extent required by U.S. tax law, must have reported as income any contributions to, earnings of, or distributions from, an applicable tax-favored foreign trust on the return or an amended return.

Penalty Relief
Eligible individuals who have been assessed a penalty for failing to comply with Code Sec. 6048 for an applicable tax-favored foreign trust and want relief must complete Form 843, Claim for Refund and Request for Abatement. The individual must write "Relief pursuant to Revenue Procedure 2020-17" on Line 7 of the form, and explain how the individual and the foreign trust meet the requirements in the guidance. The form should be mailed to Internal Revenue Service, Ogden, UT 84201-0027.

Scope
This guidance does not affect:

• any reporting obligations under Code Sec. 6038D or any other provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR);
• the exception from reporting for distributions from certain foreign compensatory trusts (Section V of Notice 97-34, 1997-1 C.B. 422); or
• the exception from information reporting requirements for certain Canadian retirement plans ( Rev. Proc. 2014-55, I.R.B. 2014-44, 753).

Proposed Regs
The Treasury and IRS intend to issue proposed regulations that would modify the information reporting requirements to exclude eligible individuals’ transactions with, or ownership of, applicable tax-favored foreign trusts. The Treasury and IRS request comments about these and other similar types of foreign trusts that should be considered for an exemption from Code Sec. 6048 reporting.

The Treasury and IRS have adopted as final the 2016 proposed regulations on covered assets acquisitions (CAAs) under Code Sec. 901(m) and Code Sec. 704. Proposed regulations issued under Code Sec. 901(m) are adopted with revisions, and the Code Sec. 704 proposed regulations are adopted without revisions. The Code Sec. 901(m) rules were also issued as temporary regulations. The CAA rules impact taxpayers claiming either direct or deemed-paid foreign tax credits.

The Treasury and IRS have adopted as final the 2016 proposed regulations on covered assets acquisitions (CAAs) under Code Sec. 901(m) and Code Sec. 704. Proposed regulations issued under Code Sec. 901(m) are adopted with revisions, and the Code Sec. 704 proposed regulations are adopted without revisions. The Code Sec. 901(m) rules were also issued as temporary regulations. The CAA rules impact taxpayers claiming either direct or deemed-paid foreign tax credits.

Covered Asset Acquisitions
The CAA rules are designed to address transactions that result in a basis difference for U.S. and foreign income tax purposes. In a CAA, the disqualified portion of any foreign income tax determined with respect to income or gain attributable to relevant foreign assets (RFAs) is not taken into account in determining direct or indirect foreign tax credits. Foreign taxes that are disqualified for foreign tax credit purposes remain eligible to be deducted.

Under Code Sec. 901(m), a CAA includes the following categories of transactions:

• a qualified stock purchase (defined in Code Sec. 338(d)(3) to which Code Sec. 338(a) applies (Code Sec. 338 CAA);
• a transaction treated as the acquisition of assets for U.S. income tax purposes and as an acquisition of stock for foreign income tax purposes;
• any acquisition of an interest in a partnership that has an election in effect under Code Sec. 754 ( Code Sec. 743(b) CAA); and
• any similar transaction determined by the Secretary of the Treasury.

An RFA is any asset, if income, deduction, gain or loss, attributable to the asset is taken into account in determining the foreign income tax.

The disqualified portion of the foreign income tax for the tax year is the ratio of:

• the aggregate base differences (i.e., excess of U.S. basis of RFA after CAA over U.S. basis before CAA) allocable to the tax year with respect to all RFAS, and
• the income on which the foreign income tax is determined.

Exemptions, Other Changes
The proposed regulations added the following three CAA transaction categories which are retained in the final regulations:

• transactions treated as an acquisition of assets for U.S. tax purposes, and as an interest in a fiscally transparent entity for purposes of foreign income tax purposes;
• transactions treated as a partnership distribution of one or more assets, the U.S. basis of which is determined under Code Sec. 732(b), Code Sec. 732(d), or which causes the U.S. basis of the partnership’s remaining assets to be adjusted under Code Sec. 734(b), provided the transaction results in an increase in the U.S. basis of one or more of the assets distributed by the partnership or retained by the partnership without a corresponding increase in the foreign basis of such assets; and
• transactions treated as an acquisition of assets for purposes of both U.S. income tax and a foreign income tax, provided the transaction results in an increase in the U.S. basis without a corresponding increase in the foreign basis of one or more assets.

The final regulations provide an exemption for CAAs if a domestic Code Sec. 901 payor or members of its consolidated group recognized the gains or losses or took into account its distributive share of the gains and losses recognized by a partnership for U.S. tax purposes as part of the original CAA. The term "aggregate base difference" is modified to take into account adjustments based on gain or loss recognized with respect to an RFA as a result of a CAA.

Under the foreign basis election in the proposed regulations, a taxpayer can elect to determine base difference as the U.S. basis in the RFA immediately after the CAA less the foreign basis in the RFA immediately after the CAA. Taxpayers may apply the election retroactively to CAAs that occurred on or after January 1, 2011, provided the remaining rules in the proposed regulations were applied retroactively. The final regulations modify the consistency requirement so that it applies only for tax years that remain open. Under a new requirement, deficiencies must be taken into account that would have resulted from the consistent application of the final regulations for a closed tax year.

The final regulations also extend the scope of the de minimis rule, under which a basis difference is not taken into account if:

• the sum of the basis differences for all RFAs is less than the greater of $10 million or 10 percent of the total U.S. basis or all RFAs after the CAA; or
• the RFA is part of a class of RFAs for which the sum of the basis differences of all RFAs in the class is less than the greater of $2 million or 10 percent of the total U.S. basis of all RFAs in the class immediately after the CAA.

An additional exclusion is added for an individual RFA with a base difference of less than $20,000.

The final regulations add a priority rule to address transactions to which both Code Sec. 901(m) and Code Sec. 909 apply. Under the rule, Code Sec. 901(m) calculations are taken into account before applying Code Sec. 909.

Tax Cut and Jobs Act changes, including the repeal of Code Sec. 902, are also reflected.

Applicability Date
The final regulations apply to CAAs occurring on or after the date the final regulations are published in the Federal Register. A taxpayer may choose to apply the regulations before they would otherwise apply, provided consistency requirements are met, for tax years open for assessment. Returns for tax years ending before the date the final regulations are published must be filed no later than one year after the publication date. For tax years not open for assessment, appropriate adjustments must be made to account for deficiencies that would have resulted from a consistent application of the rules.