The American Institute of CPAs (AICPA) has urged the IRS and Treasury in an August 12 letter to issue guidance on President Trump’s payroll tax deferral memorandum. The executive action signed by the president on August 8 instructs Treasury to defer the collection and payment of payroll taxes from September 1 through years-end for eligible employees.

The American Institute of CPAs (AICPA) has urged the IRS and Treasury in an August 12 letter to issue guidance on President Trump’s payroll tax deferral memorandum. The executive action signed by the president on August 8 instructs Treasury to defer the collection and payment of payroll taxes from September 1 through years-end for eligible employees.

The presidential memorandum to defer payroll taxes has "caused confusion and concern among accountants and businesses," according to the AICPA. Thus, in its letter released on August 13, the AICPA asks IRS Commissioner Charles "Chuck" Rettig and Assistant Treasury Secretary David Kautter to issue guidance on a number of related issues, including the following items:

• Guidance stating that the deferral is voluntary and that an "eligible employee" is responsible for making an affirmative election to defer the payroll taxes;
• Guidance stating that an "eligible employee" is an employee whose wages are less than $4,000 per bi-weekly pay period;
• Guidance stating that the $4,000 limit should apply separately to each employer of an employee; and
• Guidance stating a payment due date(s) for the deferred taxes and a mechanism for employees to pay the deferred taxes.

Payroll Tax Forgiveness

Notably, Treasury Secretary Steven Mnuchin indicated earlier this week that participation in the deferral of payroll taxes is not mandatory. "We cannot force people to participate," Mnuchin said in a televised interview. "But I think many small businesses will do this and pass on the benefits." Additionally, Mnuchin alluded that Trump intends to make the deferral a cut if reelected, essentially forgiving the deferred taxes.

To that end, White House economic advisor Larry Kudlow attempted to clarify Trump’s position that the payroll tax deferral should be forgiven rather than delayed. And when Trump talks about "terminating the payroll tax", he is only referring to those taxes specified within the presidential memorandum, not the entire payroll tax as a whole, according to Kudlow.

"I just want to be clear that the president is saying that he will provide forgiveness; he will terminate the deferral on a forgiveness basis," Kudlow told reporters at the White House on August 13. "That is what he is saying just to be clear…there was some confusion about that."

Additionally, Kudlow told reporters that the payroll tax deferral would apply to the self-employed. Although the applicable presidential memorandum is not currently written as such, Kudlow added that the administration "will make a technical change to it."

The IRS has released final regulations that address the interaction of the $10,000/$5,000 cap on the state and local tax (SALT) deduction and charitable contributions. The regulations include:

• a safe harbor for individuals who have any portion of a charitable deduction disallowed due to the receipt of SALT benefits;
• a safe harbor for business entities to deduct certain payments made to a charitable organization in exchange for SALT benefits; and
• application of the quid pro quo principle under Code Sec. 170 to benefits received or expected to be received by the donor from a third party.

The IRS has released final regulations that address the interaction of the $10,000/$5,000 cap on the state and local tax (SALT) deduction and charitable contributions. The regulations include:

• a safe harbor for individuals who have any portion of a charitable deduction disallowed due to the receipt of SALT benefits;
• a safe harbor for business entities to deduct certain payments made to a charitable organization in exchange for SALT benefits; and
• application of the quid pro quo principle under Code Sec. 170 to benefits received or expected to be received by the donor from a third party.

The final rules generally adopt the proposed regulations issued in December 2019 ( NPRM REG-107431-19) with minor clarifications.

SALT Limit

An individual’s itemized deduction of SALT taxes is limited to $10,000 ($5,000 if married filing separately) for tax years beginning after 2017. Some states and local governments adopted laws that allowed individuals to receive a state tax credit for contributions to certain charitable funds. These laws are aimed at getting around the SALT deduction limit by creating a charitable deduction for federal income tax purposes.

Under previously issued regulations, the receipt of a SALT credit for a charitable contribution is the receipt of a return benefit (quid pro quo benefit). Thus, the taxpayer must reduce any contribution deduction by the amount of any SALT credit received or expected to receive in return. A de minimis exception is available if the SALT credit does not exceed 15 percent of the taxpayer’s charitable payment.

A taxpayer is not required to reduce the charitable contribution deduction because of the receipt of SALT deductions. However, the taxpayer must reduce the charitable deduction if it receives or expects to receive SALT deductions in excess of the taxpayer’s payment or the fair market value of property transferred.

Payments by Individuals

The final regulations adopt the safe harbor for individuals whose have a portion of a charitable deduction disallowed due to the receipt of a SALT credit. Any disallowed portion of the charitable contribution deduction may be treated as the payment of SALT taxes for the purposes of deducting taxes under Code Sec. 164. The safe harbor is allowed in the tax year the charitable payment is made, but only to the extent that the SALT credit is applied as provided under state or local law to offset the individual’s SALT liability for the current or preceding tax year. Any unused credit may be carried forward as provided under state and local law.

The final regulations are not intended to permit a taxpayer to avoid the SALT deduction cap. Thus, any payment treated as a state or local tax under Code Sec. 164 is subject to the limit. Also, a taxpayer is not permitted to deduct the same under more than one rule, so a taxpayer who relies on this safe harbor to deduction payments as SALT taxes may also not deduct the same payment under any other Code provision.

Payments by Business Entities

The final regulations adopt the safe harbor that business entities may continue to deduct charitable contributions in exchange a SALT credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose.

If a C corporation or specified passthrough entity makes the charitable payment in exchange for a SALT credit, it may deduct the payment as a business expense to the extent of any SALT credit received or expected to be received. In addition, if the charitable payment bears a direct relationship to the taxpayer’s business, then it may be deducted as a business expense rather than a charitable contribution regardless of whether the taxpayer receives or expects to receive a SALT credit.

The safe harbor for C corporations and specified passthrough entities applies only to payments of cash and cash equivalents. The safe harbor for specified passthrough entities does not apply if the credit received or expected to be received reduces a state or local income tax.

Benefits from Third Party

If a taxpayer receives any goods, services, or other benefits from a charitable organization in consideration for a contribution, then the charitable deduction must be reduced by the value of those benefits. If the contribution exceeds the fair market value of the benefits received, then only the excess is a deductible as a charitable contribution.

The final regulations continue to provide that this quid pro quo principal applies regardless of whether the party providing the goods, services, or other benefits is the charitable organization or not. A taxpayer will be treated as receiving goods and services in consideration for the taxpayer’s charitable contribution if, at the time the taxpayer makes the payment or transfer, the taxpayer receives or expects to receive goods or services in return. The final rules clarify that the quid pro quo principle applies regardless of whether the party providing the quid pro quo is the donee or a third party.

The IRS has issued final regulations regarding the limitation for the business interest expense deduction under Code Sec. 163(j), including recent legislative amendments made for the 2019 and 2020 tax years. Also, a safe harbor has been proposed allowing taxpayers managing or operating residential living facilities to qualify as a real property trade or business for purposes of the limitation. In addition, new proposed regulations are provided for a number of different areas.

The IRS has issued final regulations regarding the limitation for the business interest expense deduction under Code Sec. 163(j), including recent legislative amendments made for the 2019 and 2020 tax years. Also, a safe harbor has been proposed allowing taxpayers managing or operating residential living facilities to qualify as a real property trade or business for purposes of the limitation. In addition, new proposed regulations are provided for a number of different areas.

Section 163(j) Limitation

A taxpayer’s deduction of business interest expenses paid or incurred for the tax year is generally limited to the sum of:

• the taxpayer’s business interest income for the tax year for which the taxpayer is claiming the deduction (not including investment income);
• 30 percent of the taxpayer’s adjusted taxable income (ATI), but not less than zero; and
• the taxpayer’s floor plan financing interest.

The percentage limit is generally increased to 50 percent of ATI for 2019 and 2020. For a partnership, however, the 50 percent limit applies for 2020 only, and a special allocation of excess business interest expense (EBIE) to a partner may apply for the 2019 tax year. A taxpayer may elect not to use the 50 percent ATI limit, and any taxpayer other than a partnership may elect for 2020 to use its ATI from the 2019 tax year to calculate its limitation.

The 163(j) limitation does not apply to certain small businesses whose gross receipts are less than a threshold amount ($26 million for 2020). It also does not apply to electing real property trades or businesses, electing farming businesses, and certain regulated public utilities.

Final Regulations

The final regulations generally adopt proposed rules that were issued in December 2018, with some modifications. Taxpayer may continue to rely on some of the rules in the proposed regulations. One significant change is that the final regulations provide any that any depreciation, amortization, or depletion that is capitalized into inventory under Code Sec. 263A before 2022 will be added back to tentative taxable income in calculating ATI.

This is change from the proposed rules which effectively resulted in taxpayers with inventory to effectively use earnings before interest and tax (EBIT) instead of earnings before interest, tax, depreciation, and amortization (EBITDA) before 2022 in calculating ATI. Also, the final rules eliminate the “lesser of” standard with respect to sales and disposition of stock, and require taxpayers to back out depreciation deductions that were allowed or allowable during the EBITDA period.

The IRS had adopted the broad definition of business interest in the proposed rules, including the definition of substitute interest and the embedded loan rule with some modifications. However, the final regs exclude commitment fees, debt issuance costs, guaranteed payments (except used as capital), and hedging rules. The IRS has also modified the anti-avoidance rule for time value of money.

Qualified Residential Living Facilities

The IRS has proposed a safe harbor for a trade or business that manages or operates a qualified residential living facility to be treated as a real property trade or business solely for purposes of qualifying as an electing real property trade or business. A facility is qualified if it:

• consists of multiple rental dwelling units within one or more structures that generally serve as primary residences on a permanent or semi-permanent basis to individual customers or patients;
• provides supplemental assistive, nursing, or other routine medical services; and
• has an average period of customer or patient use of the individual rental dwelling units that is 90 days or more.

The safe harbor is proposed to apply to tax years beginning after December 31, 2017.

Proposed Regulations

In addition to the final regulations, the IRS has issued new proposed regulations that provide rules regarding:

• different computational methods a taxpayer can choose in determining certain adjustments to tentative taxable income;
• the treatment of EBIE allocated to a partner in 2019, and the election to use ATI from 2019 for the 2020 tax year under Code Sec. 163(j)(10);
• interest expense associated with debt proceeds of partnerships and S corporations (passthrough entities);
• application of the limitation for a partnership’s self-charged lending transactions, partnerships engaged in trades or businesses that are not passive activities, publicly traded partnerships, certain section 734(b) adjustments, and tiered partnership structures;
• application to U.S. shareholders of controlled foreign corporations (CFCs) and to foreign persons with effectively connected income in the United States; and
• application to corporate look-through provisions.

Finally, the IRS has also released FAQs that provide a general overview of the aggregation rules that apply for purposes of the gross receipts test, and that apply to determine whether a taxpayer is a small business that is exempt from the business interest expense deduction limitation.

The IRS has issued proposed regulations that implement the "carried interest" rules under Code Sec. 1061 adopted by Congress as part of the Tax Cuts and Jobs Act of 2017 ( P.L. 115-97). Some key aspects of the lengthy proposed regulations include the definition of important terms, how the rules work in the context of tiered passthrough structures, the definition of "substantial" services provided by the carried interest holder, and the level of activity required for a business to meet the definition of an "applicable trade or business."

The IRS has issued proposed regulations that implement the "carried interest" rules under Code Sec. 1061 adopted by Congress as part of the Tax Cuts and Jobs Act of 2017 ( P.L. 115-97). Some key aspects of the lengthy proposed regulations include the definition of important terms, how the rules work in the context of tiered passthrough structures, the definition of "substantial" services provided by the carried interest holder, and the level of activity required for a business to meet the definition of an "applicable trade or business."

In general, a "carried interest" is an interest in a partnership in the investment management business that consists of the right to receive future partnership profits. Carried interests are given to a partner in exchange for performing asset management services for businesses such as private equity funds, venture capital funds, and hedge funds.

Prior to Code Sec. 1061, taxpayers tended to treat carried interests as interests in partnership profits subject to long-term capital gain rates. Code Sec. 1061, however, reflects that a carried interest may in fact be compensation for services and therefore properly subject to ordinary income rates. As a result, Code Sec. 1061 applies a longer, three-year holding period to certain net long-term capital gain with respect to any "applicable partnership interest" (API)—essentially, any carried interest. The effect of this is to recharacterize as short-term capital gain certain net long-term capital gain of a partner who holds one or more APIs.

The proposed regulations define the amount of otherwise long-term capital gain that fails to meet the three-year holding period as the "recharacterization amount," and refers to the person who is subject to income tax on the recharacterization amount as the "owner taxpayer." In addition, the proposed regulations provide a framework for determining the recharacterization amount when an API is held though one or more tiers of passthrough entities.

A partnership interest is an API if it is transferred in connection with the performance of "substantial" services. Under the proposed regulations, services are presumed to be substantial with respect to a partnership interest transferred in connection with those services. Basically, this means that the partnership is presumed to get good value for the partnership interest it transfers in exchange for services.

Generally, an API is any interest in a partnership that is transferred to or held by the taxpayer in connection with the performance of services by the taxpayer in any "applicable trade or business" (ATB). Under Code Sec. 1061(c)(2), to qualify as an ATB, an activity must be "conducted on a regular, continuous, and substantial basis." Under the proposed regulations, an activity is conducted on a regular, continuous, and substantial basis if it meets the "ATB activity test." Under this test, the total level of activity conducted in one or more entities must meet the level of activity to establish a trade or business for purposes of trade or business expenses under Code Sec. 162.

The Treasury and the IRS have issued temporary and proposed regulations to:

• reconcile advance payments of refundable employment tax credits provided under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136), and
• recapture the benefit of the credits when necessary.

The Treasury and the IRS have issued temporary and proposed regulations to:

• reconcile advance payments of refundable employment tax credits provided under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136), and
• recapture the benefit of the credits when necessary.

The text of the temporary regulations serves as the text of the proposed regulations.

Background

Under the Families First Act, many employers with fewer than 500 employees must provide paid leave to employees due to circumstances related to the Coronavirus Disease 2019 (COVID-19). Certain employers must provide an employee with up to 80 hours of paid sick leave if the employee cannot work or telework due to specific reasons related to COVID-19. The Families First Act also amends the Family and Medical Leave Act of 1993 to require employers to provide expanded paid family and medical leave to employees who cannot work or telework for certain reasons related to COVID-19.

Eligible employers may receive a refundable payroll credit for required qualified sick leave wages or qualified family leave wages paid to an employee, plus allocable qualified health plan expenses. The credits are allowed against the taxes imposed on employers by Code Sec. 3111(a) (the Old-Age, Survivors, and Disability Insurance tax (social security tax)), first reduced by any credits claimed under Code Sec. 3111(e) and (f), and Code Sec. 3221(a) (the Railroad Retirement Tax Act Tier 1 tax), on all wages and compensation paid to all employees. The credits are increased by the amount of the employer’s share of Medicare tax on qualified leave wages.

The paid leave credits have per-day and maximum dollar limits for each employee, and apply to qualified leave wages paid with respect to the period beginning on April 1, 2020, and ending on December 31, 2020.

The CARES Act provides an employee retention credit for certain employers experiencing economic hardship related to COVID-19 but who pay qualified wages to their employees. Employers eligible for the employee retention credit are those that carry on a trade or business during calendar year 2020 and tax-exempt organizations that either have a full or partial suspension of operations during any calendar quarter in 2020 due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, or experience a significant decline in gross receipts during the calendar quarter.

Qualified wages are those paid by an employer to some or all employees after March 12, 2020, and before January 1, 2021, and include the employer’s qualified health plan expenses that are properly allocable to such wages or compensation. Qualified wages differ depending on whether the employer averaged more than 100 full-time employees during 2019, or 100 full-time employees or fewer during 2019.

The employee retention credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages; the maximum for an eligible employer for qualified wages paid to any employee is $5,000. The credit is allowed against the taxes imposed on employers by Code Sec. 3111(a), first reduced by:

• any credits allowed under Code Sec. 3111(e) and (f),
• the paid leave credits described above, and
• the taxes imposed under Code Sec. 3221(a) that are attributable to the Code Sec. 3111(a) rate in effect, first reduced by any paid leave credits allowed, on all wages and compensation paid to all employees.

The same wages or compensation cannot be counted for both the Families First Act leave credits and the CARES Act employee retention credit.

Refundability of Credits

If the amount of the paid sick and family leave credits is more than the taxes imposed by Code Sec. 3111(a) or Code Sec. 3221(a) for any calendar quarter, the excess is treated as an overpayment that must be refunded under Code Sec. 6402(a) and Code Sec. 6413(b). A similar refund is required for the employee retention credit.

The IRS has revised Form 941, Employer's Quarterly Federal Tax Return, and is revising the other employment tax returns, so that employers can use these returns to claim the paid sick and family leave credits and the employee retention credit. The revised returns will provide for any credits in excess of the employment taxes imposed as described above, to be credited against other employment taxes and then for any remaining balance to be refunded to the employer.

Advance Payment of Credits and Erroneous Refunds

In anticipation of the paid sick and family leave credits, including any refundable portions, these credits may be advanced as provided by IRS forms and instructions, up to the total allowable amount and subject to applicable limits for the calendar quarter.

The IRS has created Form 7200, Advance Payment of Employer Credits Due To COVID-19, which employers can use to request an advance of the paid sick or family leave credits, the employee retention credit, or two or more of them. Employers must reconcile any advance payments claimed on Form 7200 with total credits claimed and total taxes due on their employment tax returns. A refund, a credit, or an advance of any portion of these credits to a taxpayer in excess of the amount to which the taxpayer is entitled is an erroneous refund for which the IRS must seek repayment.

Temporary Regulations

The temporary regulations provide that erroneous refunds of the credits are treated as underpayments of the taxes imposed under Code Sec. 3111(a) or Code Sec. 3221(a), and authorize the IRS to assess any portion of the credits erroneously credited, paid, or refunded in excess of the amount allowed as if those amounts were tax liabilities subject to assessment and administrative collection procedures. This allows the IRS to efficiently recover the amounts, while also preserving administrative protections afforded to taxpayers with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with litigation. These procedures will apply in the normal course in processing employment tax returns that report advances in excess of claimed credits and in examining returns for excess claimed credits.

The temporary regulations also provide that employers against whom an erroneous refund of credits can be assessed as an underpayment include persons treated as the employer under Code Sec. 3401(d), Code Sec. 3504, and Code Sec. 3511, consistent with their liability for the employment taxes against which the credit applied.

The temporary regulations apply to all paid leave credit refunds advanced or paid on or after April 1, 2020, and all employee retention credit refunds advanced or paid on or after March 13, 2020. Further, the temporary regulations apply to all paid leave credits (including any increases in the credits) refunded on or after April 1, 2020, including advanced refunds, as well as all employee retention credits that are refunded on or after March 13, 2020, including advanced refunds.

Applicability Date

The temporary regulations are effective July 29, 2020, the date they are scheduled to be published in the Federal Register.

Comments and Requests for Public Hearing

The Treasury Department and IRS request comments on all aspects of the proposed regulations. A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Written or electronic comments and requests for a public hearing must be received by 60 days after the proposed regulations are published in the Federal Register.

Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-111879-20) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have limited personnel available to process public comments that are submitted on paper through the mail. Until further notice, any comments submitted on paper will be considered to the extent practicable. The Treasury and IRS will publish for public availability any comment submitted electronically, and to the extent practicable on paper. Send paper submissions to: CC:PA:LPD:PR (REG-111879-20), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, D.C. 20044.

The IRS has provided guidance on the special rules relating to funding of single-employer defined benefit pension plans, and related benefit limitations, under Act Sec. 3608 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136). The guidance clarifies application of the extended contribution deadline, and the optional use of the prior year’s adjusted funding target attainment percentage (AFTAP), with examples.

The IRS has provided guidance on the special rules relating to funding of single-employer defined benefit pension plans, and related benefit limitations, under Act Sec. 3608 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136). The guidance clarifies application of the extended contribution deadline, and the optional use of the prior year’s adjusted funding target attainment percentage (AFTAP), with examples.

Affected Funding Rules

A single-employer defined benefit plan is subject to minimum required contribution rules under Code Sec. 430. The minimum required contribution for a plan year generally depends on a comparison of the value of plan assets (reduced by any credit balances) with the plan's funding target. If the value of plan assets is less than the funding target of the plan for the year, the minimum required contribution for that plan year is the sum of:

• the target normal cost for the plan year;
• the shortfall amortization installments for the plan year; and
• the waiver amortization installments for the plan year.

The minimum required contribution for a plan year must be paid within 8-1/2 months after the close of the plan year ( Code Sec. 430(j)). Payments made on a date other than the valuation date for the plan year must be adjusted for interest accruing for the period from the valuation date to the payment date, at the effective interest rate for the plan for the year. Employers maintaining plans that had a funding shortfall for the preceding plan year (i.e., the value of plan assets, reduced by credit balances, was less than the funding target for the preceding year) must make quarterly contributions to the plan. If the employer fails to pay the full amount of a required quarterly installment, interest is assessed at the plan's effective interest rate plus five percentage points.

Benefit limits apply to plans that have funded target attainment percentage for the preceding year below designated thresholds are deemed to be in "at-risk" status and are subject to increased target liability. The benefit limits on single-employer defined benefit plans are based on the plan’s AFTAP ( Code Sec. 436(b)). Generally, a plan's funding target attainment percentage is the ratio of the value of plan assets for the plan year (reduced by any funding standard carryover balance and prefunding balance) to the funding target for the plan year (determined without regard to the plan's at-risk status) ( Code Secs. 430(d)(2) and 436(j)(1)).

CARES Act Relief
Minimum required contributions to a single-employer retirement plan otherwise due in calendar year 2020 (including any quarterly contributions) are delayed until January 1, 2021. The amount of each such contribution is increased by any interest accruing for the period between the original due date (without regard to the delay) for the contribution and the payment date. A plan sponsor also may elect to treat the plan’s AFTAP for the last plan year ending before January 1, 2020, as the AFTAP for plan years that include calendar year 2020 (Act Sec. 3608 of P.L. 116-136.

Extended Deadline and Interest
The extended contribution due date of January 1, 2021, does not apply to a multiemployer plan, a CSEC plan, a fully-insured plan, or a money purchase pension plan. If the contribution deadline for a plan year is during 2020, a contribution in excess of the amount needed to satisfy the minimum required contribution for the plan year that is made by January 1, 2021, may be designated as a contribution for that plan year.

Any payment made after the original due date for the contribution and by the extended due date must be increased for the period between the original due date and the payment date at the effective interest rate for the plan year that includes the payment date. If the contribution is less than the amount that was due on the original due date for the minimum required contribution, as increased with interest pursuant to the CARES Act, then a portion of the minimum required contribution for that plan year would remain unpaid. The unpaid portion of the minimum required contribution, determined as of the valuation date and based on contributions made on or before January 1, 2021, with the contributions discounted for interest to the valuation date, would give rise to an unpaid minimum required contribution that would be subject to an excise tax. Furthermore, a contribution made after January 1, 2021, to satisfy that unpaid minimum required contribution must be adjusted for interest for the period between the date that the contribution is made and the valuation date at the effective interest rate for the plan year for which the contribution is made (with additional interest as required to reflect any late quarterly installments for the plan year).

The CARES Act specifies that to determine the amount of a quarterly installment due by the extended due date, the amount of that installment is increased from the installment’s original due date to the payment date at the effective interest rate for the plan year that includes the date the quarterly installment is paid. If a plan sponsor does not satisfy a quarterly installment originally due during 2020 by the extended due date, then the unpaid portion of that installment is subject to a higher interest rate for the period during which the installment (or a portion thereof) remains unpaid when determining the amount of the minimum required contribution that is satisfied by a contribution.

A contribution made after the original due date for a plan year but on or before the extended due date is taken into account as of a valuation date for a plan year after the plan year for which the contribution was made. For purposes of determining the value of plan assets, if an employer makes a contribution to the plan after the valuation date for the current plan year and the contribution is for an earlier plan year, then the present value of the contribution determined as of that valuation date is taken into account as an asset of the plan as of the valuation date, provided the contribution is made before a specified deadline. The specified deadline is the deadline for contributions for the plan year immediately preceding the current plan year. However, that deadline is extended by the CARES Act. Furthermore, the interest adjustment rules override the discounting rules that apply generally for this purpose. Note, however, that certification of the AFTAP for a plan year must not take into account contributions that are expected to be made after the certification date.

If the plan year is a plan year for which the extended due date for minimum required contributions applies, then the deadline for a plan sponsor’s election to increase a prefunding balance or to use a prefunding balance or a funding standard carryover balance to offset the minimum required contribution for that plan year is extended to January 1, 2021. However, the extended due date does not change the date by which a contribution must be made in order to be deducted for a tax year. A taxpayer is deemed to have made a payment on the last day of the preceding tax year if the payment is on account of that tax year and is made no later than the time prescribed by law for filing the return for that tax year (including extensions).

Guidance for AFTAP Election

A plan sponsor may elect to apply the AFTAP for the last plan year ending before January 1, 2020, for a plan year that includes any portion of calendar year 2020. For example, if a plan sponsor makes an election for a plan year that runs from July 1, 2019, to June 30, 2020, then the AFTAP that applies is the certified AFTAP from the plan year that ends on June 30, 2019. That plan sponsor may separately elect to use that same AFTAP for the plan year that begins on July 1, 2020.

The AFTAP election must be made using the procedures that apply for elections relating to funding balances. Thus, the plan sponsor must provide written notification of the election to the plan's actuary and the plan administrator. If a plan’s actuary has not certified the plan’s AFTAP for a plan year before the plan sponsor makes the election, then the plan sponsor’s election is treated as a certification of the AFTAP. Thus, beginning with the date of the election, the AFTAP for the last plan year ending on or before December 31, 2019, applies for the plan year for which the election is made, rather than any presumed AFTAP.

A plan’s actuary generally must certify the plan’s AFTAP for a plan year for which the plan sponsor makes the election. However, if the plan sponsor makes the election for a plan year that begins in 2019 and ends in 2020 and also makes an election for the next plan year, then the actuary is not required to certify the plan’s AFTAP for the plan year that begins in 2019. If the plan’s actuary has certified an AFTAP for a plan year, then the Schedule SB of Form 5500, Annual Return/Report of Employee Benefit Plan, for that plan year should reflect the certified AFTAP.

If a plan’s actuary certified the plan’s AFTAP for a plan year before the plan sponsor makes the election, then the plan sponsor’s election is treated as a subsequent determination of the AFTAP for that plan year. However, the plan sponsor’s election is eligible for deemed immaterial treatment, and the election is treated as the recertification on the part of the actuary that is otherwise required for deemed immaterial treatment. Thus, the AFTAP that applies pursuant to the plan sponsor’s election is applied on a prospective basis beginning with the election date.

If the AFTAP that applies is pursuant to a plan sponsor’s election, then the restriction on plan amendments and unpredictable contingent event benefits is applied, except that the AFTAP that applies pursuant to the election is substituted for the presumed AFTAP. Thus, for example, the AFTAP that applies pursuant to the plan sponsor’s election will be used to calculate a presumed adjusted funding target and an inclusive presumed AFTAP.

The AFTAP that applies pursuant to a plan sponsor’s election for a plan year generally will not apply for purposes of the presumptions used in a subsequent plan year. Instead, the actual AFTAP for the plan year that was certified by the plan’s actuary generally is used for purposes of applying the presumption rules the subsequent plan year.

The IRS has released proposed regulations that implement new Code Sec. 7602(f), which bars non-government persons who are hired by the IRS from questioning a witness under oath whose testimony was obtained pursuant to a summons issued under Code Sec. 7602. The regulations prohibit any IRS contractors from asking a summoned person’s representative to clarify an objection or assertion of privilege. The IRS has also withdrawn a notice of proposed rulemaking ( NPRM REG-132434-17) that contained proposed rules addressing the participation of persons described under Code Sec. 6103(n) in the interview of a summoned witness and excluding certain non-government attorneys from participating in an IRS examination.

The IRS has released proposed regulations that implement new Code Sec. 7602(f), which bars non-government persons who are hired by the IRS from questioning a witness under oath whose testimony was obtained pursuant to a summons issued under Code Sec. 7602. The regulations prohibit any IRS contractors from asking a summoned person’s representative to clarify an objection or assertion of privilege. The IRS has also withdrawn a notice of proposed rulemaking ( NPRM REG-132434-17) that contained proposed rules addressing the participation of persons described under Code Sec. 6103(n) in the interview of a summoned witness and excluding certain non-government attorneys from participating in an IRS examination.

Section 7602(f)

The 2016 Summons Interview Regulations under Reg. §301.7602-1(b)(3) were issued, in part, to clarify that persons described in Code Sec. 6103(n) and Reg. §301.6103(n)-1(a) may receive and review books, papers, records, or other data summoned by the IRS. The regulations were also issued to clarify that, in the presence and under the guidance of an IRS officer or employee, these non-government persons could participate fully in the interview of a person whom the IRS had summoned as a witness to provide testimony under oath, allowing a contractor to ask a summoned witness substantive questions. Code Sec. 7602(f) was enacted by section 1208 of the Taxpayer First Act of 2019 ( P.L. 116-25).

Comment Request

Written or electronic comments and requests for a public hearing must be received by October 6, 2020. Commenters are strongly encouraged to submit public comments via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-132434-17) by following the online instructions for submitting comments. Comments submitted on paper will be considered to the extent practicable. The Treasury Department and the IRS will publish for public availability any comment submitted electronically, and to the extent practicable on paper, to its public docket. Paper submissions can be sent to: CC:PA:LPD:PR (REG-132434-17), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.

Proposed regulations adopt the post-2017 simplified accounting rules for small businesses.

Proposed regulations adopt the post-2017 simplified accounting rules for small businesses.

Implementation

The Tax Cuts and Jobs Act ( P.L. 115-97) put in place a single $25 million gross receipts test (adjusted annually for inflation after 2018) for determining whether certain taxpayers can use the cash method of accounting, are not required to use inventories, are not required to apply the uniform capitalization (UNICAP) rules, and are not required to use the percentage of completion method for a small construction contract.

The proposed regulations address a variety of issues. For example, they address application of the gross receipts test to taxpayers that are not corporations or partnerships. The gross receipts test is applied by taking into account the amount of gross receipts derived from all of the taxpayer's trades or businesses. Under the proposed regulations, amounts not related to a taxpayer's trade or business—items such as Social Security benefits, personal injury awards and settlements, disability benefits, and wages received as an employee reported on Form W-2—are generally excluded from gross receipts. Similar rules are provided for each of the exemptions.

Other issues addressed in the proposed regulations include rules:

• implementing the Code Sec. 263A(i) small business taxpayer exemption for purposes of the requirement to capitalize interest;
• permitting farmers who had been using a farming exception to the Code Sec. 263A rules to adopt the small business exception, and vice versa;
• permitting a taxpayer to elect to use the allocated taxable income or loss of the immediately preceding tax year to determine whether the taxpayer is a syndicate for purposes of Code Sec. 448(d)(3) for the current tax year;
• requiring a taxpayer that meets the gross receipts test in the current tax year to obtain IRS written consent before changing to the cash method if the taxpayer had previously changed its overall method from the cash method during any of the five tax years ending with the current tax year;
• applying the look-back method to redetermine the taxpayer’s modified taxable income under Reg. §1.59-3(b) and the taxpayer’s base erosion minimum tax amount (BEMTA) for the tax year; and
• clarifying the treatment under Code Sec. 471(c) for small business taxpayers with and without applicable financial statements.

Applicability Date

The regulations are proposed to apply for tax years beginning on or after the date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register. However, for tax years beginning after December 31, 2017, a taxpayer may rely on the proposed regulations, provided that the taxpayer follows all the applicable rules contained in the proposed regulations for each Code provision that the taxpayer chooses to apply.

The IRS has modified two safe harbor explanations in Notice 2018-74, 2018-40 I.R.B. 529, that can be used to satisfy the requirement under Code Sec. 402(f) that certain information be provided to recipients of eligible rollover distributions. The modifications were necessary due to recent changes in law made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). One safe harbor explanation is for payments not from a designated Roth account, and the other is for payments from a designated Roth account. The Code Sec. 402(f) notice may be provided as many as 180 days before the date on which the distribution is made (or the annuity starting date).

The IRS has modified two safe harbor explanations in Notice 2018-74, 2018-40 I.R.B. 529, that can be used to satisfy the requirement under Code Sec. 402(f) that certain information be provided to recipients of eligible rollover distributions. The modifications were necessary due to recent changes in law made by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). One safe harbor explanation is for payments not from a designated Roth account, and the other is for payments from a designated Roth account. The Code Sec. 402(f) notice may be provided as many as 180 days before the date on which the distribution is made (or the annuity starting date).

Qualified Birth and Adoption Distributions

Code Sec. 72(t)(1) generally provides for a 10-percent additional tax on a distribution from a qualified retirement plan, unless the distribution qualifies for an exception. The SECURE Act permits an individual to receive up to $5,000 for a qualified birth or adoption distribution from an applicable eligible retirement plan without being subject to the 10 percent additional tax. A qualified birth or adoption distribution is any distribution from an applicable eligible retirement plan to an individual if made during the 1-year period beginning on the date on which the child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.

Additionally, an individual may recontribute a qualified birth or adoption distribution (not to exceed the amount of the distribution) to an eligible retirement plan in which the taxpayer is a beneficiary and to which a rollover can be made. Although the distributions may be recontributed, a plan administrator is not required to provide a Code Sec. 402(f) notice to a recipient of a qualified birth or adoption distribution.

Required Minimum Distributions

The SECURE Act also amended Code Sec. 401(a)(9) to change the required beginning date for minimum distributions from retirement plans. The new required beginning date for an employee or an IRA owner is April 1 of the calendar year following the calendar year in which the individual attains age 72, rather than April 1 of the calendar year following the calendar year in which the individual attains age 70-1/2. This is effective for distributions required to be made after December 31, 2019, with respect to individuals who will attain age 70-1/2 after that date. As a result of this change, employees and IRA owners who will attain age 70-1/2 in 2020 will not have a required beginning date of April 1, 2021.

Model Notices

To assist with the implementation of the modified safe harbor explanations, the IRS has released two model safe harbor explanations: one for distributions that are not from a designated Roth account, and the other for distributions from a designated Roth account. Both explanations should be provided to a participant if the participant is eligible to receive eligible rollover distributions from both a designated Roth account and an account other than a designated Roth account. A plan administrator or payor may customize a safe harbor explanation by omitting any information that does not apply to the plan. Alternatively, a plan administrator or payor may provide an explanation that is different from a safe harbor explanation. Any explanation must include the information required by Code Sec. 402(f) and must be written in a manner designed to be easily understood.

The IRS has reminded taxpayers that the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) can provide favorable tax treatment for withdrawals from retirement plans and Individual Retirement Accounts (IRAs). Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before December 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans and others.

The IRS has reminded taxpayers that the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) can provide favorable tax treatment for withdrawals from retirement plans and Individual Retirement Accounts (IRAs). Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before December 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans and others.

Also, until September 22, 2020, individuals eligible to take coronavirus-related withdrawals may be able to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan, if their plan allows. Loans are not available from an IRA. For eligible individuals, plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before January 1, 2021. A suspended loan is subject to interest during the suspension period, and the term of the loan may be extended to account for the suspension period.

To be eligible for COVID-19 relief, coronavirus-related withdrawals or loans can only be made to an individual if:

• the individual is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetics Act);
• the individual’s spouse or dependent is diagnosed with COVID-19 by such a test; or
• the individual, their spouse, or a member of the individual’s household experiences adverse financial consequences from: (1) being quarantined, furloughed or laid off, having work hours reduced, being unable to work due to lack of childcare, having a reduction in pay (or self-employment income), or having a job offer rescinded or start date for a job delayed, due to COVID-19; or (2) closing or reducing hours of a business owned or operated by the individual, the individual’s spouse, or a member of the individual’s household, due to COVID-19.

Taxpayers can learn more about these provisions in IRS Notice 2020-50, I.R.B. 2020-28, 35. The IRS has also posted FAQs that provide additional information.

The Treasury and IRS have issued final and proposed regulations under the global intangible low-taxed income (GILTI) and subpart F provisions for the treatment of high-taxed income. The final regulations provide guidance on determining the type of high-taxed income that is eligible for the exclusion (the "GILTI high-tax exclusion" or GILTI HTE).

The Treasury and IRS have issued final and proposed regulations under the global intangible low-taxed income (GILTI) and subpart F provisions for the treatment of high-taxed income. The final regulations provide guidance on determining the type of high-taxed income that is eligible for the exclusion (the "GILTI high-tax exclusion" or GILTI HTE).

Proposed regulations generally conform the rules for the subpart F high-tax exception to the rules for the GILTI high-tax exclusion. A single election is provided under Code Sec. 954(b)(4) for purposes of subpart F and tested income.

Under the Code Sec. 954(b)(4) high tax exception, income received by a controlled foreign corporation (CFC) is excluded under subpart F, if the income is subject to an effective rate of foreign tax that is greater than 90 percent of the maximum U.S. corporate tax rate.

Final Regulations on the GILTI HTE

The final regulations:

• provide that the GILTI HTE applies, on an elective basis, to high-taxed income of a CFC that is excluded from foreign base company (FBCI) ( Code Sec. 954) or insurance income ( Code Sec. 953) under Code Sec. 954(b)(4), regardless if the income would otherwise be FBCI or insurance income;
• provide that the effective foreign tax rate is determined on a tested unit basis;
• provide rules to determine the net amount of income (i.e., tentative tested income) and the foreign taxes paid or accrued with respect to such net amount of income that are used to compute the effective rate of tax;
• indicate how to make a GILTI HTE election; and
• do not provide rules that account for the use of foreign tax NOL carryforwards.

An exception under Code Sec. 954(b)(4) for purposes of the GILTI HTE applies to any item of income that is subject to an effective rate of tax greater than the maximum U.S. corporate tax rate, which is 18.9 percent based on a 21 percent tax. Controlling domestic shareholders of CFCs can elect to apply the exception to items of income that would not otherwise be FBCI or insurance income. An item of gross income is subject to a high-rate of foreign tax, if after taking into account properly allocable expenses, the net item of income is subject to an effective rate of tax above the statutory threshold.

The high-tax exception is applied on the basis of the items of gross income of a tested unit of a CFC, rather than the CFC as a whole. All tested units of a CFC in the same country are generally grouped together to determine the effective foreign tax rate for the purpose of applying the high-tax exclusion. The approach minimizes the blending of tax rates within a CFC and is thought to provide a more accurate idea of the income subject to a high-rate of foreign tax.

The election to exclude high-taxed income from gross tested income is generally made or revoked for a one-year period.

Proposed Regulations Single Election

The proposed regulations provide for a single election under Code Sec. 954(b)(4) for purposes of both subpart F and GILTI, based on the final GILTI high-tax exclusion regulations.

Under the proposed regulations:

• the election is made with respect to all members of a CFC group (rather than on a CFC-by-CFC basis);
• the determination of whether income is high taxed is made on a tested unit-by-unit basis;
• the determination of high tax income is simplified by grouping certain income that would otherwise qualify as subpart F income with income that would otherwise qualify as tested income for purposes of determining the effective foreign tax rate, and for purposes of the high-tax exception; and
• the method for allocating and apportioning deductions to items of gross income is modified for purposes of the high-tax exception.

One of the most complex, if not the most complex, provisions of the Patient Protection and Affordable Care Act is the employer shared responsibility requirement (the so-called "employer mandate") and related reporting of health insurance coverage. Since passage of the Affordable Care Act in 2010, the Obama administration has twice delayed the employer mandate and reporting. The employer mandate and reporting will generally apply to applicable large employers (ALE) starting in 2015 and to mid-size employers starting in 2016. Employers with fewer than 50 employees, have never been required, and continue to be exempt, from the employer mandate and reporting.

Employer mandate

The employer mandate under Code Sec. 4980H and employer reporting under Code Sec. 6056 are very connected. Code Sec. 4980H generally provides that an ALE is required to pay a penalty if it fails to offer minimum essential coverage and any full-time employee receives cost-sharing or the Code Sec. 36B premium assistance tax credit. An ALE would also pay a penalty if it offers coverage and any full-time employee receives cost-sharing or the Code Sec. 36B credit.

To receive the Code Sec. 36B credit, an individual must have obtained coverage through an Affordable Care Act Marketplace. The Marketplaces will report the names of individuals who receive the credit to the IRS. ALEs must report the terms and conditions of health care coverage provided to employees (This is known as Code Sec. 6056 reporting). The IRS will use all of this information to determine if the ALE must pay a penalty.

ALEs

Only ALEs are subject to the employer mandate and must report health insurance coverage under Code Sec. 6056. Employers with fewer than 50 employees are never subject to the employer mandate and do not have to report coverage under Code Sec. 6056.

In February, the Obama administration announced important transition rules for the employer mandate that affects Code Sec. 6056 reporting. The Obama administration limited the employer mandate in 2015 to employers with 100 or more full-time employees. ALEs with fewer than 100 full-time employees will be subject to the employer mandate starting in 2016. At all times, employers with fewer than 50 full-time employees are exempt from the employer mandate and Code Sec. 6056 reporting.

Reporting

The IRS has issued regulations describing how ALEs will report health insurance coverage. The IRS has not yet issued any of the forms that ALEs will use but has advised that ALEs generally will report the requisite information to the agency electronically.

ALEs also must provide statements to employees. The statements will describe, among other things, the coverage provided to the employee.

30-Hour Threshold

A fundamental question for the employer mandate and Code Sec. 6056 reporting is who is a full-time employee. Since passage of the Affordable Care Act, the IRS and other federal agencies have issued much guidance to answer this question. The answer is extremely technical and there are many exceptions but generally a full-time employee means, with respect to any month, an employee who is employed on average at least 30 hours of service per week. The IRS has designed two methods for determining full-time employee status: the monthly measurement method and the look-back measurement method. However, special rules apply to seasonal workers, student employees, volunteers, individuals who work on-call, and many more. If you have any questions about who is a full-time employee, please contact our office.

Form W-2 reporting

The Affordable Care Act also requires employers to disclose the aggregate cost of employer-provided health coverage on an employee's Form W-2. This requirement is separate from the employer mandate and Code Sec. 6056 reporting. The reporting of health insurance costs on Form W-2 is for informational purposes only. It does not affect an employee's tax liability or an employer's liability for the employer mandate.

Shortly after the Affordable Care Act was passed, the IRS provided transition relief to small employers that remains in effect today. An employer is not subject the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. Special rules apply to multiemployer plans, health reimbursement arrangements, and many more.

Please contact our office if you have any questions about ALEs, the employer mandate or Code Sec. 6056 reporting.

People are buzzing about Roth Individual Retirement Accounts (IRAs). Unlike traditional IRAs, "qualified" distributions from a Roth IRA are tax-free, provided they are held for five years and are made after age 59 1/2, death or disability. You can establish a Roth IRA just as you would a traditional IRA. You can also convert assets in a traditional IRA to a Roth IRA.

Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert their traditional IRA (provided they were not married taxpayers filing separate returns). Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status.

Comment: While you can only contribute a maximum of $5,000 to a Roth IRA for 2010 (plus a $1,000 catch-up contribution if you are over age 50), you can convert an unlimited amount from a traditional IRA.

Conversion is treated as a taxable distribution of assets from the traditional IRA to the IRA holder, although it is not subject to the 10 percent tax on early distributions. While paying taxes on conversion is undesirable, the advantages of holding assets in a Roth IRA usually outweigh this disadvantage, especially if you will not be retiring soon. Furthermore, if you convert assets in 2010, you have the option of including them in income in 2011 and 2012 (50 percent each year) instead of 2010.

Comment: Generally, this income-splitting would be advantageous to any taxpayer who does not expect a sharp increase in income in 2011 or 2012. A wildcard factor is that the lower income tax rates that have been in effect since 2001 will expire after 2010 and could increase in 2011.

There are four ways to convert a traditional IRA to a Roth IRA:

• A rollover - you receive a distribution from a traditional IRA and roll it over to a Roth IRA within 60 days;
• Trustee-to-trustee transfer - you direct the trustee of the traditional IRA to transfer an amount to the trustee of a Roth IRA;
• Same-trustee transfer - the trustee of the traditional IRA transfers assets to a Roth IRA maintained by the same trustee; or
• Redesignation - you designate a traditional IRA as a Roth IRA, instead of opening a new Roth account.

Comment: The account holder does not have to convert all of the assets in the traditional IRA.

Another advantage of converting assets from a traditional IRA to a Roth IRA is that you can change your mind and put the assets back into the traditional IRA. This is known as a recharacterization. You have until the due date, with extensions, for the return filed for the year of conversion. Thus, if you convert assets in 2010, you have until mid-October in 2011 to undo the conversion.

This ability to recharacterize the conversion allows you to use hindsight to check whether your assets declined in value after the conversion. Since you are paying taxes on the amount converted, a decline in asset value means that you paid taxes on phantom income that no longer exists. However, if you convert assets into multiple Roth IRAs, you can choose to recharacterize the assets in a Roth IRA that decreased in value, while maintaining the conversion for a Roth IRA's assets that appreciated in value.

The use of a Roth IRA can be a savvy investment, but whether to convert assets is not an easy decision. If you would like to explore your options, please contact this office.

When you receive cash other than the like-kind property in a like-kind exchange, the cash is treated as "boot." Boot does not render the transaction ineligible for non-recognition treatment but it does require you to recognize gain to the extent of the cash received. The same is true for other non-like-kind property. In other words, anything you receive in addition to the like-kind property, such as relief from debt from a mortgage or additional property that is not like-kind will force you to recognize the gain realized.

An illustration

An example helps to show the gain computation and basis adjustments in a like-kind exchange where boot is received:

You want to transfer land with an adjusted basis of $70,000 and a fair market value of $100,000 in a like-kind exchange. As replacement property you will receive land from Charlie that is like-kind to the one you will transfer. However, Charlie's land has a fair market value of only $80,000. To equalize the value of the like-kind properties being exchanged, Charlie will give you $20,000 in cash. Because the $20,000 is not like-kind property, the like-kind exchange rules treat it as boot and you will have to recognize gain to that extent. Your computation will be as follows:

  $80,000  FMV of like-kind land received
+ $20,000  cash received 
________
$100,000   Your amount realized
- 70,000  Your adjusted basis of the land transferred
________
  $30,000  Realized gain  

However, because you will receive only $20,000 of cash (boot), you will recognize only $20,000 of the gain realized. The rest of the gain or $10,000 will be preserved for a future date when the acquired property is recognized in a taxable transaction.

Basis adjustment. Gain that is not recognized when cash is present in a like-kind exchange will be "preserved" by adjusting your basis in the new property to reflect the remaining gain. The basis rules achieve the gain preservation by first allocating the gain realized to boot to the extent of its fair market value, then to the like-kind property in proportion to its relative fair market value.

The basis of the acquired property will be the adjusted basis of the property transferred, increased by recognized gain and decreased by loss recognized or money received in the exchange. In the above example, your adjusted basis in the replacement property will be $70,000. Because the fair market value of the replacement property is $80,000, the $10,000 of realized but unrecognized gain will be preserved in your adjusted basis.

Cash in excess of gain. In addition, if the fair market value of boot received exceeds the gain realized, only this amount of realized gain is recognized.

If, in our example, your adjusted basis were $90,000, your realized gain would only be $10,000 ($100,000 amount realized minus $90,000 adjusted basis).  In that case, your recognized gain would be limited to $10,000 even though you received $20,000 in cash.

Starting in 2010, the $100,000 adjusted gross income cap for converting a traditional IRA into a Roth IRA is eliminated. All other rules continue to apply, which means that the amount converted to a Roth IRA still will be taxed as income at the individual's marginal tax rate. One exception for 2010 only: you will have a choice of recognizing the conversion income in 2010 or averaging it over 2011 and 2012.

The Tax Increase Prevention and Reconciliation Act of 2005 eliminated the $100,000 adjusted gross income (AGI) ceiling for converting a traditional IRA into a Roth IRA. While this provision does not apply until 2010, now may be a good time to make plans to maximize this opportunity.

The Roth IRA has benefits that are especially useful to high-income taxpayers, yet as a group they have been denied those advantages up until now. Currently, you are allowed to convert a traditional IRA to a Roth IRA only if your AGI does not exceed $100,000. A married taxpayer filing a separate return is prohibited from making a conversion. The amount converted is treated as distributed from the traditional IRA and, as a consequence, is included in the taxpayer's income, but the 10-percent additional tax for early withdrawals does not apply.

Significant benefits

While recognizing income sooner rather than later is usually not smart tax planning, in the case of this new opportunity to convert a traditional IRA to a Roth IRA, the math encourages it. The difference is twofold:

1. All future earnings on the account are tax free; and
2. The account can continue to grow tax free longer than a traditional IRA without being forced to be distributed gradually after reaching age 70 ½.

These can work out to be huge advantages, especially valuable to individuals with a degree of accumulated wealth who probably won't need the money in the Roth IRA account to live on during retirement.

Example. Mary's AGI in 2010 is $200,000 and she has traditional IRA balances that will have grown to $300,000. Assuming a marginal federal and local income tax of about 40 percent on the $300,000 balance, the $180,000 remaining in the account can grow tax free thereafter, with distributions tax free. Further assume that Mary is 45 years of age with a 90 year life expectancy and money conservatively doubles every 15 years. She will die with an account of $1.44 million, income tax free to her heirs. If the Roth IRA is bequeathed to someone in a younger generation with a long life expectancy, even factoring in eventual required minimum distributions, the amount that can continue to accumulate tax free in the Roth IRA can be staggering, eventually likely to reach over $10 million.

Planning strategies

Now is not too early to start planning to take advantage of the Roth IRA conversion opportunity starting in 2010. While planning to maximize the conversion will become more detailed as 2010 approaches and your assets and income for that year are more measurable, there are certain steps you can start taking now to maximize your savings.

Start a nondeductible IRA

The income limits on both kinds of IRAs have prevented higher income taxpayers from making deductible contributions to traditional IRAs or any contributions to Roth IRAs. They could always make nondeductible contributions to a traditional IRA, but such contributions have a limited pay-off (no current deduction, tax on account income is deferred rather than eliminated, required minimum distributions).

While a taxpayer could avoid these problems by making nondeductible contributions to a traditional IRA and then converting it to a Roth IRA, this option was not available for upper income taxpayers who would have the most to benefit from such a conversion. With the elimination of the income limit for tax years after December 31, 2009, higher income taxpayers can begin now to make nondeductible contributions to a traditional IRA and then convert them to a Roth IRA in 2010. In all likelihood, there will be little to tax on the converted amount.

What's more, taxpayers with $100,000-plus AGIs should consider continue making nondeductible IRA contributions in the future and roll them over into a Roth IRA periodically. As a result, the elimination of the income limit for converting to a Roth IRA also effectively eliminates the income limit for contributing to a Roth IRA.

Example. John and Mary are a married couple with $300,000 in income. They are not eligible to contribute to a Roth IRA because their AGI exceeds the $160,000 Roth IRA eligibility limit. Beginning in 2006, the couple makes the maximum allowed nondeductible IRA contribution ($8,000 in 2006 and 2007, and $10,000 in 2008, 2009, and 2010). In 2010, their account is worth $60,000, with $46,000 of that amount representing nondeductible contributions that are not taxed upon conversion. The couple rolls over the $60,000 in their traditional IRA into a Roth IRA. They must include $14,000 in income (the amount representing their deductible contributions), which they can recognize either in 2010, or ratably in 2011 and 2012.

Assuming they have sufficient earned income each year thereafter (until reaching age 70 1/2), John and Mary can continue to make the maximum nondeductible contributions to a traditional IRA and quickly roll over these funds into their Roth IRA, thereby avoiding significant taxable growth in the assets that would have to be recognized upon distribution from a traditional IRA.

Rollover 401(k) accounts

Contributions to a Section 401(k) plans cannot be rolled over directly into a Roth IRA. The lifting of the $100,000 AGI limit does not change this rule. However, they often can be rolled over into a traditional IRA and then, after 2009, converted into a Roth IRA.

Not everyone can just pull his or her balance out of a 401(k) plan. A plan amendment must permit it or, more likely, those who are changing jobs or are otherwise leaving employment can choose to roll over the balance into an IRA rather than elect to continue to have it managed in the 401(k) plan.

For money now being contributed to 401(k) plans by employees, an even better option would be for those contributions to be made to a Roth 401(k) plan. Starting in 2006, as long as the employer plan allows for it, Roth 401(k) accounts may receive employee contributions.

Gather those old IRA accounts

Many taxpayers opened IRA accounts when they were first starting out in the work world and their incomes were low enough to contribute. Over the years, many have seen those account balances grow. These accounts now may be converted into Roth IRAs starting in 2010, regardless of income.

Paying the tax

In spite of all the advantages of a Roth IRA, a conversion is advisable only if the taxpayer can readily pay the tax generated in the year of the conversion. If the tax is paid out of a distribution from the converted IRA, that amount is also taxed; and if the distribution counts as an early withdrawal, it is also subject to an additional 10-percent penalty. For those planning to convert who may not already have the funds available, saving now in a regular bank or brokerage account to cover the amount of the tax in 2010 can return an unusually high yield if it enables a Roth IRA conversion in 2010 that might not otherwise take place.

Careful planning is key

Transferring funds between retirement accounts can carry a high price tag if it is done incorrectly. For those who plan carefully, however, converting from a traditional IRA to a Roth IRA can yield very substantial after-tax rates of return. Please feel free to call our offices if you have any questions about how the 2010 conversion opportunity should fit into your overall tax and wealth-building strategy.

The actual date a business asset is placed in service is important because it affects when depreciation may be claimed for tax purposes. Depreciation begins in the tax year that an asset is placed in service. The placed-in-service date is especially important in the case of end-of-tax year acquisitions.

If an asset is placed in service on December 31 by a calendar-year taxpayer, depreciation is claimed on that asset for that tax year. If the same asset is placed in service one day later on January 1, depreciation deductions cannot be taken before that new year. The placed-in-service date also determines whether certain mid-quarter and half-year "conventions" will apply, which can mean greater depreciation deductions if purchase and use are timed just before the quarter or mid-year cut off date.

An asset is placed in service on the date that it is in a condition or state of readiness for a specifically assigned function in a trade or business or the production of income, which is not necessarily the date of acquisition. An asset that is being used in a trade or business is clearly placed in service. However, an asset not put to use is most likely not placed in service, unless everything in the taxpayer's power has been done to put the asset to use. An example of this is a canal barge that was deemed placed in service in the year it was acquired despite not being used until the following tax year because the canals were frozen.

Another related rule is that an asset will not be considered placed in service until the business actually begins operations. For example air conditioners installed in a grocery store before the store's opening were not considered placed in service until the store was actually open for business. In many instances this is not a bad thing, since a startup business usually has a limited amount of income during its first year to offset with depreciation deductions. Depreciation deductions in that case generally are more valuable later in the business's development.

More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.

Your most important responsibility is depositing all of your payroll taxes on time. Before you do that, however, you have to know:

• Who are your taxable workers?
• What payroll taxes apply?
• What compensation is taxable?
• When are your payroll taxes due?
• What payroll and other returns should you file?

 Taxable workers

The first step is to determine who is a taxable worker. If you hire only independent contractors, they, and not you, are responsible for paying federal payroll taxes.

It's more likely that you hire employees.  In that case, you are responsible for withholding federal income tax and Social Security and Medicare taxes. You are also responsible for federal unemployment (FUTA) taxes along with any state taxes.

There are some exceptions to who is an employee for payroll taxes but they are few. The most common are real estate agents and direct sellers.

If you have any questions about the status of your workers, give our office a call. Misclassifying workers is a common mistake. If you treat an employee as an independent contractor, and your treatment is wrong, you will be liable for federal income tax and Social Security and Medicare taxes. They add up very quickly.

What taxes apply

Once you've determined that your workers are taxable employees, you have to determine what federal payroll taxes apply. Most employers must withhold federal income tax and Social Security and Medicare taxes. You are also liable for federal unemployment taxes (FUTA) but these are not withheld from an employee's pay. Only you pay FUTA taxes.

You have to withhold at the correct rate. Form W-4, which your employee fills out, tells you how much federal income tax to withhold for an employee. The Social Security, Medicare and FUTA tax rates are set by statute.

Failing to withhold at the correct rate is a surprisingly common mistake. Sometimes, an employee completes a new W-4 but the employer forgets to adjust his or her withholding. It's a good idea to review the W-4s of all your employees and make sure they are current.

Compensation

Almost every type of compensation, and not just wages, is taxable. The IRS wants its share of tips, bonuses, employee stock options, severance pay, and many other forms of compensation. This includes non-cash or in-kind compensation.

There are exceptions. Health insurance plans generally are not subject to federal payroll taxes. Per diem payments and other allowances, if they do not exceed rates set by the government, are generally not taxable as wages. Some fringe benefits are not taxable, such as employee discounts, an occasional taxi ride when an employee must work overtime and inexpensive holiday gifts.

Determining what compensation is taxable and what is not is often difficult. The complex tax rules are easy to misinterpret and you may be failing to withhold taxes on taxable compensation. It's a mistake that can be avoided with our help.

Deposit schedule

Most small employers deposit payroll taxes monthly. Large and mid-size businesses make semi-weekly deposits. Very small employers may make annual deposits.

Your deposit schedule is based on the total tax liability that you reported during a four-quarter "lookback" period. The lookback period begins July 1 and ends June 30. If you reported $50,000 or less of taxes for the lookback period, you make monthly deposits. If you reported more than $50,000, you make semi-weekly deposits.

Determining the lookback period is tricky. If the IRS finds that your lookback period is wrong, you could be heavily penalized for not making timely deposits. Your deposit schedule can also change and you have to know what can trigger a change.

Forms

If you withhold federal payroll taxes, you must file Form 941 quarterly. Of course, there are exceptions. The most important one is for very small employers. They file their returns annually instead of quarterly.

The IRS encourages employers to file Form 941 electronically. Depending on how large your business is, you may have no choice but to file electronically. A common mistake is filing more than one Form 941 quarterly. This only causes unnecessary delays.

Penalties are costly

Often, a small business just doesn't have the cash on hand to make a timely deposit. The owner thinks that he or she will double-up the next time and make things right. More often than not, that doesn't happen and the unpaid liability snowballs.

The penalties for failing to withhold or deposit federal income tax and Social Security and Medicare taxes are severe and they can be personal. If your business cannot pay the unpaid taxes, the IRS will go after you personally.

You may be using a payroll agent to pay your taxes. Keep in mind that you are still liable for those taxes if your agent doesn't pay them. Reliance on a payroll service, or anyone else, does not excuse your failure to pay.

Reporting obligations

Your payroll tax obligations also do not end with filing tax returns and depositing payments. You have reporting obligations to your employees and, in some cases, to your independent contractors.

Staying out of trouble with the IRS

Even if you believe you understand and are compliant with the federal payroll tax rules, give our office a call. The rules are riddled with exceptions that we haven't even touched on in this brief article. We'll take a look at your operations and make sure you are 100 percent compliant. It's worth avoiding any costly mistakes down the road.

Q: After what period is my federal tax return safe from audit? A: Generally, the time-frame within which the IRS can examine a federal tax return you have filed is three years. To be more specific, Code Sec. 6501 states that the IRS has three years from the later of the deadline for filing the return (usually April 15th for individuals) or, if later, the date you actually filed the return on a requested filing extension or otherwise. This means that if you file your 2014 return on July 10, 2015, the IRS will have until July 10, 2018 to look at it and "assess a deficiency;" not April 15, 2018.

Q: After what period is my federal tax return safe from audit?

A: Generally, the time-frame within which the IRS can examine a federal tax return you have filed is three years. To be more specific, Code Sec. 6501 states that the IRS has three years from the later of the deadline for filing the return (usually April 15th for individuals) or, if later, the date you actually filed the return on a requested filing extension or otherwise. This means that if you file your 2014 return on July 10, 2015, the IRS will have until July 10, 2018 to look at it and "assess a deficiency;" not April 15, 2018.

There are exceptions and caveats to this general principle, however. If you file prior to April 15, the IRS still has until April 15 of the third year that follows to audit your return. This means that if you filed an income tax return on February 10, 2017, you still won't be out-of-the-woods until April 15, 2020. For taxpayers who file fraudulent returns, incorrect returns with the intent to evade tax, and those who do not file at all, the IRS may open an audit at any time.

(Don't confuse the deadline for IRS tax assessments with your right to file a refund claim for an amount that you overpaid, either on a filed return or through withholding or estimated tax payments. That deadline is the later of three years from the filing deadline or two years from your last tax payment.)

You may also find some comfort in the practical IRS audit-cycle rhythm. While you are never truly beyond an audit until the statute of limitations has properly run, there are some general standards to keep in mind. Office audits are usually done within 1 1/2 years of the time the return was filed, and field office audits are complete by 2 1/2 years. The rule of thumb is that if you haven't been contacted within this time frame, you're probably not going to be. Especially for small businesses, the IRS has promised to shorten its normal audit cycle so that those taxpayers are not "left hanging" on potential tax liabilities (with interest and penalties) until the three-year limitations period has expired. Whether this shortened period happens, however, is still open to speculation. Most businesses should continue to make it a practice to keep "tax reserves" to cover such audit liabilities.

Whether a parent who employs his or her child in a family business must withhold FICA and pay FUTA taxes will depend on the age of the teenager, the amount of income the teenager earns and the type of business.

FICA and FUTA taxes

A child under age 18 working for a parent is not subject to FICA so long as the parent's business is a sole proprietorship or a partnership in which each partner is a parent of the child (if there are additional partners, the taxes must be withheld). FUTA does not have to be paid until the child reaches age 21. These rules apply to a child's services in a trade or business.

If the child's services are for other than a trade or business, such as domestic work in the parent's private home, FICA and FUTA taxes do not apply until the child reaches 21.

The rules are also different if the child is employed by a corporation controlled by his or her parent. In this case, FICA and FUTA taxes must be paid.

Federal income taxes

Federal income taxes should be withheld, regardless of the age of the child, unless the child is subject to an exemption. Students are not automatically exempt, though. The teenager has to show that he or she expects no federal income tax liability for the current tax year and that the teenager had no income tax liability the prior tax year either. Additionally, the teenager cannot claim an exemption from withholding if he or she can be claimed as a dependent on another person's return, has more than $250 unearned income, and has income from both earned and unearned sources totaling more than $800.

Bona fide employee

Remember also, that whenever a parent employs his or her child, the child must be a bona fide employee, and the employer-employee relationship must be established or the IRS will not allow the business expense deduction for the child's wages or salary. To establish a standard employer-employee relationship, the parent should assign regular duties and hours to the child, and the pay must be reasonable with the industry norm for the work. Too generous pay will be disallowed by the IRS.

For U.S. taxpayers, owning assets held in foreign countries may have a variety of benefits, from ease of use for frequent travelers or those employed abroad to diversification of an investment portfolio. There are, however, additional rules and requirements to follow in connection with the payment of taxes. Some of these rules are very different from those for similar types of domestic income, and more than a few are quite complex.

Two documents do not apply directly to federal income taxation, but are nevertheless highly important. The first of these is a Treasury form, Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. Any individual or organization that owns or has control over a bank or brokerage account must complete this form if the aggregate value of all such accounts under that taxpayer's ownership or control exceeds $10,000. The second such form is not a requirement per se, but taxpayers who have income in a foreign country with which the United States has a treaty would be seriously remiss in failing to complete it. IRS Form 8802, Application for United States Residency Certification, helps to speed and simplify the application process for eligible taxpayers claiming the benefits of tax treaties in connection with foreign taxes paid. Requirements for organizations that may have dual or layered status offer complications that depend on the type of entity, so these instructions must be parsed carefully.

Taxes on real and personal property held overseas are treated quite differently for purposes of federal income taxation, as opposed to the treatment of domestic property. Individuals may claim foreign real property taxes as itemized deductions on Schedule A of Form 1040, just as they would with U.S. real estate. However, taxes on personal property may only be deductible if used in connection with a trade or business or in the production of income.

U.S. taxpayers who own homes in foreign countries are eligible for the capital gains exclusion on the sale of a principal residence subject to the same requirements as domestic homeowners. Likewise, if a taxpayer derives rental income from a home, the rules for reporting income and deductions are the same. However, claiming depreciation expenses in connection with rental income subjects taxpayers to a different set of rules. Code Sec. 168(g) indicates that tangible property used predominantly outside the United States must be depreciated using the alternative depreciation system (ADS), rather than the modified accelerated cost recovery system (MACRS), and involves longer recovery periods. This is true whether the tangible property in question is the residence itself or household appliances contained therein, as well as any other tangible property.

Intangible property such as patents, licenses, trademarks, copyrights and securities produce a variety of types of income, and the taxation of such income may be subject to different rules than similar domestic income. The provisions for taxation of foreign income are often subject to modification by treaty, and the United States has negotiated treaties with over sixty nations.

Income from all sources must be reported in U.S. dollars, regardless of how it is paid. One exception to this rule is that if income is received in a currency that is not convertible to U.S. dollars because of prohibitions placed on conversion by the issuing country, then the taxpayer may choose when to report the income. The income may be reported either in the year earned, according to the most accurate valuation means available, with the taxes paid from other income, or the taxpayer may choose to wait until the currency becomes convertible again.