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Senate tax writers on Capitol Hill continue to discuss bipartisan retirement savings bills as the House gears up for a vote on a related tax measure.

The Senate Finance Committee (SFC) held a May 14 hearing during which lawmakers on both sides of the aisle highlighted the importance of moving forward with retirement savings-related legislative efforts. While a number of related tax proposals have been introduced recently, SFC lawmakers paid particular focus to the bipartisan Retirement Enhancement Savings Bill, more commonly referred to as “RESA.”

“[T]his committee worked on a bipartisan basis to put together the [RESA],” SFC ranking member Ron Wyden, D-Ore., said during opening statements. “Our bill is all about making it easier for employers -- particularly small businesses -- to offer retirement plans to their employees,” Wyden added. “Giving those small businesses an opportunity to band together and offer a common retirement plan is a simpler and more cost-effective way of helping more people save.”

House Vote Expected on Secure Bill

Notably, the Senate’s RESA bill has many similarities to the House’s Setting Every Community Up for Retirement Enhancement (SECURE) Bill of 2019 (HR 1994). The bipartisan SECURE Bill is expected to reach the House floor for a full chamber vote in the coming days.

“We’re on track to go to the House floor this month,” Kara Getz, chief tax counsel for House Ways and Means Committee Chairman Richard Neal, DMass., has said. Getz, while speaking on May 10 at the American Bar Association (ABA) May Tax Meeting in Washington, D.C., said that the House bill is derived from a true “partnership” between Democrats and Republicans.

To that end, SFC Chairman Chuck Grassley, R-Iowa, alluded during the May 14 hearing that the Senate and House measures could soon be reconciled and enacted. “I’m hoping that the House will send its version of RESA over to us at some point this month,” Grassley said. “And, I’ll continue to work closely with Senator Wyden and other Committee members to reconcile the differences and get this important bill to the President.”

Additionally, Drew Crouch, senior tax counsel for the SFC minority, while speaking on May 10 at the ABA May Meeting, stated that there is a “high probability” the retirement bill(s) will be enacted this year. Crouch further emphasized this position by adding that that there is a “high chance retirement legislation will make it across the finish line,” in this Congress.

Retirement Savings 2.0

Meanwhile, House and Senate lawmakers are already working toward Retirement Savings “2.0,” Getz stated at the ABA May Meeting. House tax writers are “actively working on 2.0,” Getz said, adding that, “we would really like to markup a second retirement bill.”

Likewise, Grassley alluded to the Retirement Savings 2.0 initiative on May 14, noting in his
opening statement that the SFC hearing “marks the start of our work on the next round of retirement savings reforms.”

To that end, SFC members Rob Portman, R Ohio, and Ben Cardin, D-Md., on March 14 introduced
a 132-page bipartisan retirement savings tax bill. The Retirement Savings & Security Bill would
make several sweeping reforms to retirement savings.

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President Donald Trump and Democratic congressional leaders have agreed to develop a $2 trillion infrastructure plan, according to Senate Minority Leader Chuck Schumer, D-N.Y.

$2 Trillion Infrastructure Plan

"There was goodwill in this meeting…which is a very good thing," Schumer told reporters at the White House on April 30 after meeting with Trump. "We agreed on a number – $2 trillion for infrastructure,"Schumer said. Further, House Speaker Nancy Pelosi, D-Calif., and Schumer both praised Trump after the meeting for his bipartisan cooperation.

The president and Democratic leaders were to meet again to discuss how to pay for the infrastructure plan, Schumer said. At that time, Trump is expected to convey his ideas on funding, Schumer added. "This was a very, very good start…and we hope it will go to a constructive conclusion."

“Pay-Fors”

Additionally, Schumer told reporters at the White House that the infrastructure plan’s "pay-fors"remained undetermined. Notably, Schumer suggested from the Senate floor on April 29 rolling back part of Republicans’ 2017 tax reform law to fund infrastructure costs.

Generally, infrastructure is considered a bipartisan priority among lawmakers. However, reaching an agreement on how to pay for the reportedly $2 trillion infrastructure plan that is still in development is expected on Capitol Hill to be an arduous task. Namely, Democrats are expected to propose scaling back certain tax cuts under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) to foot the infrastructure bill, which is not likely to receive GOP support.

"That’s a non-starter" Senate Majority Leader Mitch McConnell, R-Ky., told reporters at the U.S. Capitol on April 30. "This tax bill [TCJA] is what has generated this robust economy; the last thing we want to do is step on all of this growth…by repealing in effect what has generated all of this prosperity and low unemployment," McConnell said.

White House: Meeting Excellent, Productive

Meanwhile, the White House praised the April 30 infrastructure meeting between Trump and top congressional Democrats, calling it "excellent and productive," as noted in a statement released by White House Press Secretary Sarah Huckabee Sanders shortly after the meeting. Notably, however, the statement did not mention the $2 trillion figure allegedly agreed upon by Trump and Democratic congressional leadership.

"We will have another meeting in three weeks to discuss specific proposals and financing methods,"Sanders added. "The president looks forward to working together in a bipartisan way and getting things done for the American people."

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Highly anticipated proposed regulations have been issued on the withholding required with respect to the disposition of certain partnership interests. The proposed regulations affect certain foreign persons that recognize gain or loss on the disposition of an interest in a partnership that is engaged in a trade or business in the United States, and persons that acquire those interests. Also affected are partnerships that directly or indirectly have foreign partners.

Gain or loss from the disposition of a partnership interest is treated as income effectively connected to a U.S. trade or business, to the extent that there would have been effectively connected income to the foreign partner, if the partnership assets were sold under Code sec. 864(c)(8). The withholding rules of Code Sec. 1446(f) require 10 percent withholding on the amount realized on the disposition, absent certification that the transferor is not a nonresident alien or foreign corporation.

The proposed regulations are a companion to Proposed Reg. 1.864(c)(8)-1 issued in December 2018, on gain or loss by foreign persons on the disposition of a partnership interest.

Reporting, Withholding and Paying Tax

The proposed regulations provide rules for withholding, reporting and paying tax upon the disposition of a partnership interest in a partnership described in Code Sec. 864(c)(8) and Proposed Reg. 1.864(c)(8)-1. The proposed regulations adopt much of the temporary guidance issued in Notice 2018-29, I.R.B. 2018-16, 495, which looked to the rules for withholding on dispositions of U.S. real property interests by foreign persons in Code Sec. 1445.

The proposed regulations also:

clarify the reporting rules for transfers of partnership interests under Code Sec. 6050(k),
provide rules for implementing withholding by brokers on transfers of certain interests in publicly traded partnerships,
make changes to withholding rules for distributions by publicly traded partnerships,
make changes to reporting rules and procedures for adjusting withholding; and
provide coordination rules to prevent overwithholding.

A transferee is required to report and pay any tax withheld by the 20th day after the date of the transfer. Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

The proposed regulations also provide rules that address a partnership’s requirement to withhold if the transferee fails to withhold.

General Rule and Exceptions

A transferee of a partnership interest must withhold a tax equal to 10 percent of the amount realized on any transfer of a partnership interest (other than certain publicly traded partnership interests), if the gain is treated as effectively connected income.

There are six exceptions to withholding under the proposed regulations:

certification by transferor of non-foreign status,
certification by transferor that no gain is realized on transfer by transferor,
certification by partnership that effectively connected gain from the disposition would be less than 10 percent,
certification by transferor that for prior three tax years its effectively connected taxable income for each year was less than 10 percent of its total distributive share of net partnership income for the year;
certification by transferor that a nonrecognition provision applies, and
certification by transferor that a treaty provision applies.

Publicly Traded Partnership Interests

The proposed regulations provide rules for withholding and reporting on the transfer of an interest in a publicly traded partnership (a PTP interest). The withholding obligation is generally limited to brokers that receive proceeds from the sale and act on behalf of the transferor. Once the proposed regulations are final, the suspension on withholding on a PTP interest in Notice 2018-08, I.R.B. 2018-7, 352, will end.

Notice Requirements

A foreign partner that transfers its partnership interest will need information from the partnership to compute its tax liability based on the deemed sale. Rules are provided that will facilitate the transfer of information between a foreign partner and partnership for purposes of Code Sec. 864(c)(8).

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Proposed regulations provide rules on the attribution of ownership of stock or other interests for determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under the foreign base company sales income rules.

The proposed regulations also provide rules to determine whether a CFC receives rents in the active conduct of a trade or business, for determining the exception from foreign personal holding company income.

Ownership Attribution

The proposed regulations provide specific rules for applying principles similar to those in the Code Sec. 958(b) constructive ownership rules when determining related person status under the foreign base company sales rules. Determining related person status is relevant for many purposes, including whether certain types of income can be characterized as subpart F foreign base company sales or service income.

A person is a related person with respect to a CFC if the person is:

an individual who controls the CFC;
an entity that controls or is controlled by the CFC; or
an entity that is controlled by the same person that controls the CFC.

Under current Reg. §1.954-1(f), the Code Sec. 318(a)(3) downward attribution rules, which attribute ownership downward from the owner of an entity to an entity, apply by reference to the Code Sec. 958stock ownership rules. These rules are applied regardless of the size of the ownership interest in a partnership, estate or trust, but are applied to corporations based on a 50-percent or more ownership interest.

Based on concern that the downward attribution rules could produce inappropriate results, the proposed regulations provide that the downward attribution rule of Code Sec. 318(a)(3) and Reg. §1.958-2(d) will not apply for purposes of determining related person status under the foreign base company sales income rules.

This change does not preclude a corporation, partnership, trust, or estate from being treated as controlled by the same person or persons that control the CFC under other rules that remain applicable for the related person rules.

Additionally, an anti-abuse rule is provided with respect to the option attribution rule in Code Sec. 318(a)(4). The option attribution rule will not be applied to treat a person with an option as owning the stock or equity interest for purposes of the related person rule if the principal purpose of using the option was to cause a person to be treated as a related person.

The proposed regulations also incorporate a similar rule issued in Notice 2007-9, 2007-1 CB 401. The rule applies if the principal purpose for the use of an option is to qualify dividends, interest, rents or royalties paid by a foreign corporation for the Code Sec. 954(c)(6) CFC look-through exception from foreign personal holding company income. The rule is proposed to apply for tax years of CFCs beginning after December 31, 2006, and ending before the date that final regulation are published in the Federal Register, and for tax year of U.S. shareholders in which or with which such tax years end.

Foreign Personal Holding Company Rules

The proposed regulations modify the foreign personal holding company rules on amounts paid or incurred by a CFC in connection with the CFC’s rental income and the active rents exception. Rents are excluded from foreign personal holding company income if they are:

received from a person other than a related person; and
from the active conduct of a trade or business.

If rents are from leasing property as a result of marketing activities, there must be a substantial marketing organization in order to meet the active trade or business test. Under a safe harbor, an organization is substantial if active leasing expenses equal or exceed 25 percent of adjusted leasing profit. If the CFC receives rents from property it does not own, the substantiality of the organization is determined net of those rent payments.

The propose regulations extend the rule to apply to royalties, in addition to rents. As a result, the substantiality of the organization is determined under the safe harbor, net of the rents or royalties paid or incurred by the lessor CFC, for the right to use the property (or a component part of the property) that generated the rental income.

Applicability Date

The proposed regulations are generally proposed to apply to tax years of CFCs ending on or after the date the final regulations are published in the Federal Register, and for tax year of U.S. shareholders in which or with which such tax years end.

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Final regulations have been issued on transactions of U.S. taxpayers that have qualified business units (QBUs) with functional currency other than the U.S. dollar.

Final regulations have been issued on transactions of U.S. taxpayers that have qualified business units (QBUs) with functional currency other than the U.S. dollar. Specifically, the final regulations:

cover combinations and separations of QBUs subject to Code Sec. 987 (Reg. 1.987-2 and Reg. 1. 987-4),
cover recognition and deferral of foreign currency gain or loss with respect to a QBU subject to Code Sec. 987 in connection with certain QBU terminations and other transactions involving partnerships (Reg. 1. 987-12), and
withdraw Temporary regulations that determine a partner’s share of assets and liabilities of a Code Sec. 987 aggregate partnership (Temporary Reg. 1.987-7T). In general, the regulations prevent the selective recognition of Code Sec. 987 gain or loss.

Applicability Dates

The IRS declined to extend the applicability of these provisions. The final regulations retain the applicability dates of the temporary regulations, as extended by IRS guidance. The final regulations under Reg. 1.987-2 and Reg. 1. 987-4 generally apply to tax years beginning on or after the day that is three years after the first day of the first tax year following December 7, 2016. The final regulations under Reg. 1. 987-12 generally apply to any deferral event or outbound loss event that occurs on or after January 6, 2017.

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Medicaid waiver payments were earned income, even though IRS Notice 2014-7 treated them as “difficulty of care” foster care payments that were excluded from gross income. The Tax Court held that excluding the payments from earned income would improperly deny the taxpayers’ earned income credit and the additional child tax credit.

IRS Excludes Medicaid Waiver Payments From Gross Income

The taxpayers received payments under a state Medicaid waiver program for proving care to their adult disabled children in the family home. IRC §131 excludes foster care payments from gross income, but it applies only when the foster individuals are placed in the caregiver’s home by the state. Despite the statutory language, however, Notice 2014-7 treats Medicaid waiver payments as excludable “difficulty of care” foster payments. Thus, the taxpayers excluded the payments from their gross income.

Gross Income Vs. Earned Income

However, the taxpayers included the payments in their earned income, which allowed them to claim the earned income credit and the additional child tax credit. The IRS denied the credits, arguing that only gross income can be earned income. The Tax Court sided with the taxpayers.

No Deference For Notice 2014-7

The court concluded that Notice 2014-7 was entitled to little if any deference for two reasons:

The taxpayers’ payments did not satisfy the plain statutory definition of excludable foster care payments.
The notice reversed the IRS’s long-held position that payments like these were not foster care payments

Although the Medicaid waiver payments were not covered by §131, they absolutely fell within the statutory definition of “earned income.” The IRS could not rely on Notice 2014-7 to deny credits that Congress clearly intended to provide for earned income.

IRS, Not Congress, Provided Double Benefit

Finally, the court recognized that the taxpayers were receiving an unintended double benefit, because they were getting tax credits that were based on tax-free income. However, this was only because the IRS:

unilaterally decided to exclude Medicaid waiver
payments from gross income, and
failed to argue that if the Tax Court included the payments in earned income, they should also be included in gross income.

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The House on April 18 approved the two largest bills of a bipartisan IRS reform package. On April 17, the House approved seven other bills, by voice vote, which are also part of the larger bipartisan package. Its aim is to restructure the IRS for the first time in 20 years. The entire package of bills was approved by the Ways and Means Committee several weeks ago.

"Congress this week, the House this week, will undertake the first major reform of the IRS in more than two decades," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an April 17 leadership press briefing. "A new tax code really demands a new tax collector – and, Republicans and Democrats together, are launching reforms that create a ‘Taxpayer First’ IRS."

In an April 18 statement, Brady further remarked that "[w]ith this package, we are taking a monumental step in redesigning the IRS for first time in 20 years, refocusing the agency to live up to its mission of quality service, and reining in its enforcement powers to prevent future abuse."

IRS Reform
The Taxpayer First Act (HR 5444), which is the lead bill, passed by a 414-to-3 vote. HR 5444, proposes changes to the IRS’s appeals process and customer service programs, and would implement other organizational restructuring.

The 21st Century IRS Act (HR 5445) was approved 414-to-0. HR 5445 focuses primarily on improving cybersecurity and taxpayer identity protection, and modernizing IRS information technology.

In addition, the House approved seven bills by unanimous consent on April 17: HR 2901, HR 5440, HR 5438, HR 5446, HR 5437, HR 5439, and HR 5443. The measures include proposals to establish a single point of contact for tax-related identity theft victims, expand the use of Low-Income Taxpayer Clinics (LITCs), and require electronic filing for certain tax-exempt organizations, among other things.

The IRS reform package has no effect on revenue, according to the Joint Committee on Taxation (JCT) ( JCX-10-18).

Senate
How the IRS reform bills will fare in the Senate remains to be seen. Although Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah, has commended the House’s efforts toward restructuring the IRS, no word has been released as for when the Senate will consider the measure.

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Much-anticipated withholding tables for 2018 have been posted by the IRS. While the new withholding tables are designed to work with existing Forms W-4, the agency encouraged taxpayers to use its online withholding calculator to make adjustments if necessary. New Forms W-4, Employee’s Withholding Allowance Certificate, will be released for 2019 withholding; withholding for 2018 will adapt to existing Forms W-4 already submitted by employees. Based upon the specific impact of the new tax law on their situations, some employees may wish to file a revised Form W-4 to supplement revisions to the withholding tables already being made by the IRS.

The IRS’s online withholding calculator is being reprogramed for the Tax Cuts and Jobs Act. IRS officials told reporters in Washington, D.C that the updated withholding calculator is expected to be online in February. The guidance also sets the rates at 22 percent for optional flat-rate withholding on supplemental wages below $1 million, at 37 percent on supplemental wages on $1 million and above, and 24 percent for backup withholding.

Background

The amount withheld from an employee's wages is determined in part by the number of withholding exemptions and allowances the employee claims. For each exemption or allowance claimed, an amount equal to one personal exemption, prorated to the payroll period, is subtracted from the total amount of wages paid. This reduced amount, rather than the total wage amount, is subject to withholding.

A withholding table shows employers and payroll service providers how much federal tax to withhold from employee paychecks, given each employee’s wages, marital status and the number of withholding allowances claimed. Employees provide their employers with Form W-4 so employers can withhold the correct amount of federal tax.

The Tax Cuts and Jobs Act overhauls the Tax Code. The new law lowers individual income tax rates, revises the child tax credit, repeals the personal exemption deduction, and makes countless other changes.

Withholding for 2018

For 2018, the amount of one withholding allowance on an annual basis increases to $4,150. The amount of one withholding allowance on an annual basis for 2017 was $4,050.

For 2018, the withholding allowance amounts by payroll period are:

Weekly: $79.80
Biweekly: $159.60
Semimonthly: $172.90
Monthly: $345.80
Quarterly: $1,037.50
Semiannually: $2,075
Daily or miscellaneous (each day of payroll period): $16

The IRS instructed employers and payroll service providers to start using the new withholding tables as soon as possible, but no later than February 15, 2018. Until employers and payroll service providers implement the revised withholding tables, they should continue to use the 2017 tables, the IRS added.

Form W-4

Taxpayers will not need to complete new Forms W-4 immediately. "The new withholding tables are designed to minimize taxpayer burden as much as possible and will work with Forms W-4 that workers have already filed with their employers to claim withholding allowances," the IRS explained. Further, transition rules temporarily permit employees to claim exemption from withholding for 2018 by using 2017 Form W-4. The deadline to claim exemption from income tax withholding in either case has been extended to February 28, 2018.

In the meantime, taxpayers should check their withholding, the IRS recommended. "Taxpayers who itemize their deductions, couples with multiple jobs or individuals with more than one job are encouraged to review their situation," the IRS explained.

Comment. "The new withholding guidance, developed jointly by Treasury's Office of Tax Policy and the IRS, was constructed to work within the constraints of the existing payroll withholding system in order to deliver the benefits of the tax cuts as soon as possible, to as many Americans as possible, and with as little disruption as possible," Treasury Secretary Steven Mnuchin told reporters in Washington, D.C. "The withholding tables are designed to work with the Forms W-4 that workers have already filed with their employers. This will minimize burden on taxpayers and employers," he predicted.

Comment. Senate Finance Committee ranking member Ron Wyden, D-Oregon, has asked the Government Accountability Office (GAO) to review the new withholding tables and determine if the tables "would result in the systematic underwithholding of federal taxes from employee paychecks." Wyden and other Democrats in Congress have voiced concerns that the White House is "politically interfering with the development of the 2018 withholding tables."

Supplemental wages

An employee may receive, in addition to regular wage payments, supplemental wages. If supplemental wages are paid concurrently (for example, in a single payment) with regular wages, and the employer does not specify the amount of each, the supplemental wages are combined with the regular wages for the pay period for purposes of determining the proper withholding amount. If the supplemental wages are not paid concurrently with regular wages, or if they are paid concurrently but the employer specifies the amount of each, two different methods of calculating the amount of withholding on the supplemental wages are available. If supplemental wages exceed $1 million during the calendar year, the excess is subject to withholding at 37 percent, effective this year, the IRS explained.

Comment. Examples of supplemental wages include bonuses, commissions, overtime pay, wages paid under reimbursement or other expense allowance arrangements, dismissal pay, vacation pay, back pay, and nonqualified deferred compensation. Other types of supplemental wages include payments for unused accumulated leave and separate payments representing sick pay and regular wages.

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The Tax Cuts and Jobs Act did not directly change the tax rate on capital gains: they remain at 0, 10, 15 and 20 percent, respectively (with the 25- and 28-percent rates also reserved for the same special situations). However, changes within the new law impact both when the favorable rates are applied and the level to which to may be enjoyed.

Capital gains rates

The maximum rates on net capital gain and qualified dividends are generally retained after 2017 and are 0 percent, 15 percent, and 20 percent. The breakpoints between the zero- and 15-percent rates ("15-percent breakpoint") and the 15- and 20-percent rates ("20-percent breakpoint") are generally the same amounts as the breakpoints under prior law, except the breakpoints are indexed using the new C-CPI-U factor in tax years beginning after 2018. For 2018:

the 15-percent breakpoint is $77,200 for joint returns and surviving spouses (one-half of this amount ($38,600) for married taxpayers filing separately), $51,700 for heads of household, $2,600 for estates and trusts, and $38,600 for other unmarried individuals; and
The 20-percent breakpoint is $479,000 for joint returns and surviving spouses (one-half of this amount for married taxpayers filing separately), $452,400 for heads of household, $12,700 for estates and trusts, and $425,800 for other unmarried individuals.

“Zero” rate. In the case of an individual (including an estate or trust) with adjusted net capital gain, to the extent the gain would not result in taxable income exceeding the 15-percent breakpoint, such gain is not taxed.

Comment. The breakpoints are not aligned with the new general income tax rate brackets. For example, alignment for joint filers would have the 15-percent breakpoint at $77,400 rather than $77,200; and, more significantly, 20 percent at $600,000 rather than at $479,000. Instead, they continue the alignment themselves more closely to the prior-law rate brackets.

Comment. As under prior law, unrecaptured section 1250 gain generally is taxed at a maximum rate of 25 percent, and 28-percent rate gain is taxed at a maximum rate of 28 percent. In addition, an individual, estate, or trust also remains subject to the 3.8 percent tax on net investment income (NII tax).

Kiddie tax

Effective for tax years beginning after December 31, 2017, and before January 1, 2026, the "kiddie tax" is simplified by effectively applying ordinary and capital gains rates applicable to trusts and estates to the net unearned income of a child. A child’s "kiddie tax" is no longer affected by the tax situation of his or her parent or the unearned income of any siblings.

Taxable income attributable to net unearned income is taxed according to the brackets applicable to trusts and estates, with respect to both ordinary income and income taxed at preferential rates. For 2018, that means that the 15-percent capital gain rate starts at $2,600 and rising to 20 percent when $12,700 is reached.

Carried interest

Capital gain passed through to fund managers via a partnership profits interest (carried interest) in exchange for investment management services must meet an extended three-year holding period to qualify for long-term capital gain treatment. Under new Code 1061(a), if a taxpayer holds an applicable partnership interest at any time during the tax year, this rule treats carried interest as short-term capital gain—taxed at ordinary income rates— based on a three-year holding period instead of the usual one-year period.

SSBIC rollovers

For sales after 2017, the new law repeals the election to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sale proceeds to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC). Prior to 2018 under former Code Sec. 1044, C corporations and individuals could elect to defer recognition of capital gain realized on the sale of publicly traded securities if the taxpayer used the sales proceeds within 60 days to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC).

Like-kind exchanges

Like-kind exchanges have often been used to defer taxable gains. Going forward, like-kind exchanges are allowed only for real property after 2017 (Code Sec. 1031(a)(1)). Like-kind exchanges are no longer available for depreciable tangible personal property, and intangible and nondepreciable personal property after 2017. Gain on those assets will no longer be allowed to be deferred.

Code Sec. 199A deduction

The concept of capital gain is intertwined within the new passthrough deduction for partnerships, S corporations and sole proprietorships under Code Sec. 199A in several ways. A noncorporate taxpayer can claim a Code Sec. 199A deduction for a tax year for the sum of—

(1)

the lesser of —

(a) the taxpayer’s "combined qualified business income amount"; or

(b) 20 percent of the excess of the taxpayer’s taxable income over the sum of (i) the taxpayer’s net capital gain under Code Sec. 1(h) and (ii) the taxpayer’s aggregate qualified cooperative dividends; plus

(2)

the lesser of —

(a) 20 percent of the taxpayer’s aggregate qualified cooperative dividends; or

(b) the taxpayer’s taxable income minus the taxpayer’s net capital gain (Code Sec. 199A(a), as added by the 2017 Tax Cuts Act).

Comment. As a result, the Code Sec. 199A deduction cannot be more than the taxpayer’s taxable income reduced by net capital gain for the tax year, making monitoring of capital gains a “must” for some taxpayers.

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The Tax Cuts and Jobs Act increases bonus depreciation rate to 100 percent for property acquired and placed in service after September 27, 2017, and before January 1, 2023. The rate phases down thereafter. Used property, films, television shows, and theatrical productions are eligible for bonus depreciation. Property used by rate-regulated utilities, and property of certain motor vehicle, boat, and farm machinery retail and lease businesses that use floor financing indebtedness, is excluded from bonus depreciation.

The Tax Cuts and Jobs Act increases bonus depreciation rate to 100 percent for property acquired and placed in service after September 27, 2017, and before January 1, 2023. The rate phases down thereafter. Used property, films, television shows, and theatrical productions are eligible for bonus depreciation. Property used by rate-regulated utilities, and property of certain motor vehicle, boat, and farm machinery retail and lease businesses that use floor financing indebtedness, are excluded from bonus depreciation.

Timing Details

The 50-percent bonus depreciation rate applicable before the new law took effect has been increased to 100 percent for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The 100-percent allowance continues for five years, after which it is then phased down by 20 percent per calendar year for property placed in service after 2022. In general, the bonus depreciation percentage rates are as follows:

100 percent for property placed in service after September 27, 2017, and before January 1, 2023;
80 percent for property placed in service after December 31, 2022, and before January 1, 2024;
60 percent for property placed in service after December 31, 2023, and before January 1, 2025;
40 percent for property placed in service after December 31, 2024, and before January 1, 2026;
20 percent for property placed in service after December 31, 2025, and before January 1, 2027;
0 percent (bonus expires) for property placed in service after December 31, 2026.

Property acquired before September 28, 2017. Property acquired before September 28, 2017, is subject to the 50-percent rate if placed in service in 2017, a 40-percent rate if placed in service in 2018, and a 30-percent rate if placed in service in 2019. Property acquired before September 28, 2017, and placed in service after 2019 is not eligible for bonus depreciation. However, in the case of longer production property (LPP) and noncommercial aircraft (NCA), each of these placed-in-service dates is extended one year. Thus, a 50 percent rate applies to LPP and NCA acquired before September 28, 2017 and placed in service in 2017 or 2018, a 40 percent rate applies if such property is placed in service in 2019, and a 30 percent rate applies if such property is placed in service in 2020. They continue to apply to property acquired before the September 28, 2017, cut-off date set by Congress.

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The IRS has released the 2018 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, medical, moving and charitable purposes. Beginning on January 1, 2018, the standard mileage rates for the use of a car, van, pickup of panel truck will be:

54.5 cents per mile for business miles driven (up from 53.5 cents in 2017);
18 cents per mile for medical and moving expenses (up from 17 cents in 2017); and
14 cents per mile for miles driven for charitable purposes (permanently set by statute at 14 cents).

Comment. A taxpayer may not use the business standard mileage rate after using a depreciation method under Code Sec. 168 or after claiming the Code Sec. 179 deduction for that vehicle. A taxpayer may not use the business rate for more than four vehicles at a time. As a result, business owners have a choice for their vehicles: take the standard mileage rate, or “itemize” each part of the expense (gas, tolls, insurance, etc., and depreciation).

The IRS has released the 2018 optional standard mileage rates to be used to calculate the deductible costs of operating an automobile for business, medical, moving and charitable purposes. Beginning on January 1, 2018, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

54.5 cents per mile for business miles driven (up from 53.5 cents in 2017);
18 cents per mile for medical and moving expenses (up from 17 cents in 2017); and
14 cents per mile for miles driven for charitable purposes (permanently set by statute at 14 cents).

Comment. A taxpayer may not use the business standard mileage rate after using a depreciation method under Code Sec. 168 or after claiming the Code Sec. 179 deduction for that vehicle. A taxpayer may not use the business rate for more than four vehicles at a time. As a result, business owners have a choice for their vehicles: take the standard mileage rate, or “itemize” each part of the expense (gas, tolls, insurance, etc., and depreciation).

New depreciation limits under the Tax Cuts and Jobs Act

The new “Tax Cuts and Jobs Act” recently passed by Congress and signed into law by President Trump raises the cap placed on depreciation write-offs of business-use vehicles. The new caps will be:

$10,000 for the first year a vehicle is placed in service (up from a current level of $3,160);
$16,000 for the second year (up from $5,100); $9,600 for the third year (up from $3,050); and
$5,760 for each subsequent year (up from $1,875) until costs are fully recovered.

For passengers autos eligible for bonus first-year depreciation, that maximum first-year bonus depreciation allowance remains at $8,000 (raising the first-year write-off to $18,000). The new, higher limits only apply to vehicles placed in service after December 31, 2017.

Comment. For vehicles placed in service in 2018, the preceding caps will apply to all types of vehicles. However, the IRS figures inflation adjustments differently for (1) trucks (including SUVs treated as trucks) and vans and (2) regular passenger cars. Thus, beginning in 2019 when these figures are first adjusted for inflation, separate inflation adjusted caps will be provided for (1) trucks (including SUVs) and vans and for (2) regular passenger cars.

Also, the $25,000 section 179 expensing limit on certain heavy SUVs is inflation-adjusted after 2018. The $25,000 limit applies to a sport utility vehicle, a truck with an interior cargo bed length less than six feet, or a van that seats fewer than 10 persons behind the driver’s seat if the vehicle is exempt form the Code Sec. 280F annual depreciation caps because it has a gross vehicle weight rating in excess of 6,000 pounds or is otherwise exempt.

For a discussion of what’s best for your business situation, please contact our offices.

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January 1, 2018 not only brings a new year, it brings a new federal Tax Code. The just-passed Tax Cuts and Jobs Act makes sweeping changes to the nation’s tax laws. Many of these changes take effect January 1. Everyone – especially individuals and business owners – needs to review their tax strategies for the new law. The changes are huge. However, many changes are temporary, especially for individuals.

Individuals

Individuals who work for wages will see the impact of the new law on their paychecks. The Tax Cuts and Jobs Act sets forth seven individual tax rates: 10, 12, 22, 24, 32, 35, and 37 percent. Before 2018, these rates were 10, 15, 25, 28, 33, 35, and 39.6 percent. Because the tax rates have changed for 2018, federal income tax withholding also must change.

The IRS has promised to publish new withholding tables as soon as possible. Most likely, the IRS will post the new withholding tables this month. After the IRS posts the new withholding tables, employers will likely have a transition period. Based on past changes to the tax laws, workers can generally expect to see the impact of the new law on their pay checks in February. Our office will keep you posted of developments.

The IRS also is expected to revise Form W-4. The new law repeals the deduction for personal exemptions after 2017.

Business entities

Perhaps nowhere else does the new law turn traditional tax planning on its head more than choice of business entity. Business owners need to immediately start thinking about how they want to structure their business in 2018 and beyond.

For corporations, the Tax Cuts and Jobs Act lowers the corporate tax rate to 21 percent effective January 1, 2018. This change is permanent.

The Tax Cuts and Jobs Act also changes the tax treatment of pass-through businesses. These are partnerships, S corporations and others, which have been extremely popular choice of business entity in recent years. Very broadly, and the rules here are complex, the new law allows deductions for qualified business income of pass-throughs up to a certain percentage. This change is temporary and is scheduled to expire after 2025.

Business owners need to reevaluate their choice of entity. The corporate form may be more attractive for some business owners. The pass-through form may be less attractive. Adding complexity to the mix is the new law’s rules for certain businesses, such as law firms, and other professions. Please contact our office and we can discuss in detail these important changes.

Deductions and credits

Individuals who itemized deductions in past years may find that may no longer be the case under the new law. The Tax Cuts and Jobs Act temporarily increases the standard deduction (up to $24,000 for married couples filing a joint return and $12,000 for single individuals). The new law also places limits on the deduction for state and local taxes. Individuals may deduct state and local income, sales, property taxes up to $10,000. Gone are the days of an unlimited deduction for state and local taxes. This change is effective for 2018 and is scheduled to expire after 2025. Other popular deductions also are changed, including the medical expense deduction and the moving expense deduction.

Although the new law repeals the deduction for personal exemptions, it does enhance the child tax credit. The child tax credit increases from $1,000 to $2,000. The refundable portion also increases. The Tax Cuts and Jobs Act also creates a $500 credit for non-child dependents. These enhancements are temporary, scheduled to expire after 2025.

Alternative Minimum Tax

The Tax Cuts and Jobs Act does not repeal the alternative minimum tax (AMT) for individuals. Early on, AMT repeal seemed almost certain. However, Congress needed to keep the AMT because it raises significant revenues. The new law does increase the AMT exemption amounts.

What’s not in the new law?

The Tax Cuts and Jobs Act does not change the tax rates for capital gains and dividends. Also left unchanged are the many reporting and disclosure requirements under the Foreign Account Tax Compliance Act (FATCA).

The new law also does not repeal the Affordable Care Act’s taxes. The net investment income (NII) tax and the additional Medicare tax are left unchanged. This is also true for the ACA’s medical device tax, health insurance provider fee and excise tax on high-dollar health insurance plans. The new law also does not repeal the ACA’s shared responsibility payment for employers (it does effectively repeal the individual shared responsibility requirement).

IRS Guidance

Keep in mind that the new law leaves a lot of the details to the Treasury Department and the IRS to flesh-out. Guidance from the IRS may take some time. As discussed, payroll guidance seems to be the first item on the agency’s agenda. Guidance for the new tax treatment of pass-throughs also is likely to be high on its agenda. Our office will keep you posted of developments.

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The start of a New Year presents a time to reflect on the past 12 months and, based on what has gone before, predict what may happen next. Here is a list of the top 10 developments from 2017 that may prove particularly important as we move forward into the New Year:

#1: Tax Cuts and Jobs Act

A sweeping rewrite of the nation’s tax laws passed Congress in late 2017. The Tax Cuts and Jobs Act permanently lowers the corporate tax rate, and temporarily lowers the individual tax rates. Shareholders, partners and sole proprietors are poised to reap unprecedented rate cuts due to new pass-through rules. The Act also temporarily enhances the child tax credit, the medical expense deduction, bonus depreciation, small business expensing, and more. Lawmakers, however, did not repeal the federal estate or the alternative minimum tax (AMT) for individuals, although they did add temporary sweeteners to these provisions. For more details and analysis, see the special Briefing, Tax Cuts and Jobs Act.

#2: Regulatory Resets and Reform

Since taking office, President Trump has issued several Executive Orders (EO) on regulations. EO 13789 directed the Treasury Department to review all significant tax regulations issued since January 1, 2016. In July, the Treasury Department identified eight recent tax regulations for reevaluation. The Treasury Department later withdrew two regs: Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes (REG-163113-02) and Proposed Regulations under Section 103 on Definition of Political Subdivision (REG-129067-15).

#3: Audit Coverage

The IRS’s latest Data Book, released in 2017, showed that the IRS audited 0.7 percent of all individual income tax returns in calendar year (CY) 2015, an all-time low. Approximately two-thirds of those individual audits were correspondence audits and one-third were field audits. The Treasury Inspector General for Tax Administration (TIGTA) later reported that the IRS examined one of every 143 individual income tax returns in fiscal year (FY) 2016. This reflected a 16 percent decline compared to FY 2015, according to TIGTA. The IRS examined one in 17 returns in FY 2016 with more than $1 million in income, which, according to TIGTA, represented a decline of 29 percent compared to FY 2015.

#4: Health Care

After dominating the first half of the 2017 news cycle, Congressional efforts to repeal and replace the Affordable Care Act eventually failed when the Senate Republicans’ "skinny repeal" legislation, the Health Care Freedom Bill, failed during a dramatic past-midnight vote on July 28. However, Republican efforts returned and were partially effective as the Tax Cuts and Jobs Act repealed the individual mandate by making the payment amount $0. In the meantime, however, the 3.8 percent net investment income tax (NII tax), and its “companion” 0.9 percent Additional Medicare Tax on compensation, which were enacted as part of the Affordable care Act, have not yet been repealed.

#5: The Gig or Sharing Economy

The IRS is taking notice of the gig, or sharing, economy. The Service opened a Sharing Economy Tax Center on its website, and is educating agents on relevant examination techniques. Activities in the sharing economy can vary and can range from selling goods online, advertising or other revenue from a website or blog, creating a crowdfunding site, short-term renting out a residence, or driving others for hire. More of these activities have come to the attention of the IRS as new Form 1099-K reporting requirements emerge for online and credit card transactions, as well as the use of Form 1099-MISC by large facilitators for service or goods providers.

#6: Cybersecurity

2017 saw the IRS reporting that it finally is turning the tide against fraudulent claims for refunds. The Service is working closely with software providers and using se IT to more closely monitoring patterns in filed tax returns. Delaying 2017 refunds for taxpayers claiming the earned income tax credit and the additional child tax credit also saw results. But while the situation surrounding refund-fraud is improving, it is far from eliminated, the IRS has emphasized.

#7: Virtual Currency

Bitcoin has become the virtual currency of-choice worldwide in just a short period of time. Bipartisan legislation was introduced in September in Congress to allow consumers to make small purchases with virtual currency (also known as cryptocurrency currency) of up to $600 without needing to satisfy current reporting requirements (the Cryptocurrency Tax Act of 2017). Meanwhile, many stakeholders said that IRS policy needs updating.

#8: Partnership Audit Rules

The new centralized partnership audit regime under the Bipartisan Budget Act of 2015 (BBA) replaces the current TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) procedures beginning for 2018 tax year audits, with an earlier "opt-in" for electing partnerships. These rules dramatically change the way that audit adjustments are imposed on the partnership and its partners. With an estimated one million-plus partners under the U.S. tax system, the importance of the centralized partnership audit regime cannot be underplayed. Partnerships and their partners, if they have not done so, should review partnership agreements to address these new issues.

#9: Bonus Depreciation/Section 179 Expensing

Because of their widespread applicability to businesses, especially those that are capital intensive, the new enhanced write-offs permitted under the new bonus depreciation and section 179 expensing enacted the Tax Cuts and Jobs Act deserves special mention. The new law increases the 50-percent "bonus depreciation" allowance to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft). A 20-percent phase-down schedule would then kick in. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property.

The section 179 dollar limitation is increased to $1 million and the investment limitation is increased to $2.5 million for tax years beginning after 2017. The definition of qualified real property eligible for expensing is redefined to include improvements to the interior of any nonresidential real property (“qualified improvement property”), as well as roofs, heating, ventilation, and air-conditioning property, fire protection and alarm systems, and security systems installed on such property. What’s more, the exclusion from expensing for property used in connecting with lodging facilities, such as residential rental property, is eliminated.

#10: Disaster Relief

President Trump signed the Disaster Tax Relief Act in September. The new law provides targeted and temporary tax relief to victims of Hurricanes Harvey, Irma and Maria. The IRS also postponed certain tax deadlines for affected taxpayers. The IRS response to the various wildfires that have ravaged parts of California has been equally as expansive. And in December, the IRS issued safe harbor methods of calculating casualty and theft loss deductions (Rev. Proc. 2018-8, Rev. Proc. 2018-9).

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Yes, conversions from regular (traditional) tax-deferred individual retirement accounts (IRAs) to Roth IRAs are still allowed after enactment of the Tax Cuts and Jobs Act. In fact, in some instances, such Roth conversions are more beneficial than they were prior to 2018, since the tax rates on all income, including conversion income, are now lower. However, the special rule that allows a contribution to one type of an IRA to be recharacterized as a contribution to the other type of IRA will no longer apply to a conversion contribution to a Roth IRA after 2017.

Note, however, that recharacterization is still permitted with respect to other contributions. For example, an individual may make a contribution for a year to a Roth IRA and, before the due date for the individual’s income tax return for that year, recharacterize it as a contribution to a traditional IRA. The provision is effective for tax years beginning after December 31, 2017.

Comment. Earlier versions of the Tax Cut and Jobs Act enacted by both the House and Senate eliminated recharacterization entirely. The provision was narrowed considerably in the reconciled version to target only conversions to Roth IRAs. So, for example, an individual may still make a contribution for a year to a Roth IRA and, before the due date for the individual’s income tax return for that year, recharacterize it as a contribution to a traditional IRA. In addition, an individual may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA, but the individual is precluded from later unwinding the conversion through a recharacterization.

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