Marr - News & Alerts

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

Sample Inspection Size

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

All-Buildings Requirement

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

Reasonable Notice Time Frame Shortened

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

Amendment of Agency’s Qualified Allocation Plan

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

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 Proc. 2016-15 is obsolete with respect to an agency as of the date that on which the agency amends its qualified allocation plan.

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

Underpayment Penalty

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

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

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

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

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

AICPA

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

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

Craft Beverage Tax Reform

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

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

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

For Brewers:

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

For Vintners:

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

For Distillers:

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

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

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

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

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

50-Percent Locational Rule

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

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

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

QOZ Business Congressional Intent

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

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

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

Second Round of Proposed Regulations

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

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

IRS Cybersecurity

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

Grassley, Wyden Urge Delay

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

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

IRS Extends Transcript Faxing Service

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

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With the April 15th filing season deadline now behind us, it’s not too early to turn your attention to next year’s deadline for filing your 2014 return. That refocus requires among other things an awareness of the direct impact that many "ordinary," as well as one-time, transactions and events will have on the tax you will eventually be obligated to pay April 15, 2015. To gain this forward-looking perspective, however, taking a moment to look back … at the filing season that has just ended, is particularly worthwhile. This generally involves a two-step process: (1) a look-back at your 2013 tax return to pinpoint new opportunities as well as "lessons learned;" and (2) a look-back at what has happened in the tax world since January 1st that may indicate new challenges to be faced for the first time on your 2014 return.

Your 2013 Form 1040

Examining your 2013 Form 1040 individual tax return can help you identify certain changes that you might want to consider this year, as well encourage you to continue what you’re doing right. These "key ingredients" to your 2014 return may include, among many others considerations, a fresh look at:

Your refund or balance due. While it is nice to get a big refund check from the IRS, it often indicates unnecessary overpayments over the course of the year that has provided the federal government with an interest-free loan in the form of your money. Now’s the time to investigate the reasons behind a refund and whether you need to take steps to lower wage withholding and/or quarterly estimated tax payments.

If on the other hand you had to pay the IRS when filing your return (or requesting an extension), you should consider whether it was due to a sudden windfall of income that will not repeat itself; or because you no longer have the same itemized deductions, you had a change in marital status, or you claimed a one-time tax credit such as for energy savings or education. Likewise, examining anticipated changes between your 2013 and 2014 tax years—marriage, the birth of a child, becoming a homeowner, retiring, etc.—can help warn you whether your're headed for an underpayment or overpayment of your 2014 tax liability.

Investment income. One area that blindsided many taxpayers on their 2013 returns was the increased tax bill applicable to investment income. Because of the "great recession," many investors had carryforward losses that could offset gains realized for a number of years as markets gradually improved. For many, however, 2013 saw not only a significant rise in investment income but also a rise in realized taxable investment gains that were no longer covered by carryforward losses used up during the 2010–2012 period.

Furthermore, dividends and long-term capital gains for the first time in 2013 were taxed at a new, higher 20 percent rate for higher income taxpayers and an additional 3.8 percent net investment income tax surtax for those in the higher income brackets. Short-term capital gains saw the highest rate jump, from 35 percent to 43.4 percent rate, which reflected a new 39.6 percent regular rate and the new 3.8 percent net investment income tax rate. This tax structure remains in place for 2014.

Personal exemption/itemized deductions. Effective January 1, 2013, the American Taxpayer Relief Act (ATRA) revived the personal exemption phaseout (PEP). The applicable threshold levels are $250,000 for unmarried taxpayers; $275,000 for heads of households; $300,000 for married couples filing a joint return (and surviving spouses); and $150,000 for married couples filing separate returns (adjusted for inflation after 2013). Likewise, for it revived the limitation on itemized deductions (known as the "Pease" limitation after the member of Congress who sponsored the original legislation) for those same taxpayers.

Medical and dental expenses. Starting in 2013, the Affordable Care Act (ACA) increased the threshold to claim an itemized deduction for unreimbursed medical expenses from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI. However, there is a temporary exemption for individuals age 65 and older until December 31, 2016. Qualified individuals may continue to deduct total medical expenses that exceed 7.5 percent of adjusted gross income through 2016. If the qualified individual is married and only one spouse is age 65 or older, the taxpayer may still deduct total medical expenses that exceed 7.5 percent of adjusted gross income.

Recordkeeping. If you cannot find the paperwork necessary to prove your right to a deduction or credit, you cannot claim it. An organized tax recordkeeping system—whether on paper or computerized–therefore is an essential component to maximizing tax savings.

Filing Season Developments

So far this year, the IRS, other federal agencies and the courts have issued guidance on individual and business taxation, retirement savings, foreign accounts, the ACA, and much more. Congress has also been busy working up a "tax extenders" bill as well as tax reform proposals. All these developments can impact how you plan to maximize benefits on your 2014 income tax return.

Tax reform. President Obama, the chairs of the House and Senate tax writing committees, and individual lawmakers all made tax reform proposals in early 2014. The proposals range from comprehensive tax reform to more piece-meal approaches. Although only small, piecemeal proposals have the most promising chances for passage this year, taxpayers should not ignore the broader push toward tax reform that will be taking shape in 2015 and 2016.

Tax extenders. The Senate Finance Committee (SFC) approved legislation (EXPIRE Act) in April that would extend nearly all of the tax extenders that expired after 2013. Included in the EXPIRE Act are individual incentives such as the state and local sales tax deduction, the higher education tuition deduction, transit benefits parity, and the classroom teacher’s deduction; along with business incentives such as enhanced Code 179 small business expensing, bonus depreciation, the research tax credit, and more. Congress may now move quickly on an extenders bill or it may not come up with a compromise until after the November mid-term elections. Many of these tax benefits are significant and will directly impact the 2014 tax that taxpayers will pay.

Individual mandate. The Affordable Care Act’s individual mandate took effect January 1, 2014. Individuals failing to carry minimum essential coverage after January 1, 2014 and who are not exempt from the requirement will make an individual shared responsibility payment when they file their 2014 federal income tax returns in 2015. There are some exemptions, including a hardship exemption if the taxpayer experienced problems in signing up with a Health Insurance Marketplace before March 31, 2014. Further guidance is expected before 2014 tax year returns need to be filed, especially on how to calculate the payment and how to report to the IRS that an individual has minimum essential coverage.

Employer mandate. The ACA’s shared responsibility provision for employers (also known as the “employer mandate”) will generally apply to large employers starting in 2015, rather than the original 2014 launch date. Transition relief provided in February final regulations provides additional time to mid-size employers with 50 or more but fewer than 100 employees, generally delaying implementation until 2016. Employers that employ fewer than 50 full-time or full time equivalent employees are permanently exempt from the employer mandate. The final regulations do not change this treatment under the statute.

Other recent tax developments to be aware of for 2014 planning purposes include:

IRA rollovers. The IRS announced that, starting in 2015, it intends to follow a one-rollover-per-year limitation on Individual Retirement Account (IRA) rollovers as an aggregate limit.
myRAs. In January, President Obama directed the Treasury Department to create a new retirement savings vehicle, “myRA,” to be rolled out before 2015.
Same-sex married couples. In April, the IRS released guidance on how the Supreme Court’s Windsor decision, which struck down Section 3 of the Defense of Marriage Act (DOMA), applies to qualified retirement plans, opting not to require recognition before June 26, 2013.
Passive activity losses. The Tax Court found in March that a trust owning rental real estate could qualify for the rental real estate exception to passive activity loss treatment.
FATCA deadline. The IRS has indicated that it is holding firm on the July 1, 2014, deadline for foreign financial institutions (FFIs) to comply with the FATCA information reporting requirements or withhold 30 percent from payments of U.S.-source income to their U.S. account holders.
Vehicle depreciation. The IRS announced that inflation-adjusted limitations on depreciation deductions for business use passenger autos, light trucks and vans first placed in service during calendar year 2014 are relatively unchanged from 2013 (except for first year $8,000 bonus depreciation that may be removed if Congress does not act in time.
Severance payments. In March, the U.S. Supreme Court held that supplemental unemployment benefits (SUB) payments made to terminated employees and not tied to the receipt of state unemployment benefits are wages for FICA tax purposes.
Virtual currency. The IRS announced that convertible virtual currencies, such as Bitcoin, would be treated as property and not as currency, thus creating immediate tax consequences for those using Bitcoins to pay for goods.

Please contact this office if you’d like further information on how an examination of your 2013 return, and examination of recent tax developments, may point to revised strategies for lowering your eventual tax bill for 2014.

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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.

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Mid-size employers may be eligible for recently announced transition relief from the Patient Protection and Affordable Care Act's employer shared responsibility requirements. Final regulations issued by the IRS in late January include transition relief for mid-size employers for 2015. Mid-size employers for this relief are defined generally as businesses employing at least 50 but fewer than 100 full-time employees. Exceptions and complicated measurement rules continue to apply. The final regulations also describe the treatment of seasonal employees, volunteer workers, student employees, the calculation of the employer shared responsibility payment, and much more.

Delayed implementation

As enacted in 2010, the Affordable Care Act required applicable large employers (ALEs) to make an assessable payment if any full-time employee is certified to receive a health insurance premium tax credit or cost-sharing reduction, and either:

The employer does not offer to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan; or
The employer offers its full-time employees and their dependents the opportunity to enroll in MEC under an employer-sponsored plan, but the coverage is either unaffordable or does not provide minimum value.

The employer shared responsibility requirement was scheduled to apply January 1, 2014, the same effective date for the individual mandate and the health insurance premium assistance tax credit. In July 2013, the Obama administration announced that employer shared responsibility requirements would not apply for 2014.

The final regulations make further changes. Under the final regulations, the employer mandate will generally apply to large employers (employers with 100 or more employees) starting in 2015 and to qualified mid-size employers (employers with 50 to 99 employees) starting in 2016. Employers that employ fewer than 50 full-time employees (including full-time equivalents (FTEs)) are not subject to the employer mandate.

Caution. Determining the number of employees for purposes of the employer shared responsibility requirement is a complex calculation for many employers that is beyond the scope of this article. The Affordable Care Act and the final regulations describe how to calculate full-time employees (including FTEs) and also which employees are excluded from that calculation. Please contact our office for details about the Affordable Care Act and your business.

Transition relief for mid-size employers

Qualified employers are not subject to the employer mandate until 2016 if they satisfy certain conditions. Among other requirements, the employer must employ on average at least 50 full-time employees (including FTEs) but fewer than 100 full-time employees (including FTEs) on business days during 2014. Additionally, the final regulations impose a broad maintenance of previously offered heath coverage requirement.

The final regulations do not allow an employer to reduce the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition and thus be eligible for the transition relief. A reduction in workforce size or overall hours of service for bona fide business reasons, however, will not be considered to have been made in order to satisfy the workforce size condition. This provision is certainly one that is expected to generate many questions. The IRS may provide additional guidance and/or clarification in 2014 and our office will keep you posted of developments.

Additionally, the final regulations also modify the extent of required coverage. Proposed regulations required that the employer provide coverage to 95 percent of its full-time employees. The final regulations delay the 95 percent requirement until 2016 for larger employers. For 2015, larger employers need only provide coverage to 70 percent of their full-time employees.

Special types of employees

Since passage of the Affordable Care Act, questions have arisen about the treatment of certain types of employees. These include seasonal employees, short-term employees, volunteer workers, and student employees. The final regulations clarify some of the issues surrounding these employees.

Many industries employ seasonal workers. The final regulations describe who may qualify as a seasonal worker. The retail industry, which employs many workers for the holiday season, asked the IRS to specify which events or periods of time that would be treated as holiday seasons. The final regulations, however, do not indicate specific holidays or the length of any holiday season as these will differ for different employers, the IRS explained.

For volunteer workers, such as volunteer fire fighters and first responders, the final regulations provide that an individual's hours of service do not include hours worked as a "bona fide volunteer." This definition, the IRS explained, encompasses any volunteer who is an employee of a government entity or a Code Sec. 501(c)(3) organization whose compensation is limited to reimbursement of certain expenses or other forms of compensation.

Many college, university and vocational students are engaged in federal and state work-study programs. The final regulations provide that hours of service for purposes of the employer mandate do not include hours of service performed by students in federal or other governmental work-study programs. The IRS noted the potential for abuse by labeling individuals who receive compensation as "interns" to avoid the employer mandate. Therefore, the IRS did not adopt a special rule for student employees working as interns for an outside employer, and the general rules apply.

The final regulations also describe how the employer mandate may or may not apply to adjunct faculty, members of religious orders, airline industry employees, employees who must work “on-call” hours, short-term employees and others. Special rules may apply to these employees in some cases.

Waiting period limitation

The Affordable Care Act generally requires that an employee (or dependent) cannot wait more than 90 days before employer-provided coverage becomes effective. The IRS issued final regulations in February on the 90-day waiting period limitation. The IRS also issued proposed regulations generally allowing employers to require new employees to complete a reasonable orientation period. The proposed regulations set forth one month as the maximum length of any orientation period.

If you have any questions about the final regulations for the employer mandate, the transition relief, the 90-day waiting period, or any aspects of the Affordable Care Act, please contact our office.

TD 9655, TD 9656, NPRM REG-122706-12

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If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

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If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

Regardless of the type of record keeper you consider yourself to be, there are numerous ways to simplify the burden of logging your automobile expenses for tax purposes. This article explains the types of expenses you need to track and the methods you can use to properly and accurately track your car expenses, thereby maximizing your deduction and saving taxes.

Expense methods

The two general methods allowed by the IRS to calculate expenses associated with the business use of a car include the standard mileage rate method or the actual expense method. The standard mileage rate for 2017 is 53.5 cents per mile. In addition, you can deduct parking expenses and tolls paid for business. Personal property taxes are also deductible, either as a personal or a business expense. While you are not required to substantiate expense amounts under the standard mileage rate method, you must still substantiate the amount, time, place and business purpose of the travel.

The actual expense method requires the tracking of all your vehicle-related expenses. Actual car expenses that may be deducted under this method include: oil, gas, depreciation, principal lease payments (but not interest), tolls, parking fees, garage rent, registration fees, licenses, insurance, maintenance and repairs, supplies and equipment, and tires. These are the operating costs that the IRS permits you to write-off. For newly-purchased vehicles in years in which bonus depreciation is available, opting for the actual expense method may make particularly good sense since the standard mileage rate only builds in a modest amount of depreciation each year. For example, for 2017, when 50 percent bonus depreciation is allowed, maximum first year depreciation is capped at $11,160 (as compared to $3,160 for vehicles that do not qualify). In general, the actual expense method usually results in a greater deduction amount than the standard mileage rate. However, this must be balanced against the increased substantiation burden associated with tracking actual expenses. If you qualify for both methods, estimate your deductions under each to determine which method provides you with a larger deduction.

Substantiation requirements

Taxpayers who deduct automobile expenses associated with the business use of their car should keep an account book, diary, statement of expenses, or similar record. This is not only recommended by the IRS, but essential to accurate expense tracking. Moreover, if you use your car for both business and personal errands, allocations must be made between the personal and business use of the automobile. In general, adequate substantiation for deduction purposes requires that you record the following:

The amount of the expense;
The amount of use (i.e. the number of miles driven for business purposes);
The date of the expenditure or use; and
The business purpose of the expenditure or use.

Suggested recordkeeping: Actual expense method

An expense log is a necessity for taxpayers who choose to use the actual expense method for deducting their car expenses. First and foremost, always keep your receipts, copies of cancelled checks and bills paid. Maintaining receipts, bills paid and copies of cancelled checks is imperative (even receipts from toll booths). These receipts and documents show the date and amount of the purchase and can support your expenditures if the IRS comes knocking. Moreover, if you fail to log these expenses on the day you incurred them, you can look back at the receipt for all the essentials (i.e. time, date, and amount of the expense).

Types of Logs. Where you decide to record your expenses depends in large part on your personal preferences. While an expense log is a necessity, there are a variety of options available to track your car expenditures - from a simple notebook, expense log or diary for those less technologically inclined (and which can be easily stored in your glove compartment) - to the use of a smartphone or computer. Apps specifically designed to help track your car expenses can be easily downloaded onto your iPhone or Android device.

Timeliness. Although maintaining a daily log of your expenses is ideal - since it cuts down on the time you may later have to spend sorting through your receipts and organizing your expenses - this may not always be the case for many taxpayers. According to the IRS, however, you do not need to record your expenses on the very day they are incurred. If you maintain a log on a weekly basis and it accounts for your use of the automobile and expenses during the week, the log is considered a timely-kept record. Moreover, the IRS also allows taxpayers to maintain records of expenses for only a portion of the tax year, and then use those records to substantiate expenses for the entire year if he or she can show that the records are representative of the entire year. This is referred to as the sampling method of substantiation. For example, if you keep a record of your expenses over a 90-day period, this is considered an adequate representation of the entire year.

Suggested Recordkeeping: Standard mileage rate method

If you loathe recordkeeping and cannot see yourself adequately maintaining records and tracking your expenses (even on a weekly basis), strongly consider using the standard mileage rate method. However, taking the standard mileage rate does not mean that you are given a pass by the IRS to maintaining any sort of records. To claim the standard mileage rate, appropriate records would include a daily log showing miles traveled, destination and business purpose. If you incur mileage on one day that includes both personal and business, allocate the miles between the two uses. A mileage record log, whether recorded in a notebook, log or handheld device, is a necessity if you choose to use the standard mileage rate.

If you have any questions about how to properly track your automobile expenses for tax purposes, please call our office. We would be happy to explain your responsibilities and the tax consequences and benefits of adequately logging your car expenses.

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Businesses benefit from many tax breaks. If you are in business with the objective of making a profit, you can generally claim all your business deductions. If your deductions exceed your income for the year, you can claim a loss for the year, up to the amount of your income from other activities. Remaining losses can be carried over into other years.

These are very generous tax breaks and sometimes people establish a business to generate losses. They have no intention of ever earning a profit. Other times, they genuinely hope to earn a profit but never do.

The IRS calls these activities "hobbies." Expenses from these activities are never deductible in excess of any income that is declared earned from them. Recently, the IRS issued a new warning in the form of a Fact Sheet (FS-2007-18) to educate taxpayers about the differences between a for-profit business and a hobby.

No bright line

There's no bright line to distinguish a genuine business with a profit motive from a hobby. Over the years, the IRS and the courts have developed a list of factors to determine if an activity has a profit motive or is a hobby. No one factor is greater than the others and the list is not exhaustive. That means that the IRS and the courts have great leeway in their analyses.

Let's take a quick look at the factors:

How the business is run? Is the activity carried on in a businesslike manner? Do you keep complete and accurate business records and books? Have you changed business operations to increase profits?

Expertise. Do you have the necessary expertise to run the business? If you don't, do you seek help from experts?

Time and effort. Do you spend the time and effort necessary for the business to succeed?

Appreciation. Will business assets appreciate in value over time? A profit motive can exist if gain from the eventual sale of assets, plus any other income, will result in an overall profit even if there's no profit from current operations.

Success with other activities. Have you engaged in similar activities in the past?

History of income or loss. This factor looks to when the losses occurred. Were they in the start-up phase? Maybe they were due to unforeseen circumstances. Losses over a very long period of time could, but not always, indicate a hobby.

Amounts of occasional profits. Are your occasional profits significant when compared to the size of your investment and prior losses?

Financial status of owner. Is the activity your only source of income?

Personal pleasure or recreation. Is your business of a type that is not usually considered to have elements of personal pleasure or recreation?

Your financial status

If the activity is your only source of income, you would think that the IRS would automatically treat it as a for-profit business. That's not true. Every case is different and the IRS and the courts look at all the circumstances.

A few years ago, there was a case in the U.S. Tax Court involving a married couple. The husband owned a house framing business. His income was about $33,000 a year. The wife worked as a secretary in an accounting department of a big corporation. Her income was about $28,000 a year.

Together, they also operated a horse breeding and racing activity. They had no experience in breeding or racing horses. They didn't have the best of luck either. Several of their horses suffered injuries and they were involved in a legal dispute over the ownership of one. They did seek help from experts and also kept good financial records.

The Tax Court looked at all the nine factors. It recognized that the couple had a very modest income from their employment and this factor weighed in their favor. However, some of the other factors went against them, especially the fact that they never made a profit after 16 years and lost nearly $500,000. The court knew that the couple "hoped" to make a profit but hope wasn't enough and the court found their business was not engaged in for a profit.

Presumption

Generally, the IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five years, including the current year. If it appears that the business will not be profitable for some years, you won't be able to come within the presumption of profit motive. You'll have to rely on qualifying under the nine factors.

The IRS has a form on which you can officially elect to have the agency wait until the first five years are up before examining the profitability of your business. While it's generally not necessary to file the form in order to take advantage of the presumption, it's usually a good idea.

Types of businesses

Although the IRS is not limited in the kind of businesses that it can challenge as being hobbies, businesses that look like traditional hobbies generally face a greater chance of IRS scrutiny than other types of businesses. These include horse breeding and racing, "gentlemen farming" and craft businesses operated from the home. There are many court cases about these activities and usually the taxpayers lose.

This is a very complicated area of the tax law and many people, like the secretary and her husband, honestly believe they are operating a for-profit business. But as we've seen, the IRS and the courts can, and often do, determine otherwise.

Don't hesitate to contact us if you have any questions about the differences between a business and a hobby ...and how you can set up your operations to have a better chance of falling on the right side of any argument with the IRS.

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Although the old adage warns against doing business with friends or relatives, many of us do, especially where personal or real property is involved. While the IRS generally takes a very discerning look at most financial transactions between family members, you can avoid some of the common tax traps if you play by a few simple rules.

Of course, because there are so many types of potential transactions, there are few hard and fast rules that apply across the board. If you're thinking of selling property to a family member, or buying from a family member, you must evaluate the potential negative tax consequences before agreeing to enter into a transaction. In a worst case scenario, the IRS could set aside the transaction as if it never took place and whatever gain, or loss, you have, would evaporate.

"Arms-length" transactions

The IRS is on alert for transactions between family members because often they are not "arms-length" transactions. Conducting a transaction at "arms-length" means that pricing is established as if the seller and buyer were independent parties. To be considered an "arm's length" transaction, the seller must genuinely wants to sell his or her property at a fair market price and the buyer must offer a fair price. The transaction cannot be motivated primarily by tax avoidance. Transactions between unrelated parties, for example when you buy your new car from an automobile dealer, are "arms length" transactions. The seller is in the business of selling and the buyer is an independent third party.

Transactions between family members - say, the transfer of real estate or other property -- frequently may look, at first glance, to be not quite at arms length. Did the buyer make a fair offer? Did the seller accept a fair price? Was the sale really a gift? The rules allow the IRS to set aside abusive transactions as shams and impose penalties.

Dealing with your children

Tax problems frequently arise in transactions between parents and children. Let's say that you agree to sell your vacation home to your daughter. If your daughter pays the first and only price you gave, some warning bells may sound. Did your selling price reflect the fair market value of the property? Did the buyer investigate, or seek an appraisal, of the value of the property. Did comparable properties sell at similar prices?

If you want to claim a loss from the sale, don't count on it. The tax rules specifically disallow in most situations a loss from the sale - or exchange - of property when the sale or exchange is between members of a family -whether or not you can prove that the price is fair. The IRS's definition of family is pretty broad for this purpose. It includes brothers and sisters (whether by the whole or half blood), spouses, ancestors, and lineal descendants. Ancestors include parents and grandparents, and lineal descendants includes children and grandchildren. Thus, nieces and nephews, aunts and uncles and in-laws are excluded. Stepparents, stepchildren and stepgrandchildren are excluded, but adopted children are treated the same as natural children in all respects

If you claim a gain on the sale, expect some questions from the IRS if your return is audited. The IRS can claim that you recognized too little gain, hoping to tax the rest as a taxable gift. In selling property to a family member, you should build a file of comparable prices in order to be ready for the IRS on an audit of your return.

Divorcing couples also under scrutiny

Divorce spawns many tax consequences. Often, a court will direct one spouse to transfer property to the other spouse. Generally, no gain or loss is recognized when property is transferred incident to the divorce. Problems develop over the last three words, "incident to the divorce." If the transaction is not "incident to the divorce" and one spouse claims large losses, the IRS will examine carefully whether the transaction was genuine.

Gain or loss also is not recognized when a transfer takes place between spouses who are still married, even if they don't file a joint return, and whether or not their relationship is amicable or hostile.

Be proactive to avoid future inquiries

Selling to, or buying from, a family member shouldn't be avoided just because the rules are complex. First, recognize that your transaction may be subject to special scrutiny by the IRS. If it is, you can't go on this road alone without professional backup but you can be proactive by anticipating potential challenges and by taking some simple, common sense steps:

Be prepared. Because documentation is very important to the IRS and plays a very big part in whether a claim will be allowed, it is important that you document your related party transaction every step of the way. All agreements should be in written format and corroborating evidence (such as comparable price lists) should be retained.

Invest in an independent appraisal. Unless you are a professional in selling your particular property, let an expert place a value on it. Having this sort of independent third party verify the reasonableness of the transaction price is exactly the type of documentation the IRS likes to see.

Weigh alternatives to relinquishing total control over the property. Consider "gifting" the property to a family member instead of selling it - the positive tax consequences of gifting are often overlooked.

As illustrated above, there is absolutely nothing wrong with engaging in financial transactions with related persons - as long as all parties involved are aware of the added scrutiny the transaction may bring and properly prepare for such an event. If you are contemplating such a transaction, please feel free to contact the office for additional guidance.

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