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2011 ENGAGEMENT LETTER

Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271

Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271

President Donald Trump has signed bipartisan legislation, which expands a religious exemption for the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate. The exemption is effective for taxable years beginning after December 31, 2018.

Religious Exemption

SUPPORT for Patients and Communities Act ( HR 6) amends Code Sec. 5000A(d)(2)(a) to expand the religious conscience exemption for the ACA individual mandate. Individual taxpayers who rely solely on a religious method of healing for whom the acceptance of medical health services would be inconsistent with their religious beliefs are exempt from the ACA mandate to maintain health insurance or pay a penalty.

Tax Reform

Additionally, last year’s tax reform legislation essentially repeals the ACA’s individual mandate. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) repeals the ACA’s shared responsibility payment for individuals failing to maintain minimum essential coverage effective January 1, 2019.

Congressional Republicans are looking to move forward with certain legislative tax efforts during Congress’s lame-duck session. The House’s top tax writer, who will hand the reins to Democrats next year, has reportedly outlined several tax measures that will be a priority when lawmakers return to Washington, D.C., during the week of November 12. However, President Donald Trump’s recently touted 10-percent middle-income tax cut does not appear to be one of them.

Congressional Republicans are looking to move forward with certain legislative tax efforts during Congress’s lame-duck session. The House’s top tax writer, who will hand the reins to Democrats next year, has reportedly outlined several tax measures that will be a priority when lawmakers return to Washington, D.C., during the week of November 12. However, President Donald Trump’s recently touted 10-percent middle-income tax cut does not appear to be one of them.

Democrats Take the House

Republicans will lose their one-party rule in Washington, D.C. in the 116th Congress beginning in January 2019. As a result of the November 6 midterm elections, Democrats will control the House during the next Congress, and Republicans will retain control of the Senate.

Currently, Rep. Kevin Brady, R-Tex., serves as chairman of the House’s tax-writing Ways and Means Committee. Republicans’ majority in both chambers of Congress enabled the GOP, in coordination with the Trump administration, to enact tax reform legislation last year. However, the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) reportedly did not turn out to be as popular as they had hoped. The TCJA’s unpopularity is at least in part why Republicans lost vital seats in the House, according to several reports.

Lame-Duck

Before the turnover of power, however, Brady is reportedly gearing up to introduce a tax extenders measure during the lame-duck session, which would extend certain temporary or expired tax breaks. Generally, Democrats have been supportive of year-end tax extender legislation. At this time, the details of the tax-extender proposal remain unclear.

Additionally, Brady reportedly said on November 7 that a TCJA technical corrections bill with "minor changes" will move in the lame-duck session. Further, the Senate is expected to take up a House-approved retirement savings measure that is part of House Republicans’ "Tax Reform 2.0" efforts.

Looking Forward

House Ways and Means Committee ranking member Richard Neal, D-Mass., is expected to chair the committee in the 116th Congress. Neal has a fairly moderate tax-legislative record, and is considered on Capitol Hill to be "business-friendly." To that end, Neal has recently sponsored several retirement savings measures, which would enhance employer workplace savings accounts. Additionally, infrastructure and tax-related health care initiatives are expected to be a priority among House Democrats.

GOP Retains Senate

Republicans will continue to lead the Senate in the 116th Congress. While the GOP Senate majority may not be enough to approve additional GOP tax legislation, it is likely to prevent Democrats from repealing parts of the TCJA. However, it is expected on Capitol Hill that hearings will be held in both chambers’ tax writing committees to examine various provisions of the new tax law. Although a divided Congress can result in fewer tax bills being approved, successful legislation will likely be bipartisan.

The Senate Finance Committee’s (SFC) top ranking Democrat has introduced a bill to restore a retirement savings program known as myRA that was terminated by Treasury last year. The myRA program was created by former President Obama through an Executive Order.

The Senate Finance Committee’s (SFC) top ranking Democrat has introduced a bill to restore a retirement savings program known as myRA that was terminated by Treasury last year. The myRA program was created by former President Obama through an Executive Order.

Retirement Savings

"Cost-of-living is soaring with working families having less and less to save for their futures," SFC ranking member Ron Wyden, D-Ore., said in a November 15 tweet. "Today, I’m introducing a bill to address this retirement crisis."

The Encouraging Americans to Save Bill is co-sponsored by Sens. Ben Cardin, D-Md., Bob Casey, D-Pa., Amy Klobuchar, D-Minn., and Michael Bennet, D-Colo. An earlier version of the bill, Sen. 2492, was introduced by Wyden in the 114th Congress that also aimed to expand the myRA program.

"The Encouraging Americans to Save [Bill] enhances retirement savings incentives by restructuring the existing, nonrefundable saver’s credit into a refundable, government matching contribution of up to $500 a year for middle-class workers who save through 401(k) type plans or IRAs, "Wyden’s November 15 press release noted. Additionally, the bill would restore the myRA program, which Treasury determined last year was too costly to continue.

myRA Program

The Obama-era myRA program was designed as a government-sponsored retirement savings program available to individuals without access to employer-sponsored retirement plans. Although the program was determined to have very little demand to warrant its high operating costs, Democrats attributed the low sign-up to the program still being in its infancy. However, Republicans criticized the program as an "executive overreach" that could not become successful based on its investments in little interest yielding Treasury bonds and posed certain risks to taxpayers and employees.

House

House Ways and Means Committee ranking member Richard Neal, D-Mass., along with Wyden, sent a letter last year to Treasury Secretary Steven Mnuchin urging Treasury to continue the myRA program. Neal is expected to become chairman of the House’s tax writing committee this coming January in the 116th Congress.

However, considering the Trump administration ended the program, it is seen as unlikely on Capitol Hill that Trump would support legislation to restore it. Moreover, Republicans will retain their majority-hold of the Senate in the next Congress, thus further limiting its chances of success.

A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November.

A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November.

Middle-Income Tax Cut

President Donald Trump announced on October 22 that a new 10 percent tax cut would soon be unveiled that will focus specifically on middle-income taxpayers. "President Trump is determined to provide further tax relief for middle-class families," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an October 23 statement. "We will continue to work with the White House and Treasury over the coming weeks to develop an additional 10 percent tax cut focused specifically on middle-class families and workers, to be advanced as Republicans retain the House and Senate," Brady added.

Comment. Notably, Brady is essentially highlighting in his statement that any such additional tax cut measure would require a Republican majority for congressional approval. As November midterm elections near, there is "talk" on Capitol Hill that Republicans may lose control of the House.

The additional 10 percent tax cut for middle-income taxpayers would aim to build upon the individual tax cuts enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). To that end, the House passed a "Tax Reform 2.0"package last month, which would make permanent the TCJA’s individual and small business tax credits. The TCJA’s individual tax cut provisions were enacted temporarily through 2025 in accordance with certain Senate budget rules. Although the TCJA did not receive one Democratic vote, the Tax Reform 2.0 package did clear the House with some bipartisan support.

New Congress, New Tax Cut

"We expect to advance this in the new session of Congress if Republicans maintain control of the House and Senate," Brady, said of the tax cut in an October 26 televised interview. However, President Trump said a couple of days before that a " resolution" would be introduced for the tax cut by the week of October 29.

Democratic lawmakers have been criticizing Trump’s announcement as nothing more than politically-driven rhetoric ahead of the November 6 midterm elections. Several top congressional Democrats have voiced intent to repeal, at least in part, the TCJA enacted last December. While Republicans, on the other hand, want to continue building upon the TCJA’s tax cuts.

"What President Trump is looking at is a 10 percent cut focused on middle-class workers and families…he still believes middle-class families are the ones always in the squeeze," Brady said on October 26. "We’ve been working with the White House and the Treasury on some ideas about how best to do it," he added.

Net Neutral

Trump has predicted that the tax cut will be net neutral. A chief complaint of last year’s tax reform among Democrats is the TCJA estimated $1.4 trillion price tag over a 10-year budget window.

"If you speak to Brady and a group of people, we're putting in a tax reduction of 10 percent, which I think will be a net neutral because we're doing other things, which I don't have to explain now," Trump said. A spokesperson for Brady has reportedly said that cost measures for the tax cut will be addressed once the proposal has been scored.

Looking Ahead

At this time, it is considered likely on Capitol Hill that Republicans will retain control of the Senate, but several predictions continue to float that the GOP will lose its House majority. Republicans would likely need to retain control of both chambers for any chance of approving further individual tax cuts or making permanent those enacted under the TCJA.

Although, the House approved its "Tax Reform 2.0" package last month, which includes measures to make permanent the TCJA’s individual tax cuts and enhance various savings accounts and business innovation, the Senate has showed little interest in taking up the package as a whole before the end of the year. However, consideration of the retirement and savings measure in the lame-duck session remains a possibility.

IRS Commissioner Charles Rettig gave his first speech since being confirmed as the 49th chief of the Service at the American Institute of CPAs (AICPA) November 13 National Tax Conference in Washington, D.C. "You’re going to see things [I do] and go, ‘I can’t believe he did that,’" Rettig said.

IRS Commissioner Charles Rettig gave his first speech since being confirmed as the 49th chief of the Service at the American Institute of CPAs (AICPA) November 13 National Tax Conference in Washington, D.C. "You’re going to see things [I do] and go, ‘I can’t believe he did that,’" Rettig said.

Rettig, nominated by President Donald Trump last February and sworn in as IRS Commissioner on October 1, was a practicing tax attorney for over 30 years. "I’m not going to lose my tax edge," he told CPAs and other tax professionals.

Modernizing the IRS

Rettig, since being confirmed, has maintained that a top priority of the IRS is updating the Service’s technology. "We must work on our IT modernization efforts," Rettig said in a previous statement.

Additionally, Rettig discussed the IRS’s antiquated information technology (IT) systems and software at the AICPA event. "I can call Google…or All State and a recording…says, 'you are 14th in line, we can call you back, you won't lose your place in line," Rettig said. "We don't have those tools, we need those tools."

However, Rettig emphasized that the IRS’s employees should have pride in their roles, and that many IRS challenges are a result of constrained financial resources. IRS employees are "people who care,"Rettig said. Further, Rettig said he wants the IRS to gain taxpayers’ respect.

Additionally, in line with the IRS’s increased efforts toward transparency, Rettig said that employee training materials for last year’s tax reform will soon be posted to the IRS’s website. The Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) was enacted last December. Rettig is tasked with overseeing the new tax law’s implementation.

Tax Reform

A copy of Rettig’s prepared remarks for the AICPA event was provided to Wolters Kluwer by the IRS on November 14. Notably, an IRS spokesperson told Wolters Kluwer that Rettig "did not stick to the script." In an informal outline of areas on which Rettig intends to focus, "the top of the list is continuing to implement the Tax Cuts and Jobs Act, which contains the most sweeping tax changes in 30 years,"Rettig stated in the prepared remarks. "The IRS has already made great progress in this area, but more remains to be done."

IRS Guidance

The IRS is committed to helping taxpayers and tax professionals understand the new tax law changes, as well as file returns next year timely and accurately, Rettig noted. To that end, the IRS will continue to issue guidance this year related to tax reform, according to Rettig. "You can expect additional guidance in the next several weeks in a number of areas," he added, which include TCJA provisions related to the following:

• Opportunity Zones;
• the limitation on the business interest expense deduction; and
• the Base Erosion and Anti-Abuse Tax (BEAT).

Additionally, the IRS will continue to update taxpayer forms and instructions related to new tax law provisions, Rettig noted. "We’re well on our way to having those completed in time for [the 2019] filing season."

The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules.

The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules.

Transition Tax

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, revived and amended Code Sec. 965. The new Code Sec. 965 generally requires U.S. shareholders pay a mandatory one-time repatriation "transition" tax on untaxed foreign earnings of certain foreign corporations.

"The Tax Cuts and Jobs Act treats these foreign earnings as repatriated and places a 15.5 percent tax on cash or cash equivalents, and an 8 percent tax on the remaining earnings. Generally, the transition tax can be paid in installments over an eight-year period when a taxpayer files a timely election under section 965(h),"Treasury Secretary Steven Mnuchin said in a statement.

The IRS held an October 22 public hearing on NPRM REG-104226-18, which provides rules for implementing the transition tax created under last year’s tax reform. IRS officials did not provide any feedback at the hearing.

AICPA Recommendations

In an October 31 comment letter to the IRS, the AICPA offered 15 recommendations to provide taxpayers further clarity and guidance on tax reform’s transition tax requirements. The AICPA’s recommendations include the following:

• Clarify that previously taxed earnings (PTI) under Code Sec. 965(b)(4)(A) are deemed included in Code Sec. 951 for purposes of applying Code Sec. 1248(d).
• Clarify that the portion of a Code Sec. 965 inclusion liability attributable to Code Sec. 956 is eligible for the appropriate reduced rate of tax as a consequence of the deduction provided for in Code Sec. 965(c).
• Provide taxpayers with additional flexibility when making the basis adjustment election under Proposed Reg. §1.965-2(f) by including the ability to make partial basis adjustments, elect adjustments on an entity-by-entity basis, and modify the proposed consistency provision on related persons.
• Provide guidance as to the ordering of distributions of PTI between Code Sec. 965(a) PTI and Code Sec. 965(b) PTI for purposes of applying Code Sec. 959(c) and Code Sec. 986(c).
• Provide relief to taxpayers that make or have made late elections under the proposed regulations and clarify the procedure for obtaining such relief.
• Provide that U.S. shareholders that are members of the same consolidated group are treated as a single U.S. shareholder for all purposes with respect to Code Sec. 965.
• Clarify that the PTI amount created under Code Sec. 965(b)(4)(A) is not taken into account under Code Sec. 864(e)(4)(D) for purposes of allocating and apportioning interest expense.
• Exercise the authority under Code Sec. 965(o) to provide relief from the income inclusion to certain affected taxpayers. Specifically, provide guidance excluding a foreign corporation that is considered a controlled foreign corporation (CFC) solely as a result of the "downward attribution" rules of Code Sec. 318(a)(3) from the definition of an specified foreign corporation (SFC) for any U.S. shareholder not considered a related party (within the meaning of Code Sec. 954(d)(3)) with respect to the domestic corporation to which ownership was attributed.
• Provide a carve-out for certain "triggering events" of an S corporation Code Sec. 965(i), such as where the S corporation and relevant shareholders maintain direct or indirect ownership of the transferred assets (e.g., tax-free transfers).
• Provide guidance on the interaction between a Code Sec. 962 election and a Code Sec. 965(i) election, including clarifying that an eligible taxpayer may make a Code Sec. 962 election for a Code Sec. 965 tax liability for which they intend to defer inclusion under Code Sec. 965(i).

ABA Recommendations

Likewise, the ABA made similar recommendations on the proposed regulations and related guidance in an October 29 letter sent to IRS Commissioner Charles Rettig. The ABA’s 80-page letter grouped its principal recommendations into the three categories:

• the application of Code Sec. 965 to passthrough entities (other than S corporations) and individuals;
• the application of the netting of accumulated post-1986 deferred foreign income with deficits in other related entities; and
• issues in applying the foreign tax credit.

Last year’s tax reform created a new Opportunity Zone program, which offers qualifying investors certain tax incentives aimed to spur investment in economically distressed areas. Treasury Secretary Steven Mnuchin has predicted that the Opportunity Zone program will create $100 billion in private capital that will be invested in designated opportunity zones.

Last year’s tax reform created a new Opportunity Zone program, which offers qualifying investors certain tax incentives aimed to spur investment in economically distressed areas. Treasury Secretary Steven Mnuchin has predicted that the Opportunity Zone program will create $100 billion in private capital that will be invested in designated opportunity zones.

The IRS released the much anticipated proposed regulations for the Opportunity Zone program in October ( REG-115420-18). The proposed rules provide "clarity and some good news for taxpayers," Micheal Bernier, partner at Ernst & Young’s National Tax practice, told Wolters Kluwer in an emailed statement.

Opportunity Zones

The Opportunity Zone program was created under the Tax Cuts and Jobs Act ( P.L. 115-97) enacted in December 2017. The TCJA added Code Secs. 1400Z-1 and 1400Z-2, which include procedural rules for designating opportunity zones and provisions allowing qualifying taxpayers to elect certain income tax benefits. Although not a single Democrat voted for the TCJA, the Opportunity Zone program was based on a bipartisan bill sponsored by Sens. Tim Scott, R-S.C., and Cory Booker, D-N.J. The program "creates tax incentives to help stimulate the flow of capital into communities that need opportunity the most," Cory Booker said in an October 29 tweet.

Generally, the proposed rules have been considered on Capitol Hill as leaning favorably toward taxpayers. However, stakeholders and practitioners are reporting that many questions remain. To that end, the Office of Information and Regulatory Affairs (OIRA), housed under the Office of Management and Budget (OMB), has announced that a second package of regulations is expected to be completed by the end of this year.

Qualified Opportunity Funds

The TCJA’s Opportunity Zone program generally established the following investor tax benefits:

• a temporary tax deferral for capital gains realized on the sale of appreciated assets and reinvested within 180 days in a qualified opportunity fund (QOF);
• the elimination of up to 10 or 15 percent of the tax on the capital gain that is invested in the QOF and held between five and seven years; and
• the permanent exclusion of tax when exiting a qualified opportunity fund investment held for at least 10 years.

"Most importantly, taxpayers can use the fund as collateral. This was a surprise and is important," Bernier told Wolters Kluwer. "The type of investments made by Opportunity Funds do have some strings attached, which are designed to make sure the investments are creating economic activity in the Opportunity Zones, not just buying and holding existing assets," he added. "Under an Opportunity Zone structure, if you refinance the property and take cash out of the Opportunity Zone fund, that would be a disposition and would trigger the gain, thus reducing the amount of investment that is eligible for the 10-year deferral."

Real Estate Investors

Additionally, real estate investors stand to receive significant tax advantages through the Opportunity Zone program, according to Bernier. "As collateral, it is possible to borrow against the Opportunity Zone fund, a very important option for real estate investors," he said. "There are a few extra hurdles to using that strategy, but it’s valuable in the real estate world and would be the rough equivalent of a cash-out refinancing."

Additionally, Bernier noted the generous latitude that Treasury and the IRS used in defining certain statutory terms. For example, "‘substantially all’ of owned or leased assets was defined as 70 percent [in the proposed regulations]; this could have been as high as 90 percent or more," Bernier said. Further, "the time allowance for working capital is set at 30 months to deal with cash. This helps in getting the development done," he added.

Too Flexible?

The proposed regulations for the Opportunity Zone program may be too flexible, according to an October article released by the liberal-leaning Urban-Brookings Tax Policy Center (TPC). "Neither the statute nor the guidance ensure that the investments will benefit low- and moderate-income residents of these communities,"the TPC article noted. "The investment flexibility makes it very difficult to evaluate the success of Opportunity Zones."

Additionally, TPC researchers noted the need for proper reporting under the Opportunity Zone program. "The next round of IRS regulations and tax forms is expected to detail those reporting requirements,"the TPC article said. "It will be vital that this disclosure provide the public with the answers to a series of basic questions: Who is investing in Opportunity Zones? How much is being invested? How is the money being used?"

Likewise, the conservative-leaning Tax Foundation noted in an October 23 article that the proposed regulations do nothing to ensure the program’s success. "The benefits given to investors through opportunity funds are remarkably generous, and many of these regulations only increase and widen those benefits without regard to the results," the article said.

Further, stakeholders testifying before the Senate Small Business Committee in early October also emphasized the importance of establishing proper reporting metrics for the program.

Questions Remain

Although stakeholder feedback has been largely positive, stakeholders and practitioners have noted several areas where additional IRS guidance is needed. Particularly, uncertainties surrounding the application of the QOF penalty, tax treatment of the sale of a QOF asset, and clarity on the definition of qualified opportunity zone business property are reportedly among items circulating the tax community as needing further guidance.

After the IRS released the proposed regulations, Sen. Scott praised the guidance while also noting that it is incomplete. "The first set of rules released by the Treasury Department today reinforce that this will not be another bureaucratic process burdened by red tape, but rather a streamlined, efficient process that allows for investments to truly help communities in need," Scott said.

Additionally, Bernier told Wolters Kluwer that future regulations are needed to "fill in gaps." The next package of proposed regulations are "anticipated in November and December, "he added.

To that end, the House’s top tax writer has urged stakeholders in a recent statement to provide feedback on the proposed regulations. Moreover, those comments should include "identifying any areas where additional technical guidance would be valuable in providing certainty to potential investors and project managers," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said.

The IRS is expected to soon release proposed regulations for tax reform’s new business interest limitation. "They are so broad that nearly every domestic taxpayer will be impacted," Daniel G. Strickland, an associate at Eversheds Sutherland, told Wolters Kluwer.

The IRS is expected to soon release proposed regulations for tax reform’s new business interest limitation. "They are so broad that nearly every domestic taxpayer will be impacted," Daniel G. Strickland, an associate at Eversheds Sutherland, told Wolters Kluwer.

The first set of proposed regulations for the Code Sec. 163(j) business interest limitation is expected to focus primarily on corporations. A second package of proposed regulations, expected sometime in December, will reportedly address the business interest limitation’s treatment of partnerships and S corporations.

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, amended Code Sec. 163(j) to include a broader limitation on the business interest expense deduction. Before last year’s tax reform, the former Code Sec. 163(j) "earnings stripping" rules were applied much more narrowly to a specific type of debt-to-equity ratio held by corporations. Now, the amended Code Sec. 163(j)limitation encompasses all debt, regardless of entity or individual. The new business interest limitation was intended by Republicans, at least in part, to serve as a revenue raiser to help offset tax reform’s significant corporate tax rate reduction from 35 to 21 percent.

OMB Review

Currently, the proposed regulations for the Code Sec. 163(j) business interest limitation are under review at the Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA). OIRA received the proposed regulations from Treasury and the IRS on October 25, according to OIRA’s website.

It is expected on Capitol Hill that a 10-day expedited review process that is available for tax reform-related regulations was requested.

Business Interest Limitation

Under the amended Code Sec. 163(j), a taxpayer’s annual business interest expense for the tax year, effective for tax years after December 31, 2017, is limited to the following three factors:

• business interest income;
• 30 percent of adjustable taxable income (ATI); and
• floor plan financing interest.

Under the TCJA, business interest excludes "investment interest" as defined in Code Sec. 163(d). Additionally, the calculation requirements for "adjusted taxable income" are set to change in 2022.

Practitioner Insight

"In terms of statutory language, phrases like ‘properly allocable’ jump off the page,"Strickland told Wolters Kluwer. Under the TCJA, "business interest" is defined as any interest paid or accrued on indebtedness that is properly allocable to a trade or business. It remains to be seen how the IRS will identify what is "properly allocable,"according to Strickland.

"Since propriety differs between taxpayers and the government, it will be interesting to see how the regulations handle it," Strickland said. "Will we get a two-pronged objective and subjective test or will there be a bright line rule?" he posited.

Additionally, Strickland said that tax practitioners expect allocation rules will be included, but noted that it remains unclear what form the rules will take. Whether there will be separate rules for different types of entities and how the IRS will treat allocation between exempt and non-exempt entities and within consolidated groups are all interesting yet unsettled components, according to Strickland.

Further, Strickland predicted that the forthcoming regulations will clarify how Code Sec. 951A’s global intangible low-taxed income (GILTI) provision will interact with Code Sec. 163(j). "In the same vein, I expect that we will see how 163(j) plays with 168(k) and 267A, among other sections," he added. "As we get each new piece of the puzzle, the whole picture comes into focus."

The IRS recently announced that inflation is increasing many dollar amounts in the Tax Code for 2012.  For taxpayers, the inflation adjustments may help reduce their overall tax liability in 2012.

Inflation adjustments

Many provisions in the Tax Code are required to be adjusted annually for inflation. These include various deductions, exemptions and exclusion amounts.  The tax law also requires that the individual income tax brackets be adjusted annually for inflation.  Low inflation in 2009 and 2010 resulted in many of the provisions experiencing no increases for 2010 and 2011.

Next year is different. In October, the IRS announced that inflation is running at just over 3.8 percent. In response, the IRS adjusted a number of amounts in the Tax Code upward for 2012.

Retirement accounts

401(k) plans. For 2012, the maximum amount an individual can contribute tax-free to a 401(k) plan increases $500 from $16,500 to $17,000.  However, some 401(k) plans limit maximum contributions to levels below the ceiling in the Tax Code.

IRAs. The deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of households who are covered by a workplace retirement plan and whose modified adjusted gross incomes fall within certain ranges. For 2012, the income phaseout range starts at $58,000 and ends at $68,000, up from $56,000 and $66,000, respectively, for 2011.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phaseout range for 2012 starts at $92,000 and ends at $112,000, up from $90,000 and $110,000, respectively, for 2011.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out for 2012 if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000, respectively, for 2011.

Roth IRAs are subject to similar rules. The AGI limit for maximum Roth IRA contributions for a married couple filing a joint return for 2012 is $173,000, an increase of $4,000 from 2011. The AGI limitation for all other taxpayers (other than married taxpayers filing separate returns) increases from $107,000 for 2011 to $110,000 for 2012.

Saver’s credit.  The Code Sec. 25B credit rewards eligible individuals with a tax credit for contributing to a retirement plan or an IRA.  For 2012, the AGI limit for the “saver’s credit” increases for single individuals to $28,750, an increase of $500 from 2011. The AGI limit for married couples filing joint returns increases from $56,500 for 2011 to $57,500 for 2012.

Individual income tax brackets

Inflation also impacts the individual income tax rate brackets (which are 10, 15, 25, 28, 33, and 35 percent, respectively, for 2011 and 2012).  Indexing of the income tax rate brackets effectively lowers tax bills by including more of an individual’s income in lower brackets.

More inflation adjustments

Standard deduction. Taxpayers who elect not to itemize deductions use the standard deduction amount. The standard deduction increases by $500 for married couples filing a joint return from $11,400 for 2011 to $11,900 for 2012.   The standard deduction for single individuals increases from $5,700 for 2011 to $5,950 for 2012.

Personal exemption.  Taxpayers may claim a personal exemption deduction (and an exemption deduction for each person they claim as a dependent). The amount of the personal exemption and the dependency exemption increases from $3,700 for 2011 to $3,800 for 2012.  The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) repealed the personal exemption phaseout for higher income taxpayers for 2011 and 2012.

Estate tax.  The 2010 Tax Relief Act provided that the basic exclusion amount for determining the amount of the unified credit against estate tax for estates of decedents dying after December 31, 2009 is $5 million. The $5 million amount is adjusted for inflation for tax years beginning after December 31, 2011. For 2012, the inflation-adjusted amount is $5,120,000.

Gift tax exclusion.  For 2012, you can give up to $13,000 to any person without incurring gift tax. Married couples can gift up to $26,000 tax-free to any person. There is no limit on the number of individuals you can make the $13,000 ($26,000) gift. The $13,000 and $26,000 amounts are unchanged from 2011.

If you have any questions about these or other inflation adjustments, please contact our office.

In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program.  It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation before the IRS or Department of Labor initiates an examination.

The distinction between independent contractors and employees is significant for employers, especially when they file their federal tax returns. While employers owe only the payment to independent contractors, employers owe employees a series of federal payroll taxes, including Social Security, Medicare, Unemployment, and federal tax withholding. Thus, it is often tempting for employers to avoid these taxes by classifying their workers as independent contractors rather than employees.

If, however, the IRS discovers this misclassification, the consequences might include not only the requirement that the employer pay all owed payroll taxes, but also hefty penalties. It is important that employers be aware of the risk they take by classifying a worker who should or could be an employee as an independent contractor.

“All the facts and circumstances”

The IRS considers all the facts and circumstances of the parties in determining whether a worker is an employee or an independent contractor. These are numerous and sometimes confusing, but in short summary, the IRS traditionally considers 20 factors, which can be categorized according to three aspects: (1) behavioral control; (2) financial control; (3) and the relationship of the parties.

Examples of behavioral and financial factors that tend to indicate a worker is an employee include:

• The worker is required to comply with instructions about when, where, and how to work;
• The worker is trained by an experienced employee, indicating the employer wants services performed in a particular manner;
• The worker’s hours are set by the employer;
• The worker must submit regular oral or written reports to the employer;
• The worker is paid by the hour, week, or month;
• The worker receives payment or reimbursement from the employer for his or her business and traveling expenses; and
• The worker has the right to end the employment relationship at any time without incurring liability.

In other words, any existing facts or circumstances that point to an employer’s having more behavioral and/or financial control over the worker tip the balance towards classifying that worker as an employee rather than a contractor. The IRS’s factors do not always apply, however; and if one or several factors indicate independent contractor status, but more indicate the worker is an employee, the IRS may still determine the worker is an employee.

Finally, in examining the relationship of the parties, benefits, permanency of the employment term, and issuance of a Form W-2 rather than a Form 1099 are some indicators that the relationship is that of an employer–employee.

Conclusion

Worker classification is fact-sensitive, and the IRS may see a worker you may label an independent contractor in a very different light. One key point to remember is that the IRS generally frowns on independent contractors and actively looks for factors that indicate employee status.

Please do not hesitate to call our offices if you would like a reassessment of how you are currently classifying workers in your business, as well as an evaluation of whether IRS’s new Voluntary Classification Program may be worth investigating.

Job-hunting expenses are generally deductible as long as you are not searching for a job in a new field. This tax benefit can be particularly useful in a tough job market. It does not matter whether your job hunt is successful, or whether you are employed or unemployed when you are looking.

Expenses directly connected with a job search are deductible as a miscellaneous itemized deduction. You can deduct job-hunting expenses if the amount of all your so-called miscellaneous itemized deductions exceeds two percent of your adjusted gross income. However, if you claim the standard deduction, you cannot deduct job-hunting expenses. Therefore, as a practical matter for many job seekers, job hunting expenses do not materialize as a tax deduction.

For those who are able to use job seeking expenses as a deduction, it can be difficult to determine what a new field is. A professional photographer who pursues a job in the retail industry clearly is searching in a new field and cannot deduct any of his or her job-hunting expenses. But there are exceptions. The IRS has allowed persons who retired from the military to search for jobs in new fields and claim their job-hunting expenses. Taking a temporary job while searching for permanent employment in your current field will not be considered a job change that disqualifies your job-hunting expenses.

Persons entering the job market for the first time, such as college students, and persons who have been out of the job market for a long period of time, such as parents of young children, cannot deduct their job-hunting expenses. However, a college student who worked in a particular field while in school may be able to deduct job-hunting expenses.

Deductible expenses include typing, printing and mailing a resume. Long-distance phone calls are also deductible. You can deduct travel costs for going on a job search or an interview, including air transportation, railroad, or car expenses. The standard rate for car expenses for business is 55 cents per mile for 2012. Amounts you pay to a job counselor, employment agency or job referral service are all deductible.

It is important to keep records of your costs. While your individual expenses may not be substantial, your total expenses can add up to a significant amount.

Many tax benefits for business will either expire at the end of 2011 or become less valuable after 2011. Two of the most important benefits are bonus depreciation and Code Sec. 179 expensing. Both apply to investments in tangible property that can be depreciated. Other sunsetting opportunities might also be considered.

Bonus depreciation

Bonus depreciation is 100 percent for 2011. A business can write-off, in the first year, the entire cost of its investment in new depreciable property. Under current law, bonus depreciation will decrease to 50 percent in 2012 and will terminate after 2012. (These deadlines are extended one year for certain transportation property and property with a longer production period). President Obama has proposed to extend 100 percent bonus depreciation through 2012. Normally, this would have a good chance of being approved, but with the focus on deficit reduction and the linking of tax benefits to tax increases, it is not at all clear what will happen.

So, if a business has income in 2011 and plans to invest in depreciable property, it is worthwhile to consider making that investment in 2011, while the available write-off is at its highest. Under normal depreciation rules, a business will still be able to claim accelerated write-offs, but this may be 50 percent or less of the cost of the property, with the balance written-off over several years, instead of all in one year.

Planning for bonus depreciation is important because the property must satisfy placed-in-service and acquisition date requirements. Property is placed in service when it is in a condition or state of readiness on a regular ongoing basis for a specifically assigned function in a trade or business. The acquisition date rules may vary. For 2011, property is acquired when the taxpayer incurs or pays its cost. This could occur when the property is delivered, but it could also be when title to the property passes. For 2012, property is acquired when the taxpayer takes physical possession of the property.

Code Sec. 179 expensing

Code Sec. 179 expensing (first-year writeoff) has been around for awhile, but at higher amounts more recently. While there is no limit on bonus depreciation, expensing is limited to a statutory amount. For 2011, this amount is $500,000. It is scheduled to drop to $125,000 in 2012 and to $25,000 after 2012 (adjusted for inflation). Moreover, the cap is reduced for the amount of total investment in Code Sec. 179 property. The phaseout threshold is $2 million for 2011, dropping to $500,000 for 2012 and $200,000 for 2013 and subsequent years. For businesses who want to invest in depreciable property, the payoff is definitely greater in 2011. Taxpayers taking advantage of expensing should write off assets that would otherwise have the longest recovery periods.

Other 2011 benefits

Some other important benefits expire at the end of 2011 or become less valuable. A significant benefit in 2011 is the 100 percent exclusion for small business stock. After 2012, the normal exclusion rate will drop to 50 percent, although it has been 75 percent in recent years. The exclusion is based on the year the stock is acquired; the stock must be held for five years before sold and satisfy other requirements.

Another important benefit is the 20 percent research credit. The credit has been extended one year at a time for a long period, so it is likely to be extended again. Nevertheless, until Congress acts, there is some uncertainty for research expenses incurred after 2011.

Conclusion

To maximize the benefits of 2011 year-end tax planning, a business must be proactive in determining what upcoming capital investments might be accelerated into this year and what investments become cost effective because of the immediate tax benefits that they offer. Some business-related tax benefits will be less valuable after 2011; for others, it is not clear what Congress and the administration will do in terms of surprising taxpayers with a year-end tax bill. Please contact this office if you have any questions over how year-end tax strategies that begin now and continue through December can help maximize tax benefits for your business.

When an individual dies, certain family members may be eligible for Social Security benefits. In certain cases, the recipient of Social Security survivor benefits may incur a tax liability.

Family members

Family members who can collect benefits include children if they are unmarried and are younger than 18 years old; or between 18 and 19 years old, but in an elementary or secondary school as full-time students; or age 18 or older and severely disabled (the disability must have started before age 22).  If the individual has enough credits, Social Security pays a one-time death benefit of $255 to the decedent’s spouse or minor children if they meet certain requirements.

Benefit amount

The benefit amount is based on the earnings of the decedent.  The more the decedent paid into Social Security, the larger the benefit amount. Social Security uses the decedent’s basic benefit amount and calculates what percentage survivors may receive. That percentage depends on the age of the survivors and their relationship to the decedent. Children, for example, receive 75 percent of the decedent’s benefit amount. 

Taxation

The person who has the legal right to receive Social Security benefits must determine whether the benefits are taxable. For example, if a taxpayer receives checks that include benefits paid to the taxpayer and the taxpayer's child, the child's benefits are not considered in determining whether the taxpayer's benefits are taxable. Instead, one half of the portion of the benefits that belongs to the child must be added to the child's other income to see whether any of those benefits are taxable to the child.

Social security benefits are included in gross income only if the recipient's "provisional income" exceeds a specified amount, called the "base amount" or "adjusted base amount."  There are two tiers of benefit inclusion. A 50-percent rate is used to figure the taxable part of income that exceeds the base amount but does not exceed the higher adjusted base amount. An 85-percent rate is used to figure the taxable part of income that exceeds the adjusted base amount.

Up to 50 percent of Social Security benefits could be included in taxable income if a recipient's provisional income is more than the following base amounts:

--$25,000 for single individuals, qualifying surviving spouses, heads of household, and married individuals who live apart from their spouse for the entire tax year and file a separate return; and

--$32,000 for married individuals filing a joint return;

--zero for married individuals who do not file a joint return and do not live apart from their spouse during the entire tax year

Up to 85 percent of benefits could be included in taxable income if a recipient's provisional income is more than the following adjusted base amounts:

--$34,000 for single individuals, qualifying surviving spouses, heads of household, and married individuals who live apart from their spouse for the entire tax year and file a separate return; and

--$44,000 for married individuals filing a joint return;

--zero for married individuals who do not file a joint return and do not live apart from their spouse during the entire tax year.

If the taxpayer's provisional income does not exceed the base amount, no part of Social Security benefits will be taxed. For taxpayers whose income exceeds the base amount, but not the higher adjusted base amount, the amount of benefits that must be included in income is the lesser of:

--One-half of the annual benefits received; or

--One-half of the amount that remains after subtracting the appropriate base amount from the taxpayer's provisional income.

Taxpayers whose provisional income exceeds the adjusted base amount must include in income the lesser of:

--85 percent of the annual benefits received; or

--85 percent of the excess of the taxpayer's provisional income over the applicable adjusted base amount plus the smaller of: (a) the amount calculated under the 50-percent rules above, or (b) one-half of the difference between the taxpayer's applicable adjusted base amount and the applicable base amount. One-half of the difference between the base amount and the adjusted base amount is $6,000 for married taxpayers filing jointly and $4,500 for other taxpayers. For taxpayers who are married, not living apart from their spouse, and filing separately, the amount will always be zero.

If you have any questions about the taxation of Social Security benefits, please contact our office.

Congress has returned to work after its August recess under a tight deadline to reduce the federal budget deficit and also, possibly, extend some expiring tax incentives.  Between now and the end of the year, Congress could enact significant tax reform in a deficit reduction package; or it may take a piecemeal approach. All this Congressional activity contributes to uncertainty in tax planning.

Joint committee’s task

On August 2, 2011, President Obama signed the Budget Control Act of 2011 (P.L. 112-25).  Along with cutting approximately $1 trillion in federal spending and raising the federal debt ceiling, the Budget Control Act creates a special a bipartisan joint select committee of Congress to propose more deficit reduction measures.   The Budget Control Act charges the Joint Select Committee on Deficit Reduction with reducing the federal government budget deficit by at least $1.5 trillion over fiscal years 2012 to 2021. If the joint committee cannot agree on deficit reduction measures, or if Congress rejects the committee’s proposals, the Budget Control Act provides for automatic cuts over the coming decade.

The12-member joint committee is composed of an equal number of members from both parties: six Democrats and six Republicans.  The joint committee must make its proposals, in legislative language, not later than November 23, 2011 (if a majority of the committee agrees on the proposals). Congress must vote on the proposals not later than December 23, 2011.

Flood of proposals expected

The joint committee is expected to be flooded with proposals to reduce the federal deficit.  President Obama has urged the joint committee to take a “balanced approach” to deficit reduction. The president has called for reducing the federal deficit through a combination of spending cuts and revenue raisers. Some of the tax provisions mentioned by President Obama for repeal or reform include tax incentives for oil and gas producers and the last-in, first-out (LIFO) method of accounting. President Obama also wants Congress to extend the two percent payroll tax cut, which is scheduled to expire after 2011.

One of the most contentious proposals the joint committee may address is the fate of the Bush-era tax cuts. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act (2010 Tax Relief Act) extended the Bush-era tax cuts through the end of 2012. President Obama wants to extend the Bush-era tax cuts for lower and middle income taxpayers but not for higher income taxpayers (which the White House defines as individuals with incomes over $200,000 and families with incomes over $250,000).  It is unclear at this time if the joint committee will take up the Bush-era tax cuts.

The joint committee may look to some recent tax reform proposals for guidance. In 2010, the President's National Commission on Fiscal Responsibility and Reform developed a six-part plan to reduce the federal deficit. The commission recommended reducing or eliminating many tax incentives for individuals in exchange for lower individual income tax rates. The commission also endorsed lowering the corporate tax rate to 26 percent. In July 2011, a bipartisan group of senators, known as the "gang of six," introduced a plan for deficit reduction. The senators' plan would, among other provisions, replace the current individual income tax rate schedule with three new tax brackets along with abolishing the alternative minimum tax (AMT).

Expiring tax provisions

A number of popular but temporary tax incentives (known as “tax extenders) are scheduled to expire after 2011. In past years, Congress has routinely extended many of them. This year may be different. The joint committee could include the tax extenders in its work, extending some but allowing others to expire. Alternatively, the joint committee could decide not to touch the tax extenders. In that case, some or all of them could be extended in separate legislation.

Some of the extenders scheduled to expire after 2011 are (not an exhaustive list):

• Research tax credit
• 15-year recovery for qualified leasehold improvements, restaurant property and retail improvements
• Work Opportunity Tax Credit
• Employer wage credit for activity military reservists
• Indian employment credit and accelerated depreciation for business property on Indian reservations
• Special expensing rules for film and production costs
• Basis adjustment to stock of an S corporation making charitable contributions
• Enhanced deduction for charitable contributions of food inventory, corporate charitable contributions of book inventory and corporate charitable contributions of computers
• Expensing of environmental remediation costs
• Grants for investment in certain energy property in lieu of tax credits
• Income tax credit for alcohol fuels
• Refined coal production facilities credit
• Tax treatment of payments to controlling exempt organizations
• Subpart F exceptions for active financing income

Additionally, one hundred percent bonus depreciation is scheduled to expire after 2011 (except for property with a longer production period).  Enhanced Code Sec. 179 expensing ($500,000 maximum amount/$2 million investment ceiling) also is scheduled to expire after 2011.

At this time, September 2011, it is not too early to contemplate how tax reform could impact your planning. Please contact our office and we can schedule a time to review your tax strategy.