New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.

New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.

Final Regulations

The final regulations in T.D. 98xx_1 largely adopt the proposed regulations in NPRM REG-107892-18 (August 16, 2018), but with substantial modifications.

Taxpayers are likely to be disappointed in one thing that did not change: all items treated as capital gain or loss, including Section 1231 gains and losses, are still excluded from qualified business income (QBI). Taxpayers should continue to apply the Section 1231 netting and recapture rules when calculating the Code Sec. 199A deduction.

However, the final regulations drop the rule that treated an incidental non-specified services trade or business (SSTB) as part of an SSTB if the businesses were commonly owned and shared expenses, and the non-SSTB’s gross receipts were no more than five percent of the business’s combined gross receipts.

The final regulations make several adjustments to the proposed regulations for estates and trusts. Most significantly, the final regulations remove the definition of "principal purpose" under the anti-abuse rule that allows the IRS to aggregate multiple trusts. The IRS is taking this issue under advisement. Also, in determining if a trust or estate has taxable income that exceeds the threshold amount, distributions are no longer excluded. Instead, the entity’s taxable income is determined after taking into account any distribution deduction under Code Sec. 651 or Code Sec. 661.

The final regulations retain the presumption that an employee continues to be an employee while doing the same work for the same employer. However, the regulations provide a new three-year look back rule, and allow the worker to rebut the presumption by showing records (such as contracts or partnership agreements) that corroborate the individual’s status as a non-employee.

Other changes of note include:

• Disallowed, limited or suspended losses must be used in order from the oldest to the newest, on a FIFO (first in, first out) basis.
• A relevant passthrough entity (RPE) can aggregate businesses.
• If an RPE fails to report an item, only that item is presumed to be zero; the missing information may be reported on an amended return.
• The S portion and non-S portion of an electing small business trust (ESBT) are treated as a single trust for purposes of determining the threshold amounts.

Proposed Regs for QBI, RICs, Trusts, Estates

Taxpayers may rely on the proposed regulations in NPRM REG-134652-18, which cover three broad topics.

First, in calculating QBI, previously disallowed losses are treated as losses from a separate trade or business. If the losses relate to a publicly traded partnership (PTP), they must be treated as losses from a separate PTP. Attributes of the disallowed loss are determined in the year the loss is incurred.

Second, a RIC that receives qualified REIT dividends may pay Section 199A dividends. The IRS continues to consider permitting conduit treatment for qualified PTP income received by a RIC, and seeks public comment on this issue.

Finally, the proposed regulations also provide rules for charitable remainder unitrusts (and their beneficiaries), split-interest trusts, and separate shares.

Rental Real Estate Enterprise

The proposed revenue procedure set forth in Notice 2019-7 provides a safe harbor for a rental real estate enterprise to be treated as a trade or business for purposes of Section 199A. RPEs can also use the safe harbor.

A rental real estate enterprise must satisfy three conditions to qualify for the safe harbor:

• Separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise.
• At least 250 or more hours of rental services must be performed per year with respect to the rental enterprise. For tax years beginning after December 31, 2022, this test can be satisfied in any three of the five consecutive tax years that end with the tax year.
• The taxpayer must maintain contemporaneous records of relevant items, including time reports, logs, or similar documents. (This requirement does not apply to tax years beginning in 2018.)

Relevant items include hours of all services performed, description of all services performed, dates on which such services were performed, and who performed the services.

W-2 Wages

Rev. Proc. 2019-11 allows taxpayers to use one of three methods to calculate W-2 wages for the passthrough deduction:

• the unmodified Box method;
• the modified Box 1 method; or
• the tracking wages method.

These methods were proposed in Notice 2018-64, I.R.B. 2018-35, 347. The unmodified Box method is simplest, but the other two methods are more accurate.

Comments Requested

The IRS requests comments on the proposed regulations and the proposed safe harbor. The IRS must receive the comments and any requests for public hearing within 60 days after the proposed regulations are published in the Federal Register.

The IRS has provided safe harbors for business entities to deduct certain payments made to a charitable organization in exchange for a state or local tax (SALT) credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose. Proposed regulations that limit the charitable contribution deduction do not affect the deduction as a business expense.

The IRS has provided safe harbors for business entities to deduct certain payments made to a charitable organization in exchange for a state or local tax (SALT) credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose. Proposed regulations that limit the charitable contribution deduction do not affect the deduction as a business expense.

Charitable Contributions and SALT Limit

An individual’s itemized deduction of SALT is limited to $10,000 ($5,000 if married filing separately). Some states and local governments have adopted or considered adopting laws that allowed individuals to receive a tax credit for contributions to funds controlled by the state and local government.

Under proposed regulations, however, an individual, estate, and trust generally must reduce the amount of any charitable contribution deduction by the amount of any SALT credit he or she receives or expects to receive for the transfer. A de minimis exception allows a taxpayer to disregard up to 15 percent of the payment or transfer to the charitable organization.

C Corporations

If a C corporation makes the charitable payment in exchange for a state and local tax credit, it may deduct the payment as an ordinary and necessary business expense to the extent of any SALT credit received or expected to receive.

Specified Pass-Through Entity

A specified pass-through entity may also deduct the payment as an ordinary and necessary business expense, but only if the SALT credit applies or is expected to apply to offset a SALT other than an income tax. A specified pass-through entity for this purpose is any business entity other than a C corporation that is regarded as separate from its owner for all federal income tax purposes (i.e., disregarded entity). The entity also must operate a trade or business within the meaning of Code Sec. 162 and be subject to SALT incurred in carrying on that trade or business that is imposed directly on the entity.

Effective Date

The safe harbors apply to any payments made to a charitable organization in exchange for a SALT credit paid on or after January 1, 2018.

How can an EA help me?

Enrolled agents advise, represent, and prepare tax returns for individuals, partnerships, corporations, estates, trusts, and any entities with tax-reporting requirements. The expertise of EAs in the continuously changing field of taxation enables them to effectively represent taxpayers audited by the IRS.

Privilege and the Enrolled Agent

The IRS Restructuring and Reform Act of 1998 allow federally authorized practitioners (those bound by U.S. Department of the Treasury Circular 230 regulations) a limited client privilege. This privilege allows confidentiality between the taxpayer and the enrolled agent under certain conditions. The privilege applies to situations in which the taxpayer is being represented in cases involving audits and collection matters. It is not applicable to the preparation and filing of a tax return. This privilege does not apply to state tax matters, although a number of states have an accountant-client privilege.

Are enrolled agents required to take continuing professional education?

In addition to the stringent testing and application process, the IRS requires enrolled agents to complete 72 hours of continuing professional education, reported every three years, to maintain their EA status. NAEA members are obligated to complete 90 hours per three-year reporting period. Because of the knowledge necessary to become an EA and the requirements to maintain the license, there are only about 40,000 practicing EAs.

What are the differences between enrolled agents and other tax professionals?

Only EAs are required to demonstrate to the IRS their competence in matters of taxation before they may represent a taxpayer before the IRS. Unlike attorneys and CPAs, who may or may not choose to specialize in taxes, all EAs specialize in taxation. EAs are the only taxpayer representatives who receive their right to practice from the U.S. government (CPAs and attorneys are licensed by the states).

Are enrolled agents bound by standards?

Enrolled agents are required to abide by the provisions of U.S. Department of the Treasury Circular 230, which provides the regulations governing the practice of EAs before the IRS. National Association of Enrolled Agents (NAEA) members also are bound by the NAEA Code of Ethics and Rules of Professional Conduct.

Why should I choose an enrolled agent who is a member of the National Association of Enrolled Agents?

The principal mission of the National Association of Enrolled Agents and its members is qualified, accurate, and ethical representation of the financial positions of taxpayers before governmental agencies. Members of NAEA must fulfill continuing professional education requirements that exceed the IRS required minimum. NAEA members comprise a strong network of experienced, well-trained tax professionals who effectively represent their clients and work to make the tax code fair and reasonably enforced.

How can I hire an enrolled agent?

The fastest way to locate an enrolled agent in your area is to visit www.naea.org. The ‘Find an EA’ function located on the home page will allow you to search instantly by locality or specialty. You also can reference your local phone book under the ‘Tax Preparation’ category and look for the phrase ‘Enrolled Agent,’ ‘Enrolled to Represent Taxpayers before the IRS,’ or the ‘EA’ credential following the name of the tax professional.

The "Nanny Tax" applies to employers of household employees, including but not limited to nannies. If you employ a nanny, home health care worker, or other household employee, read about your tax implications.

The IRS simplified filing requirements for employers whose only employees are household employees, such as nannies. (CT allows household employers to file employment forms annually instead of quarterly, except for unemployment forms, but otherwise requires the same filings as non-household employers.) For federal purposes, household employers file a Schedule H as part of their Form 1040 income tax return to report employee wages as well as Social Security, Medicare, and Federal Unemployment Taxes.

In addition, the household employer may choose to pay the employee’s share of Social Security and Medicare taxes from the employer’s own funds. (This choice is common for household employers paying a nanny.) If the employer does NOT choose to pay the employee’s share, she will withhold the employee portion (7.65% of wages) from each paycheck.

The household employee may request that her employer withhold federal and/or state income taxes. If so, the employee completes a Form W-4 and Form CT-W4 for her employer’s files.

The household employer and the employee must complete the U.S. Citizenship and Immigration Services (USCIS) Form I-9 Employment Eligibility Verification no later than the first day of work. Get the form at www.uscis.gov. Keep the completed form with employer records.

If the household employer chooses to pay the employee’s share of social security and Medicare taxes and if the household employee does not choose to have federal and state income taxes withheld, the following summarizes the transactions between a household employer and the household employee:

•Household employer pays the household employee her gross wages via check weekly (most common) or biweekly with no withholdings deducted.

•By 31 January, the household employer gives her household employee her W-2.

•By 31 January, the household employer sends Copy A of all Forms W-2 to the Social Security Administration.

•By 15 April, the household employer files Schedule H as part of her Form 1040 to pay the Social Security and Medicare taxes for herself and her household employee (a total of 15.3% of wages).

For example, if the household employee receives checks totaling $10,000 during 2007:

•Take-home pay was $10,000.

•W-2 wages will be $10,765 to include the 7.65% household employee share of Social Security and Medicare the household employer will pay for her.

•The household employer will remit an additional $1,530 plus federal unemployment tax (8% on the first $7,000 with credit subtracted for timely state payments) to pay her share of payroll taxes as well as the household employee share of social security and Medicare taxes.

The household employEE will make quarterly estimated payments to cover her estimated federal and state income taxes due or adjust other withholdings.

The household employER will make quarterly estimated payments to cover her own estimated federal and state income taxes as well as her Schedule H payroll taxes or adjust other withholdings.

The household employer must contact CT to receive state unemployment filing forms.

See IRS Topic 756, Publication 926, and Instructions for Schedule H available on www.irs.gov.

Rita Lewis will highlight issues that have been of concern to her clients.  Rita's Blog:  2019 Update on tax laws...  

BREAKING NEWS:

Well, they did it!! Read the separate articles to learn what the New Tax Act will mean to you over the next decade. A huge new tax law, revised tax forms, and most IRS employees furloughed for weeks, means we are all waiting on final tax forms, on final tax guidance, and for the IRS to catch up on their backlog this tax season. The IRS will not be ready to accept many tax forms until later in February.

And, they did NOT do it. When the government/IRS goes back to work, expect more new "clarifications" this year (probably later rather than earlier) as well as over the next few years, so check back here monthly to see the latest news for 2019 and for planning for the next few years. We're still waiting on all the "fall" guidance on the new tax laws. The latest topic is 247 pages long!

The revised withholding tables mean more in your take-home pay. But, that means your balance due or refund for 2018 with your federal return filed in 2019 will be an unpleasant surprise.

Refunds are much, much slower as the IRS battles tax return fraud. And, even slower if you take Education, Child Tax, Earned Income Credits, or use Head of Household filing status. And, slower still if you file an amended return.

Also, expect your tax preparer to ask a LOT more due diligence questions if you want to take the American Opportunity, Child Tax, &/or Earned Income Credits, or use Head of Household filing status. EXPANDED questionaires are part of your tax return if claiming any of those credits or HoH filing status.

You NEED your Form 1098-T as well as a transcript from the bursar's office AND what YOU PAID to qualify for any Educational Credits or Deductions.

NEW: If you receive a Form K-1 for 2018 or future years, it will have additional information due to the new tax laws. And, it will take your tax return preparer more time to complete your returns.

Remember that the IRS and the Social Security Administration/Medicare and CT and most states contact you via US Mail and NOT electronically. There are a lot of very aggressive telephone scams out there, including some targeting Medicare recipients. Do NOT pay anyone who claims to be from the IRS or Medicare or any governmental unit without calling me first. Newer scams target employees in human resource departments and request W-2 information. And, a new official-looking MAILING targets LLCs in CT and other states. Read carefully!

CONNECTICUT

Repeat: A new official-looking MAILING targets LLCs in CT and other states. CT did NOT change how you file and pay your annual report to the Secretary of the State.

CT continues to reduce the value of the property tax credit, and has made many new 2018 tax law changes.

If you are part of a partnership or S-corporation, new CT laws are retroactive to 1 January 2018. Partnerships and S-corporations must pay estimated taxes to CT. Partners and shareholder/employees can make correspondingly lower payments to CT; they will get credit for a percentage of payments made by their pass-through companies to CT.

The CT Forms K-1 will have additional information due to CT's new tax law. And, it will take your tax return preparer more time to complete your returns.

CT also jumped on the problem of fraudulent tax returns, so don't be surprised if CT contacts you to prove your identity. This also means slower refunds.

And, the CT Department of Revenue Services frequently demands proof of eligibility for it's fairly new Earned Income Credit.

CT's Department of Labor is taking a hard look at Independent Contractor vs. Employee issues.

NEW TAX LAW

Expect Many, Many Interpretations of our New Tax Laws! Effective dates are 2018 and later. Sunset date is 2025.

The new tax laws and the revised tax forms and the lack of clarification from Congress and the government shutdown and the furloughed IRS employees mean your tax preparer will spend more time on your tax returns this year. And, ask you a lot of new questions.

As usual, Congress gives and it takes away. Before you rely on any new law to change your tax position, call Rita Lewis at 203-557-0909 to learn if the law was in the signed version, or was extended or modified or expired, or if income phase-outs reduce the law's application to your specific situation.

CAUTION: Any and all laws still could change during 2019 for 2018, yes 2018, and future tax returns.