Tax reform legislation widely known as the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) was signed into law on December 22, 2017. The TCJA brought forth the most sweeping overhaul of the U.S. tax code in over 30 years. However, widespread efforts to implement the TCJA amidst ongoing tax-related global developments continue to this day. Now, two years following its enactment, Treasury, the IRS, and the tax community remain steadfast in working toward understanding and communicating congressional intent under the new law.

Tax reform legislation widely known as the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) was signed into law on December 22, 2017. The TCJA brought forth the most sweeping overhaul of the U.S. tax code in over 30 years. However, widespread efforts to implement the TCJA amidst ongoing tax-related global developments continue to this day. Now, two years following its enactment, Treasury, the IRS, and the tax community remain steadfast in working toward understanding and communicating congressional intent under the new law.

The Tax Council Policy Institute (TCPI), a nonprofit, non-partisan public policy research and educational organization, will devote its 21st Annual Tax Policy & Practice Symposium to reviewing the current state of U.S. tax law and how it may continue to evolve, when it presents "Hindsight is 2020: What the TCJA and Global Developments Tell us About the Future of Tax" (February 13-14, 2020).

Wolters Kluwer Tax & Accounting sat down recently with two principal organizers of this year’s TCPI Symposium to preview some of the issues that will be discussed. Lynda K. Walker, Esq., is executive director and general counsel of TCPI. John Gimigliano is principal-in-charge of legislative and regulatory services in the Washington National Tax practice of KPMG LLP and former senior tax counsel for the House Ways and Means Committee. KPMG is program manager for the 2020 TCPI Symposium.

Wolters Kluwer: As the name of this year’s symposium reflects, hindsight is 20/20. Are there any particular policy choices made two years ago under the TCJA that standout now as being either well-matched or less than ideal for the functionality of the current U.S. tax system as it relates to domestic as well as multinational business?

Lynda K. Walker: Tax law is constantly evolving, and it seems now more rapidly than ever. Congress and the business community worked for years to advance some of the concepts in the TCJA, particularly the necessity of lower rates for global competitiveness. Enactment of the major overhaul of the business tax system within that legislation was met with much enthusiasm, but it is not the end of the challenge. Promulgation of regulations—an ongoing process—as well as implementation of those rules and the administration of them are major areas of focus for tax executives and will be covered extensively at our upcoming conference. We have designed this symposium’s program to examine how well the tax system is working to meet the goals that Congress was looking to achieve given the passage of time and the practical application of the law. The experts speaking at the symposium are from various fields and bring varying perspectives. We hope to provide our attendees with the gamut of expert thought on the issues of current interest. The program also strives to bring some new understanding to both external and internal pressures on our tax system(s) in the U.S. and globally, not only currently but prospectively.

John Gimigliano: In some ways it is almost too early to know, being only one complete tax filing season in, but that is part of what we are trying to explore by bringing together the experts at the symposium. Although the TCJA was a partisan piece of legislation and there were people that claimed it did or did not do certain things, hopefully we can now put that aside and evaluate what the law does and does not do, and maybe we now have enough experience with it to make those determinations.

Wolters Kluwer: As you mentioned, internal and external pressures on the federal tax system will be examined during the symposium. What are some examples of internal and external forces that affect tax policy generally?

John Gimigliano: You can look at budgetary and political pressures as key internal forces that affect all tax policy. As I said, the TCJA was a Republican bill, and Democrats have made it pretty clear that they have issues with not only how it was enacted but also the substance of the bill. We saw these internal, political pressures manifest especially because we had an election since the enactment of the TCJA, and the House has gone from Republican to Democratic-controlled. That is not to suggest cause and effect, but it does change the potential for changes to the system that was enacted in December of 2017. And, of course there is another big election looming that could change that political calculus again. As for external pressures, the most notable one is the work being done at the Organisation for Economic Co-operation and Development (OECD) to address the digital economy and the opportunity to change international tax rules pretty dramatically in a way that was not envisioned when the TCJA was negotiated, drafted, and enacted. Additionally, there are external trade pressures at work on the tax system. There has always been a fine line between tax and trade policy, and if we have dramatic changes in trade policy, it could certainly trickle over to the tax side.

Lynda K. Walker: Currently, we are seeing a recognition of the correlation between tax and trade policy that is vastly different from a few years ago. Among our peers in the tax policy community, we now talk about tax and trade as related in a way that seems to have more common acceptance than in the past. There is a convergence of these other global issues on tax policy in a very distinguishable way that is a big potential external pressure.

Wolters Kluwer: Can you touch upon the importance of businesses staying informed of the direction the OECD will go with regard to reforms to international tax standards?

Lynda K. Walker: It is really important that businesses pay very close attention to what is going on in the OECD, the European Union (EU), and other economic blocks around the world, perhaps now more than ever. During the time we were debating tax reform in this country, other countries began to move in their efforts to broaden their tax bases. We were occupied with tax reform, and their tax proposals and efforts were moving forward. Moreover, tax executives need certainty—and the whole debate and movement toward multilateral agreements from bilateral and unilateral jurisdictional action could be a forbearer to another regime in global taxation. It is important that taxpayers be part of the dialogue and that business has a seat at the table with government as matters that could have a sweeping impact on where and how business is conducted are discussed and determined.

Wolters Kluwer: As TCPI materials noted, the symposium is expected to highlight the "real world" effects of the TCJA and how it has changed thinking about global investment. What might a preview of this discussion include?

John Gimigliano: Now stepping away from the theoretical of enactment and all the things the TCJA may or may not do, it is important to examine what it means now to be a tax professional. With two years of experience with the TCJA, what does it really do, and how does it change the decisions that tax directors have to make as to whether, when, or where to buy equipment or to develop intellectual property? Those are the kind of questions we are hoping to address with this real world application of our experience with the TCJA.

Wolters Kluwer: Generally, have the regulations promulgated since passage of the TCJA succeeded in clarifying complex provisions of the statute?

Lynda K. Walker: The TCJA is so broad and impacts so much of the tax code, it really does seem like we are relying heavily on regulations, which we always do in the tax world, but we still need a lot more explanation on some of the TCJA provisions. I am sure it has been a challenge for the IRS, and we are very happy that we will have Michael J. Desmond, IRS chief counsel, with us for this symposium to provide some insight into how the IRS has proceeded and plans to continue to move forward with guidance.

John Gimigliano: This is the challenge of being in the executive branch and getting a piece of legislation handed to you and trying to make it work. As a former tax writer, it is often easier to write these provisions in the abstract, but it is so much more challenging in various ways to make sure that it works for taxpayers and that it is administrable by the IRS. You do not want to put the IRS in a position to fail with a provision that ultimately is impossible to administer. These are the challenges that the IRS has, and so far, by all accounts, both Treasury and the IRS have done a pretty good job. But there’s still so much left to do.

Wolters Kluwer: As for any particular provisions, especially those with final regulations, that may still carry uncertainty for taxpayers and practitioners, what might generally be the way to approach the conundrum?

John Gimigliano: I could point to many of the TCJA regulations that are finalized and still say that there are unanswered questions and that people are going to have to make judgment calls. That has always been the case with tax; there are always judgment calls to be made. There is no statute and no regulation that can ever anticipate every fact pattern. So, people will do their best to analyze the rules and examples provided but will ultimately have to make judgment calls.

Wolters Kluwer: How should U.S. businesses prepare for potential changes in tax policy after the elections?

Lynda K. Walker: Businesses should stay engaged in the process with policy makers and groups like TCPI. Tax executives should engage in the discussion, and never think tax law is static. Taxpayers should be prepared for government to revisit the tax code as fiscal and economic needs change, and be prepared to navigate those waters as they shift.

Wolters Kluwer: Can the current corporate tax rate really be considered "permanent" just because it was enacted as such under the TCJA, or is it a relatively impermanent feature of the tax code just like others, largely dependent upon which Party has the White House and majority in Congress?

Lynda K. Walker: It is definitely fair to say that there will be pressure put on the rate as well as the tax code in general, because both Parties have objectives that require money. I do not know that anyone believes anything in the tax code is absolutely written in stone. That is part of the challenge for business in that they need some level of certainty to make long-term business and investment decisions, and to have major changes on an ongoing basis does not provide that certainty.

John Gimigliano: Permanence is an illusion; nothing is permanent. And even temporary policy is somewhat misleading. Take for example the R&D tax credit that was finally made permanent after being considered temporary tax policy for over 30 years. These are all relative terms.

Wolters Kluwer: What are you hoping the symposium accomplishes?

Lynda K. Walker: We hope that this program accomplishes our mission, which is to bring about a stronger and better understanding of federal tax policies and how they impact business and the economy as a whole. We hope this brings some careful study to the forefront through active evaluation and open discussion so that people leave more engaged and perhaps more aware. In our programs, our goal is always to have as inclusive a dialogue as possible by engaging all the critical stakeholders, including government, business, and academia. We work diligently to elevate the discourse on issues where we all might not have exactly the same frame of reference but hopefully the same goal, which is a thriving economy where business can operate under fair and transparent tax laws.

John Gimigliano: I hope we can advance taxpayers’ and practitioners’ understanding of the TCJA. We have all had so many questions since its enactment in late 2017. Now with a little bit of time, hopefully by gathering these experts together and in keeping with TCPI’s mission, it will advance everyone’s understanding of the law—where it is working, where it is not, and what changes are likely to come.

For more information on the 2020 TCPI Symposium, go to https://www.tcpi.org/event/21st-annual-tax-policy-and-practice-symposium/.

On February 11, the White House released President Donald Trump’s fiscal year (FY) 2021 budget proposal, which outlines his administration’s priorities for extending certain tax cuts and increasing IRS funding. Treasury Secretary Steven Mnuchin testified before the Senate Finance Committee (SFC) on February 12 regarding the FY 2021 budget proposal.

On February 11, the White House released President Donald Trump’s fiscal year (FY) 2021 budget proposal, which outlines his administration’s priorities for extending certain tax cuts and increasing IRS funding. Treasury Secretary Steven Mnuchin testified before the Senate Finance Committee (SFC) on February 12 regarding the FY 2021 budget proposal.

Extension of TCJA’s Individual Tax Cuts
Trump’s FY 2021 budget proposal indicates that tax cuts for individuals and passthrough entities under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), which are set to expire at the end of 2025, would be extended. This extension is estimated to cost $1.4 trillion over 10 years, and is reportedly being used as a "placeholder" in the budget for Trump’s forthcoming "Tax Cuts 2.0" plan.

Infrastructure
Trump’s budget proposal also calls for a $1 trillion infrastructure package, although funding details remain scarce at this time. In January, House Democrats unveiled their infrastructure proposal, which also lacked funding details.

IRS Funding
Additionally, Trump’s budget proposes $12 billion in base funding for the IRS "to modernize the taxpayer experience and ensure that the IRS can fulfill its core tax filing season responsibilities." The budget proposal would boost IRS funding from currently enacted levels of $11.5 billion.

Further, the budget would provide $300 million to continue the IRS’s modernization efforts. Specifically, the budget proposal states that IRS funding would help to:

• digitize more IRS communications to taxpayers, so they can respond quickly and accurately to IRS questions;
• create a call-back function for certain IRS telephone lines, so taxpayers do not need to wait on hold to speak with an IRS representative; and
• make it easier for taxpayers to make and schedule payments online.

Hill Reaction
"The Trump Economy stands firm on the proven pro-growth pillars of tax cuts, deregulation, energy independence, and better trade deals," the budget proposal states. However, Democratic lawmakers, while highlighting criticisms of the TCJA, are all but promising Trump’s budget request will not become law.

"Repealing incentives to reduce carbon emissions will hinder our fight against climate change and deter the kind of innovation our planet needs. And extending misguided tax cuts for the richest Americans will only deepen the deficit and further concentrate wealth at the top," House Ways and Means Committee Chairman Richard Neal, D-Mass., said in a statement after the budget proposal was released.

"It [Trump’s budget proposal] doubles down on the failed 2017 GOP tax law, extending expiring provisions and adding $1.5 trillion more to debt over the last six years of the budget window. Most of this extension’s tax breaks go to the richest one-fifth of households," House Budget Committee Democrats said in a committee report during the week of February 10.

However, it is worth noting that Trump’s budget proposal is merely an annual starting point for budget negotiations as Congress has the "power of the purse." Additionally, many of Trump’s requests, particularly those that include extending TCJA tax cuts, would have little chance of successfully clearing the currently Democratic-controlled House.

SFC Hearing; Wyden Bill
Secretary Mnuchin spent much of the SFC hearing praising and defending the TCJA and Treasury’s implementation of the GOP law. "Tax cuts, regulatory reform, and better trade deals are improving the lives of hardworking Americans," Mnuchin told lawmakers. "Unemployment remains historically low at 3.6 percent and is at or near all-time lows for African Americans, Hispanic Americans, and veterans. The unemployment rate for women recently reached its lowest point in nearly 70 years," he added.

Likewise, SFC Chairman Chuck Grassley, R-Iowa praised the TCJA and pointed to the same statistics mentioned by Mnuchin as evidence of its success. "Statistics like these show the tax reform is a success. The Treasury Department’s work to implement the new tax law has been an important part of that success," Grassley said.

However, SFC ranking member Ron Wyden, D-Ore., did not mince words when criticizing Mnuchin’s leadership of Treasury, the TCJA, and related regulations. "It sure looks like corporate special interests are going to make off with new loopholes worth $100 billion in addition to their outlandish share of the original $2 trillion Trump tax law," Wyden said during his opening statement. "When people say the tax code is rigged and the Trump administration has made it worse, what I’ve described is a textbook case of what they are talking about."

In that vein, Wyden introduced a bill on February 12 which would block Treasury’s "exception to the new tax on foreign earnings that allows multinationals to essentially choose the lowest available tax rate," as noted in Wyden’s press release. During the hearing, Wyden accused Treasury of creating a new "corporate tax loophole." Generally, Wyden’s bill would amend the tax code to clarify that high-taxed amounts are excluded from tested income for purposes of determining global intangible low-taxed income (GILTI) only if such amounts would be foreign base company income or insurance income.

Recently, Democrats have been criticizing Treasury for proposing related GILTI regulations based on corporate interests, but Mnuchin vehemently denied that claim. "Our job is to implement the legislation, not to make the legislation," he told lawmakers during the hearing. "Our job has been to implement that part of the tax code consistent with the intent and as prescribed by the law and that is what we have done."

Energy Tax Policy
Meanwhile, on the other side of the Capitol, in a February 11 letter to Senator Grassley, nearly 30 Democratic senators called for prompt committee action on energy tax policy. "Despite numerous opportunities, including in the recent tax extenders package, the Finance Committee has failed to take action on the dozens of energy tax proposals pending before it," the senators wrote in the letter led by Wyden. "Energy tax incentives have played a key part in shaping U.S. energy policy for more than 100 years, and members have shown clear interest in re-examining that ongoing role."

House Committee on Transportation & Infrastructure, "Moving Forward Framework"; House Ways and Means Committee, January 29 hearing witnesses’ testimony

House Committee on Transportation & Infrastructure, "Moving Forward Framework"; House Ways and Means Committee, January 29 hearing witnesses’ testimony

House Democrats on January 29 unveiled their framework for a $760 billion infrastructure plan. Meanwhile, the House Ways and Means Committee held a hearing the same day to examine proposals for funding infrastructure and various "tools" within the Tax Code to encourage investment.

Democratic Infrastructure Framework
Notably, House Democrats’ infrastructure framework, which also contains proposals related to climate change, is considered on Capitol Hill as an opening bid. It is not legislative text, and it does not include any specificities on how to fund infrastructure.

"I think it is really important that we not volunteer a revenue stream until the administration reaches an agreement with us," House Ways and Means Committee Chairman Richard Neal, D-Mass., said in a January 29 news conference. President Donald Trump and Treasury Secretary Steven Mnuchin have both expressed a readiness to move forward on infrastructure.

Ways and Means Infrastructure Hearing
Among some of the funding proposals presented during the January 29 hearing, Neal emphasized his preference for tax-preferred bonds. "Tax-preferred bonds are one of our most powerful tools. When we invest in infrastructure, it results in a significant economic multiplier," Neal said in his opening statement at the hearing. To that end, some witnesses also testified in support of reinstating a program known as Build American Bonds (BABs) on a permanent basis to help finance infrastructure. Neal likewise expressed his support for reinstating BABs.

Additionally, some Democratic lawmakers have discussed raising taxes to help fund infrastructure, namely the federal gas excise tax. Although the move would be met with resistance by lawmakers on both sides of the aisle, Republicans are particularly vocal in their opposition. The last gas tax increase occurred in 1993.

"Workers who are driving used cars shouldn’t be paying higher taxes at the pump so that the wealthy can claim a tax credit for their $75,000 electric vehicles," ranking member Kevin Brady, R-Tex., said during the hearing. "Both will drive on roads and bridges but only the blue-collar worker will pay any taxes to maintain them."

Looking Ahead
Although infrastructure is indeed a priority among congressional tax writers and the Trump administration, the Democratic framework is largely seen as a campaign-related proposal ahead of the 2020 elections, quite similar to Republicans’ talk of "Tax Cuts 2.0." While lawmakers on both sides of the aisle and the U.S. Capitol are certainly eager to address these tax-related issues, it remains to be seen if requisite bipartisan agreement will be reached during an election year and a shortened legislative calendar.

House Democratic and Republican tax writers debated the effects of tax reform’s corporate income tax cut during a February 11 hearing convened by Democrats. Democratic lawmakers have consistently called for an increase in the corporate tax rate since it was lowered from 35 percent to 21 percent in 2017 by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

House Democratic and Republican tax writers debated the effects of tax reform’s corporate income tax cut during a February 11 hearing convened by Democrats. Democratic lawmakers have consistently called for an increase in the corporate tax rate since it was lowered from 35 percent to 21 percent in 2017 by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

During the House Ways and Means Committee hearing, Democrats largely criticized low federal income tax receipts from corporations following the TCJA’s corporate tax rate cut, while Republicans focused on highlighting the resulting economic growth and global competitiveness.

Corporate Tax Revenue
House Ways and Means Committee Chairman Richard Neal, D-Mass., opened the hearing by criticizing corporate tax revenues for being at their lowest level in history. "Some large corporations pay zero year after year. It is therefore not surprising that we collect less corporate tax revenue than all but one of the other OECD nations," Neal said during opening statements.

Similarly, Jason Furman, an economic policy professor in the Harvard Kennedy School and Department of Economics at Harvard University, told lawmakers during the hearing that the low levels of corporate tax revenue are a major reason why overall federal revenue is also low. Additionally, Furman told lawmakers that there is no evidence that the TCJA has made a "substantial contribution to investment or longer-term economic growth."

Inversions
However, Douglas Holtz-Eakin, president of the American Action Forum, testified that corporate tax receipts were falling before the TCJA ever took effect. He credited the TCJA’s corporate tax cut for essentially ceasing corporate inversions. A corporate inversion, in very general terms, is a process in which U.S.-based companies relocate operations outside of the country to reduce their tax burden.

"After years of having five to six prominent companies annually depart the United States, inversions have simply stopped," Holtz-Eakin testified. "Multinationals are bringing operations back to the United States, and many acquisitions of U.S. businesses now are made by U.S. firms, rather than foreign buyers," he added.

Further, Holtz-Eakin issued a reminder that "everyone bears the burden" of corporate income taxes. "Corporations are not walled off from the broader economy, and neither are the taxes imposed on corporate income. Taxes on corporations fall on stockholders, employees, and consumers alike."

JCT
The Joint Committee on Taxation (JCT), Congress’s nonpartisan scorekeeper, detailed in its February 10 report several contributing variables in understanding the corporate income tax equation and its relation to federal revenue. Generally, a corporation’s income tax liability is determined by applying a 21-percent rate to its taxable income.

As the JCT notes in its report, prior to the TCJA, the corporate income tax involved a four-step graduated tax rate schedule, with a top corporate tax rate of 35 percent on taxable income in excess of $10 million. The corporate income tax also included "an alternative minimum tax (AMT) that was payable (in addition to all other tax liabilities) to the extent that it exceeded the corporation’s regular income tax liability." However, the TCJA eliminated the graduated corporate rate structure and repealed the corporate AMT, effective in 2018.

More Hearings Expected
While this particular hearing convened by Democrats was generally seen on Capitol Hill to serve more of a messaging purpose rather than legislative purpose, more TCJA-related hearings are expected this year. "We’re going to be doing a series of hearings on the [GOP] tax bill," Neal told the press after the hearing. "People frequently pay a lot of attention to the spending side, and we are saying that there is also a revenue question here."

The IRS will allow a farmer that is exempt from the uniform capitalization (UNICAP) rules by reason of having average annual gross receipts of $25 million or less to revoke a prior election out of the UNICAP rules made under Code Sec. 263A(d)(3) with respect to pre-productive plant expenditures. The guidance also explains how a farmer may make an election out under Code Sec. 263A(d)(3) in a tax year in which the farmer is no longer exempt from the UNICAP rules as a qualifying small business taxpayer with $25 million or less in average annual gross receipts.

The IRS will allow a farmer that is exempt from the uniform capitalization (UNICAP) rules by reason of having average annual gross receipts of $25 million or less to revoke a prior election out of the UNICAP rules made under Code Sec. 263A(d)(3) with respect to pre-productive plant expenditures. The guidance also explains how a farmer may make an election out under Code Sec. 263A(d)(3) in a tax year in which the farmer is no longer exempt from the UNICAP rules as a qualifying small business taxpayer with $25 million or less in average annual gross receipts.

Revocation of the prior election out is beneficial because a farmer that makes the election must depreciate farm property placed in service during any tax year the election is in effect using the MACRS alternative depreciation system (ADS). ADS requires use of the straight-line method over depreciation periods that are generally longer than those that apply under the MACRS general depreciation system (GDS) if the election out is not made ( Code Sec. 263A(e)(2)). If the election out is revoked, a qualifying small business farmer remains exempt from the UNICAP rules under the $25 million gross receipts test but is no longer required to use ADS on existing or newly acquired property by reason of the prior election out.

In addition, a rule that treats all plants produced by the farmer as section 1245 property, and requires ordinary income recapture to the extent of deductions otherwise required to be capitalized, no longer applies to new plantings after revocation of the election out is made ( Code Sec. 263A(e)(1)).

Eligible Farmers
The election out may be revoked by a farmer that:

• is exempt from the UNICAP rules by reason of the $25 million average gross receipts test for qualifying small business taxpayers (as described in Code Sec. 448(c) and provided by Code Sec. 263A(i), as added by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), effective for tax years beginning after 2017);
• previously made the election out of UNICAP under Code Sec. 263A(d)(3); and
• wants to apply the $25 million gross receipts exemption for small business taxpayers in the same tax year that it revokes the Code Sec. 263A(d)(3) election out.

Revocation Procedure
An eligible small business farmer receives IRS consent to revoke a prior election out by continuing not to capitalize costs under the UNICAP rules on its original tax return (including extensions) for the tax year of the revocation of the election out, continuing to treat plantings in prior tax years as section 1245 property, and changing the depreciation method of farm property from ADS to GDS as explained below.

Special rule for 2018 tax year. A small business farmer that already filed a timely 2018 return may revoke the election out in the 2018 tax year by filing an amended 2018 return (an administrative adjustment request in the case of certain partnerships) before filing a 2019 return. Alternatively, Form 3115, Application for Change in Accounting Method, may be filed with a timely income tax return for the first, second, or third tax year following the 2018 tax year.

Changing From ADS to GDS
A farmer revoking the election out may cease using ADS to depreciate its existing farming property beginning in the year the election out is revoked, and ADS will not apply to farm property placed in service in the revocation year or thereafter. The switch from ADS to GDS is made using the MACRS change in use rules ( Reg. §1.168(i)-4(d)) and, therefore, the GDS method applies prospectively on the remaining basis of the farm property. The change in use rules, however, allow a farmer to elect to continue to depreciate its existing property using ADS. Property switched from ADS to GDS is not eligible for bonus depreciation. A farmer may make an ADS election for classes of newly acquired property under the usual ADS election rules.

A farmer revoking the election out has adopted an impermissible accounting method if it continues to use ADS in the revocation year and the following tax year (unless the election to continue using ADS was made under the change in use rules). In this case, a farmer must file Form 3115 and compute a section 481 adjustment as if the switch from ADS to GDS had been made in the revocation year. Similarly, a farmer that depreciates newly acquired property using ADS in the revocation year and the following year has adopted an impermissible method that must be corrected by filing Form 3115 unless a valid ADS election was made.

Losing Exemption Under Gross Receipts Test
The guidance allows a small business farmer to make a Code Sec. 263A(d)(3) election out of the UNICAP rules in the first tax year the farmer no longer qualifies for exemption under the $25 million average gross receipts test. The election out is made on the original tax return (including extensions) using the currently prescribed election Code Sec. 263A(d)(3) procedures, and by continuing not to capitalize costs under the UNICAP rules.

The electing farmer must use ADS to depreciate property placed in service in the election out year and subsequent years. Bonus depreciation may not be claimed on this property. An election out is not valid if ADS is not used to depreciate this property. ADS does not apply to property placed in service during tax years prior to the election out year.

Effective Date
The guidance is generally effective on February 21, 2020. Transition guidance is provided for taxpayers that filed a Form 3115 on or before February 21, 2020, to obtain consent to revoke a Code Sec. 263A(d)(3) election.

Rev. Proc. 2019-43, I.R.B. 2019-48, 1107, which lists the automatic accounting method changes, is modified to included certain accounting method changes described in the guidance.

Taxpayers claiming the low-income housing credit should apply the "average income" minimum set aside test by reference to the "very low-income" limits calculated by the U.S. Department of Housing and Urban Development (HUD) for purposes of determining eligibility under the HUD Section 8 program. HUD determinations for very low-income housing families are currently used to calculate the low-income housing credit income limits under the alternate "20-50" and "40-60" minimum set-aside tests.

Taxpayers claiming the low-income housing credit should apply the "average income" minimum set aside test by reference to the "very low-income" limits calculated by the U.S. Department of Housing and Urban Development (HUD) for purposes of determining eligibility under the HUD Section 8 program. HUD determinations for very low-income housing families are currently used to calculate the low-income housing credit income limits under the alternate "20-50" and "40-60" minimum set-aside tests.

Rev. Rul. 89-24, 1994-2 C.B. 5, as modified and superseded in part by Rev. Rul. 94-57, 1994-2 C.B. 5, is amplified.

Average Income Test
A taxpayer claiming the low-income housing credit under Code Sec. 42 must elect to satisfy one of three minimum-set aside tests:

• the "20-50" test, under which at least 20 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 50 percent or less of the area median gross income (AMGI);
• the "40-60" test, under which at least 40 percent of the residential units in the project must be both rent-restricted and occupied by tenants whose gross income is 60 percent or less of AMGI; or
• the "average income" test under Code Sec. 42(g)(1)(C), which was added by the Consolidated Appropriations Act of 2018 ( P.L. 115-141).

The average income test is satisfied if 40 percent or more of the residential units in the project (25 percent or more in the case of a project located in a high cost housing area) are both rent-restricted and occupied by tenants whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit. The imputed income limitation for any unit must be 20, 30, 40, 50, 60, 70 or 80 percent of AMGI. The average of the designated imputed income limitations may not exceed 60 percent of AMGI.

Application of HUD Calculation
HUD uses three different principal income level calculation categories:

• "low-income," which is limited at 80 percent of AMGI;
• "very low-income," which is limited at 50 percent of AMGI; and
• "extremely low-income," which is limited at the higher of 30 percent of AMGI or the “Federal Poverty Level.”

Under the IRS guidance, HUD’s "very low-income" calculation, as adjusted for family size and consistent with the methods provided in Rev. Rul. 89-24, is used as the basis for determining the full range of percentage-based income limits under the new average-income set-aside test.

Specifically, the income attributable to a family in a unit may not exceed an applicable percentage of the HUD income limit for a very low income family of the same size in accordance with the following schedule for the percentage-based imputed income limit chosen for the unit within the 20 through 80 percent range:

• 20 percent limit: 40 percent or less of the income limit for a very low-income family of the same size;
• 30 percent limit: 60 percent or less of the income limit for a very low-income family of the same size;
• 40 percent limit: 80 percent or less of the income limit for a very low-income family of the same size;
• 50 percent limit: 100 percent or less of the income limit for a very low-income family of the same size;
• 60 percent limit: 120 percent or less of the income limit for a very low-income family of the same size;
• 70 percent limit: 140 percent or less of the income limit for a very low-income family of the same size;
• 80 percent limit: 160 percent or less of the income limit for a very low-income family of the same size.

A list of income limits released by HUD may be relied upon until 45 days after HUD releases a new list of income limits, or HUD’s effective date for the list expires.

Prospective Application
Special relief is provided to a taxpayer who receives a low-income housing credit allocation prior to February 18, 2020. The taxpayer must have unambiguously indicated in its application that it will elect the average-income set aside test, and also specified a dollar amount as an expected designated imputed income limitation for a unit that is higher than allowed by the new guidance. If the dollar amount is reasonable it may be relied upon for the entire compliance period of the building, and is also used to determine whether the tenant initially meets the income limitation for the unit.

Final regulations increase a vehicle’s maximum value for eligibility to use the fleet-average valuation rule or the vehicle cents-per-mile valuation rule. The regulations provide transition rules for certain employers. The final regulations are effective on February 5, 2020, the date of publication in the Federal Register.

TCJA Increased Maximum Vehicle Values
Before the Tax Cuts and Job Act (TCJA) ( P.L. 115-97), the maximum base fair market value of a vehicle for use of the fleet-average valuation rule was $16,500, as adjusted annually for inflation (in 2017: $21,100 for a passenger automobile, and $23,300 for a truck or van). The pre-TCJA maximum base fair market value of a vehicle for use of the vehicle cents-per-mile valuation rule was $12,800, as adjusted annually for inflation (in 2017: $15,900 for a passenger automobile, and $17,800 for a truck or van). The TCJA increased these amounts to $50,000, adjusted for inflation.

To implement the changes, the IRS issued Notice 2019-8, I.R.B. 2019-3, 354, to provide interim guidance for 2018 on new procedures for calculating the price inflation adjustments to the maximum vehicle values for use with the fleet-average valuation rule in Reg. §1.61-21(d) and the vehicle cents-per-mile valuation rule in Reg. §1.61-21(e) using amended Code Sec. 280F(d)(7). In Notice 2019-34. I.R.B. 2019-22, 1257, the IRS provided (among other things) that the inflation-adjusted maximum value of an employer-provided vehicle (including cars, vans, and trucks) first made available to employees for personal use in calendar year 2019 for which the vehicle cents-per-mile valuation rule or the fleet-average valuation rule may be used is $50,400. This guidance also provided information about the manner in which the Treasury Department and the IRS intended to publish the maximum vehicle value in the future.

In August 2019, a notice of proposed rulemaking was published that was consistent with Notice 2019-8 and Notice 2019-34 and reflected changes made by TCJA to the depreciation limitations in Code Sec. 280F. The final regulations update the fleet-average and vehicle cents-per-mile valuation rules to conform to the changes made by the TCJA.

Trucks and Vans Not Separately Valued
Before the TCJA, inflation adjustments were determined using the Consumer Price Index (CPI), which contained both a new car and a new truck component. Accordingly, separate inflation adjustments were released for cars using the car component of the CPI, and for trucks and vans using the truck component of the CPI.

Under the TCJA, the price inflation amount for automobiles (including trucks and vans) is calculated using both the CPI automobile component and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) automobile component. There is no separate C-CPI-U component for trucks and vans. As a result, the IRS will publish only one maximum value of a vehicle for use with the fleet-average and vehicle cents-per-mile valuation rules.

Transition Rules
Consistent with Notice 2019-34 and the proposed regulations, the final regulations provide several transition rules.

For the Fleet-Average Valuation Rule: If an employer did not qualify to use the fleet-average valuation rule prior to January 1, 2018, because the automobile’s fair market value exceeded the inflation-adjusted maximum value requirement for the year the automobile was first made available to the employee for personal use, the employer may adopt the fleet-average valuation rule for 2018 or 2019, provided the fair market value of the automobile does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

For the Vehicle Cents-Per-Mile Valuation Rule: An employer that did not qualify to adopt the vehicle cents-per-mile valuation rule for a vehicle first made available to an employee for personal use before calendar year 2018, may first adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year for the vehicle if:

• the employer did not qualify to adopt the vehicle cents-per-mile valuation rule because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the vehicle was first used by the employee for personal use; and
• the vehicle’s fair market value does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

Similarly, if the commuting valuation rule ( Reg. §1.61-21(f)) was utilized when the vehicle was first used by an employee for personal use, the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year if:

• the employer did not qualify to switch to the vehicle cents-per-mile valuation rule on the first day on which the commuting valuation rule was not used because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the commuting valuation rule was first not used; and
• the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

An employer that adopts the vehicle cents-per-mile valuation rule must continue to use the rule for all subsequent years in which the vehicle qualifies for use of the rule. However, the employer may use the commuting valuation rule for the vehicle for any year during which use of the vehicle qualifies for the commuting valuation rule.

The IRS has provided guidance on qualifying for the Earned Income Tax Credit (EITC). The EITC is a refundable tax credit that is intended to be a financial boost for families with low to moderate incomes.

The IRS has provided guidance on qualifying for the Earned Income Tax Credit (EITC). The EITC is a refundable tax credit that is intended to be a financial boost for families with low to moderate incomes.

Due to changes in marital, parental or financial status, millions of workers may qualify for EITC for the first time this year. The IRS urges individuals who (1) work for someone else or have their own businesses or farm, and (2) earned $55,952 or less in 2019, to see if they qualify by using the "EITC Assistant" on the IRS’s website ( https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/use-the-eitc-assistant).

Taxpayers must file a Form 1040, U.S. Individual Income Tax Return, and attach a completed Schedule EIC, Earned Income Credit Qualifying Child Information, to the tax return for a qualifying child, in order to claim EITC. A taxpayer must have a valid Social Security number for themselves, their spouses if they are filing a joint return, and each qualifying child before they file their return.

The IRS expects most EITC-related refunds to be available in taxpayers’ bank accounts or on debit cards by the first week of March, if they choose direct deposit and there are no other issues with their tax return.

Eligibility for EITC
In order to qualify, the worker must have earned income an adjusted gross income with certain limits and meet certain basic rules. The worker also must meet the rules for those without a qualifying child, or must have a child who meets all the qualifying child rules. Only one person can use a particular child to claim the EITC, if that child meets the rules to be a qualifying child for more than one person. Under a special rule, those who receive combat pay may choose to count it as taxable income for the purposes of EITC; this may or may not increase the amount of EITC.

Credit Limits for 2019
For tax year 2019, those who qualify for EITC can get a credit up to:

• $529 with no qualifying children,
• $3,526 with one qualifying child,
• $5,828 with two qualifying children, and
• $6,557 with three or more qualifying children.

Free Tax Help
Since EITC is complex and many special rules apply, the IRS encourages workers to do their taxes using the IRS Free File program, by choosing a trusted tax professional, or at a local free tax preparation site. The IRS also reminds taxpayers that they are always be responsible for the accuracy of their own tax return, even if someone else may have prepared it, because filing a tax return with an error on the EITC claim could have lasting impacts.

The IRS has proposed regulations with guidance for employers on withholding federal income tax from employee’s wages.

The IRS has proposed regulations with guidance for employers on withholding federal income tax from employee’s wages. The proposed regulations:

• implement recent changes made to Code Secs. 3401 and 3402 by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
• reflect the redesigned 2020 Form W-4, Employee’s Withholding Certificate, and the related wage withholding tables and computational procedures published in IRS Pub. 15-T, Federal Income Tax Withholding Methods.

TCJA Changes
The TCJA made many Code amendments affecting income tax withholding on wages. Among other things, the TCJA:

• repealed the rule that, for purposes collecting income tax at source on wages, the "number of withholding exemptions claimed" meant the number of withholding exemptions claimed in a withholding exemption certificate in effect, except that if no such certificate was in effect, the number of withholding exemptions claimed was considered zero;
• permanently modified the wage withholding rules and replaced "withholding exemptions" with a "withholding allowance" prorated to the payroll period, to reflect the reductions in the personal exemption amount to zero due to the temporarily repeal of the personal and dependency exemption deduction for tax years 2018–2025;
• changed the list of factors on which the withholding allowance is based, and entitled an employee to take into account the number of individuals for which the employee expects to take an income tax credit for other dependents, instead of the number of individuals for whom the employee reasonably expects to claim an personal and dependency exemption deduction;
• changed an employee’s entitlement to take into account the standard deduction from an amount generally equal to one withholding exemption to the standard deduction allowable to the employee (one-half of the standard deduction for a married employee whose spouse is an employee receiving wages subject to withholding);
• added a provision that the employee’s withholding allowance also takes into account whether the employee has withholding allowance certificates in effect for more than one employer;
• added the Code Sec. 199A qualified business income deduction to the list of deductions that an employee may take into account in determining the additional withholding allowance that the employee is entitled to claim on Form W-4;
• struck references to payments made under certain divorce or separation instruments; and
• changed the rules for withholding from periodic payments under Code Sec. 3405(a) when no withholding allowance certificate has been furnished.

IRS Guidance
After the TCJA was enacted, the IRS issued guidance for 2018 and 2019 to implement the changes (e.g., Notice 2018-14, I.R.B. 2018-7, 353; Notice 2018-92, I.R.B. 2018-51, 1038; Notice 2020-3, I.R.B. 2020-3, I.R.B. 2020–3, 330). The IRS also released a draft 2019 Form W-4 and instructions, which made significant changes intended to improve the accuracy of income tax withholding and to make the withholding system more transparent for employees. In response to comments received, Treasury and the IRS postponed implementing the redesigned form until 2020. The final redesigned 2020 Form W-4 was released on December 4, 2019, and was then rereleased on December 31, 2019, to reflect the amendment to the medical expense deduction threshold for 2020 made by the Further Consolidated Appropriations Act, 2020 ( P.L. 116-94).

In 2019, the IRS also released drafts of IRS Pub. 15-T, which provided percentage method tables, wage bracket withholding tables, and other computational procedures for employers to use to compute withholding for the 2020 calendar year. IRS Pub. 15-T was finalized and released on December 24, 2019. Withholding tables previously published in IRS Pub. 15, (Circular E), Employer’s Tax Guide, IRS Pub. 15-A, Employer’s Supplemental Tax Guide, and IRS Pub. 51, Agricultural Employer’s Tax Guide, are now published in IRS Pub. 15-T. The IRS also discontinued publishing several other withholding tables in 2020.

Proposed Regulations
The proposed regulations incorporate the TCJA changes to Code Secs. 3401 and 3402, and provide flexible and administrable rules for wage withholding that work with both the 2020 Form W-4 and the related tables and computational procedures described in IRS Pub. 15-T, as well as Forms W-4 and related tables and computational procedures provided in 2019 and earlier years. The proposed regulations are generally compatible with the income tax withholding system in effect for 2019, as well as the system in effect for 2020, and may be relied on by employers for withholding until final regulations are published.

W-4 Issues
An employee is not required to furnish a new Form W-4 solely because of the form’s redesign, regardless of when the employee’s Form W-4 currently in effect was furnished. Similarly, an employer must generally continue to compute the amount of tax to be withheld from an employee’s wages based on a valid Form W-4 furnished by the employee regardless of when the employee furnished the Form W-4.

The 2020 IRS Pub. 15-T provides guidance on how employers will withhold income tax using Forms W-4 furnished and in effect on or before December 31, 2019. An employer can ask all employees who were first paid wages before 2020 to furnish a 2020 Form W-4, but if it does, the employer should explain that:

• employees are not required to furnish a new Form W-4; and
• if the employee does not furnish a 2020 Form W-4, the tax to be withheld from the employee’s wages will continue to be based on the last valid Form W-4 previously furnished.

Similar to the current regulations, the proposed regulations generally provide that Forms W-4 that took effect under prior law generally remain in effect until another Form W-4 is furnished. There are special rules regarding when a Form W-4 furnished by an employee subject to a "lock-in letter" stops being effective.

Periodic Payments
The proposed regulations do not address withholding under Code Sec. 3405(a) on periodic payments from pensions, annuities, or certain other deferred income. Instead, Notice 2020-3 describes the withholding rules for the 2020 calendar year.

Proposed Applicability Date
The proposed regulations are generally proposed to apply on the date that a Treasury Decision adopting them as final regulations is published in the Federal Register. Taxpayers may rely on the rules set forth in the notice of proposed rulemaking until that date. However, Proposed Reg. §31.3402(f)(2)-1(g) is proposed to apply on February 13, 2020 (i.e., the date the notice of proposed rulemaking was published in the Federal Register), Proposed Reg. §31.3402(f)(5)-1(a)(3) is proposed to apply on March 16, 2020 (i.e., 30 days after the date the notice of proposed rulemaking was published in the Federal Register), and a proposed removal of Reg. §31.3402(h)(4)-1(b) relating to the combined income tax withholding and employee FICA tax withholding tables is proposed to apply on and after January 1, 2020. Except for the removal of Reg. §31.3402(h)(4)-1(b), taxpayers may choose to apply the rules on or after January 1, 2020.

Comments and Requests for Hearing
Before the proposed regulations are adopted as final regulations, the IRS will consider any electronic and written comments that are submitted timely to the IRS. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available at http://www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of its date, time, and place will be published in the Federal Register.

Electronic submissions are made via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-132741-17) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking portal, comments cannot be edited or withdrawn. The Treasury Department and the IRS will publish for public availability any comment received to their public docket, whether submitted electronically or in hard copy. Send hard copy submissions to: CC:PA:LPD:PR (REG-132741-17), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.

All comments and requests for a public hearing must be received by April 13, 2020.

Amounts received as an annuity are included in gross income to the extent that they exceed the exclusion ratio, which is determined by taking the original investment in the contract, deducting the value of any refund features, and dividing the result by the expected yield on the contract as of the annuity starting date. In general, the expected return is the product of a single payment and the anticipated number of payments to be received, i.e., the total amount the annuitant can expect to receive. In the case of a life annuity, the number of payments is computed based on actuarial tables provided in IRS Regulation Sec. 1.72-9.

If a contract provides for fixed payments to be made to an annuitant for a guaranteed period but specifies that the payments will cease on the annuitant's death, the expected return is computed as if the arrangement were a temporary life annuity rather than a fixed term annuity.  The applicable IRS tables under Regulation Sec. 1.72-9 contain multiples based on the guaranteed period (rounded to the nearest whole number of years) and age at the annuity starting date.  The expected return under the contract is the product of this multiple and the total annual amount of annuity payments.

Example:  Smith is to receive $100 each month for five years, beginning on his 60th birthday, but the payments will cease abruptly and all obligations will be terminated on his death.  Either Pursuant to Table IV under IRS Regulations Sec. 1.7209, a 60-year-old male receiving payments for a term of five years can expect to live 4.8 of those five years; that multiple multiplied by $1,200 yields an anticipated return of $5,760.  If Table VIII is applicable, the expected return is $5,880, based on a multiple of 4.9.

Another form of annuity provides for fixed periodic payments for the duration of the recipient's life, but for a changing amount: payments of a first amount for an initial guaranteed period, followed by payments of a reduced amount thereafter.  In determining the expected return, the contract is treated as a combination of two annuities: (1) a whole life annuity providing payments at the lower amount, commencing at the annuity starting date; and (2) a separate temporary life annuity, of the kind discussed above, providing payments in the amount of the difference between the two specified amounts.

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

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

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

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

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

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

The closely-held corporate form of entity is widely used by family-owned businesses. As its name implies, the owners of the business are typically limited to a small group of shareholders. Many businesses operate for years as closely-held corporations without giving a second thought to a little-known danger: the personal holding company tax.

The personal holding company tax lurks in the background to prevent the use of closely-held family corporations as reservoirs in which to collect investment income. The government wants corporations to distribute income rather than enabling shareholders to build an investment portfolio subject only to the corporate income tax.

The tax is triggered by a corporation's percentage of investment to total income. It is imposed on undistributed earnings and is added to the regular corporate tax. One frequent trigger for the personal holding company tax is the accumulation of income earmarked for expanding the business. Despite its ominous nature, the tax can be anticipated and maybe even averted through strategic planning.

Some triggers

Here are some scenarios that have unfortunately triggered the personal holding company tax for other businesses:

• A consolidated return group becomes unaffiliated, or an ineligible group, as the result of a change in stock ownership or a line of business
  
• A large amount of insurance proceeds are invested until replacement property can be purchased
  
• For asset protection purposes, a corporation holds investment assets or operating equipment without engaging in other operations
  
• During a plan of liquidation, a line of business is sold and the sale proceeds are invested while management is attempting to sell remaining assets or businesses
  
• As part of a plan to invest in a new line of business, a line of business is sold and the sale proceeds are invested while management is attempting to acquire a business or grow its new line of business

Two tests

It's important to remember that any corporation can be a personal holding company. The IRS has developed two tests: (1) an income test and (2) an ownership test.

Income test

The income test is met if 60 percent or more of the corporation's adjusted ordinary gross income is "personal holding company income." This type of income is frequently derived from investment properties and includes:

• Interest, dividends and royalties,
• Rents,
• Mineral, oil and gas royalties,
• Copyright royalties,
• Produced film rents,
• Amounts received in compensation for use of the corporation's property,
• Compensation from personal contracts, where the corporation is not a personal service company, and
• Estate and trust income.

There are some important exceptions to this list. Some types of royalties, for example, are excluded.

Note. The PHC income test is not a test of gross receipts. The income test compares gross receipts less the cost of goods sold to investment income less its direct costs. Gross profit margins are significant to the test and investment activities generally have few direct costs. Thus, an increase in investment income is leveraged for purposes of the PHC income test and an increase in investment income that is insignificant to total gross income can cause investment income to exceed 60 percent of adjusted gross income (AGI). Manufacturing businesses are at a disadvantage. Because of high cost of goods sold when compared to a service business that has little or no costs of goods sold.

Ownership test

The ownership test is met if five or fewer individuals owned more than 50 percent of the corporation's stock value at any time during the last half of the tax year. The ownership test also has some important exceptions. Some important - and common - types of corporations are excluded:

• S corporations,
• Tax-exempt corporations,
• Banks, lending or finance companies,
• Small business investment companies, and
• Corporations in bankruptcy.

The personal holding company tax doesn't have to be an unwelcome and expensive surprise. If your business has experienced - or is planning - any of the events that could trigger the tax, give our office a call.  Careful planning can help avoid or minimize the tax; at any rate, it can alert you to your possible liability for the tax.

Many people are surprised to learn that some "luxury" items can be deductible business expenses. Of course, moderation is key. Excessive spending is sure to attract the IRS's attention. As some recent high-profile court cases have shown, the government isn't timid in its crackdown on business owners using company funds for personal travel and entertainment.

First class travel

The IRS doesn't require that your business travel be the cheapest mode of transportation. If it did, businesspeople would be traveling across the country by bus instead of by plane. However, the expense as it is relative to the business purpose must be reasonable. Taking the Queen Mary II across the Atlantic to a business meeting in the U.K. could raise a red flag at the IRS.

As long as your business is turning a profit and is operated legitimately as a business and not a hobby, traveling first class generally is permissible. Even though a coach airline seat will get you to your business appointment just as quickly and an inexpensive hotel room is a place to sleep, the IRS generally won't try to reduce your deduction.

However, if your trip lacks a business purpose, the IRS will deny your travel-related deductions. Don't try to disguise a family vacation as a business trip. Many people are tempted; it's not worth the consequences, especially in today's environment where the IRS is aggressively looking for business abuses.

Conventions

Convention expenses are deductible if a sufficient relationship exists to your profession or business and the convention is in North America. No deduction is allowed for attending conventions or seminars about managing your personal investments.

Overseas conventions definitely get the IRS's attention. If you want to deduct the costs of attending a foreign convention, you have to show that the convention is directly related to your business and it is as reasonable to hold the convention outside North America as within North America.

Country clubs expenses

Country club dues are not deductible. In fact, no part of your dues for clubs organized for business, pleasure, recreation, or social purposes is deductible.

Some country club costs may be partially deductible if you can show a direct business purpose and you meet some tough written substantiation requirements. These include greens fees as well as food and beverage expenses. They may be deductible up to 50 percent.

Meals and entertainment

Younger colleagues don't remember when business meals were 100 percent deductible and deals were brokered at "three martini lunches." Meals haven't been 100 percent deductible for a long time and, like other entertainment expenses, the IRS combs them carefully for abuses.

Expenditures for meals, entertainment, amusement, and recreation are not deductible unless they are directly related to, or associated with, the active conduct of your business. The IRS also requires you to keep a written or electronic log, made at the time you make the expenditure, recording the time, place, amount and business purpose of each expense.

Even if you pass the two tests, only 50 percent of meal and entertainment expenses are deductible.  If you write-off business meals through your company and there is a proper reimbursement arrangement in place, you won't be charged with any imputed income for the half that is not deductible, but your company will be limited to a 50 percent write-off.

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

FICA and FUTA taxes

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

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

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

Federal income taxes

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

Bona fide employee

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

Owning a vacation home is a common dream that many people share...a special place to get away from the weekday routine, relax and maybe, after you retire, a new place to call home. When thinking about buying a vacation home, you should also think about what you will ultimately do with it. Will it one day be your principal residence? Will you sell it in five, 10 or 20 years? Will you rent it? Will you leave it to your children or other family members? These decisions have important tax consequences.

You'll want to think about:

Capital gains

The maximum long-term capital gains tax rate for 2009 is currently 15 percent taxpayers in the highest brackets. For taxpayers in the 10 and 15 percent brackets, the maximum long-term capital gains rate is zero through 2010. However, these lower rates expire at the end of 2010. The maximum rate is set to rise to 20 percent in 2011. Congress also eliminated a special holding period rule but, again, only through the end of 2011.

The process of computing capital gains because of all these changes is very complicated. Yet, "doing the math" up front in assessing the benefits of a vacation home as a long term investment as well as a source of personal enjoyment is recommended before committing to such a large purchase. Our office can help you make the correct computations.

Renting your vacation home

Renting your vacation home to help defray some or a good portion of your carrying costs, especially in the early years of ownership, can be a sound strategy. Be aware, however, that renting raises many complex tax questions. Special rules limit the deduction you can take. The rules are based on how long you rent the property. If you rent your vacation home for fewer than 15 days during the year, all deductions directly attributable to the rental are not allowed, but you don't have to report any rental income. If you rent your vacation home for more than 15 days, you must recognize the rental income while being allowed deductions only on certain items depending on your personal use of the property. The methodology is very complicated. We can help you pin down your deductions and plan the true cost of ownership, especially if you're planning to swing a vacation home purchase on plans to rent it out.

Home sale exclusion

One of the most generous federal tax breaks for homeowners is the home sale exclusion. If you're single, you can generally exclude up to $250,000 of gain from the sale of your principal residence ($500,000 for married joint filers). Generally, you have to have owned your home for at least two of the five years before the sale, but like all the tax rules, there are exceptions.

Congress modified the home sale exclusion for home sales occurring after December 31, 2008. Under the new law, gain from the sale of a principal residence home will no longer be excluded from gross income for periods that the home is not used as a principal residence. This is referred to as "non-qualifying use." The rule is intended to prevent use of the home sale exclusion of gain for appreciation attributable to periods after 2008 during which the residence was used as a vacation home, or as a rental property before being used as a principal residence. However, the new income inclusion rule is based only on periods of nonqualified use that start on or after January 1, 2009, good news for vacation homeowners who have already owned their properties for a number of years.

Buying a vacation home is a big investment. We can help you explore all these and other important tax consequences.

A remainder interest is the interest you receive in property when a grantor transfers property to a third person for a specified length of time with the provision that you receive full possessory rights at the end of that period. The remainder is "vested" if there are no other requirements you must satisfy in order to receive possession at the end of that period, such as surviving to the end of the term. This intervening period may be for a given number of years, or it may be for the life of the third person. Most often, this situation arises with real estate, although other types of property may be transferred in this fashion as well, such as income-producing property held in trust. The holder of a remainder interest may wish to sell that interest at some point, whether before or after the right to possession has inured.

To determine the amount of gain or loss on the sale of an interest in property, you must first need to know the basis in that property. Generally, the basis of property is either the transferor's basis, if the transferor made a gift of the property while still living, or the fair market value at the time of the transfer if it was a testamentary gift. However, the value of a remainder interest is not the full value of the property, because someone else has an intervening right to its use.

The value of the remainder interest is equal to the undivided value of the property minus the value of the intervening interest. The value of this interest depends on applicable interest rates and the duration of the interest. In the case of a life estate, the duration depends on the age of the recipient and is determined with reference to mortality tables published in the Treasury regulations. The applicable interest rate is specified in Code Sec. 7520 as being 120 percent of the applicable federal rate (AFR) for that month, rounded to the nearest 0.2 percent. You may find these tables at the IRS web site.

IRS Pub. 1457 is known as Actuarial Values Book Aleph and contains tables that express the values of life estates, term interests and remainders. In this publication, you will need to select the appropriate section based on whether the interest is a term for years or a life estate. In each section is a series of tables based on interest rates ranging from 2.2 to 22.2 percent. Find the age of the life estate holder or duration of the term in the first column of the table. Next to it, under the column for remainder interests, is a decimal representation of the fractional interest represented by the remainder. Multiply this decimal by the basis of the property and you have the basis of the remainder interest.

Examples: Bob's grandfather died in March of 2009 and left a house valued at $100,000 to his mother for life, with the remainder interest to Bob. Bob's mother is 65 years old. The Sec. 7520 rate for that month is 2.4 percent, and the fractional value of the remainder is .67881. The value of Bob's interest in the house is $67,881.

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

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

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

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

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

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