The IRS and the Treasury intend to provide regulations that will address issues affecting foreign corporations with previously taxed earnings and profits (PTEP). The regulations are in response to changes made by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97)

The IRS and the Treasury intend to provide regulations that will address issues affecting foreign corporations with previously taxed earnings and profits (PTEP). The regulations are in response to changes made by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), and are intended to include rules for:

• the maintenance of PTEP in annual accounts and within certain groups;
• the ordering of PTEP upon distribution and reclassification; and
• the adjustment required when an income inclusion exceeds a foreign corporation's earnings and profits.

The IRS and Treasury intend to withdraw 2006 proposed regulations relating to the exclusion from gross income of PTEP and associated basis adjustments ( NPRM REG-121509-00), and issue new proposed regulations under Code Sec. 959 and Code Sec. 961.

Previously Taxed Earnings and Profits
Previously taxed earnings and profits (PTEP) are a foreign corporation's earnings and profits attributable to amounts which are or have been included in a U.S. shareholder's gross income under Code Sec. 951(a) or under Code Sec. 1248(a). Under the subpart F rules, a U.S. shareholder of a controlled foreign corporation (CFC) is generally currently taxed on certain income earned by the CFC, and on certain earnings invested in U.S. property.

To prevent double taxation, Code Sec. 959 provides that earnings and profits of the foreign corporation that are attributable to the inclusion are excluded from gross income when actually distributed. An exclusion is also allowed when earnings and profits are attributable to amounts included in the U.S. shareholder’s gross income that would otherwise again be included in gross income under the rule for investment of earnings in U.S. property.

To determine the amount of an actual distribution that is not taxable because it represents previously taxed income upon an actual distribution by the CFC, the earnings distributed are treated as attributable in the following order:

• first, to retained earnings that were required in prior years to be included in income on account of investments in excess passive assets, together with the earnings in prior years that were required to be included in income on account of investments in U.S. property under Code Sec. 956, allocated to each category on a pro rata basis ( "section 959(c)(1) PTEP");
• next, to retained earnings that were required to be included in income as subpart F income ( "section 959(c)(2) PTEP"); and
• finally, to other earnings and profits ( "section 959(c)(3) E&P").

Changes made by the TCJA created the need to account for new groups of PTEP, because section 959(c)(2) PTEP may arise due to income inclusions under Code Secs. 951(a)(1)(A), 245A(e)(2), 951A(f)(1), 959(e), 964(e)(4), or 965(a), or by applying Code Sec. 965(b)(4)(A). Those different groups of PTEP may be subject to different rules under Code Secs. 960, 965(g), 245A(e)(3), and 986(c).

In addition, Proposed Reg. § 1.960-3(c) establishes, for purposes of determining the amount of foreign income taxes deemed paid, a system of accounting for PTEP in annual accounts for each separate category of income ( "section 904 category") and further segregate each annual account among 10 PTEP groups.

Annual Accounts and Groups of Previously Taxed Earnings and Profits
The new regulations are expected to provide that an annual account must be maintained and each annual PTEP account must be segregated into 16 PTEP groups in each section 904 category:

• reclassified section 965(a) PTEP;
• reclassified section 965(b) PTEP;
• section 951(a)(1)(B) PTEP;
• reclassified section 951A PTEP;
• reclassified section 245A(e)(2) PTEP;
• reclassified section 959(e) PTEP;
• reclassified section 964(e)(4) PTEP;
• reclassified section 951(a)(1)(A) PTEP;
• section 956A PTEP;
• section 965(a) PTEP;
• section 965(b) PTEP;
• section 951A PTEP;
• section 245A(e)(2) PTEP;
• section 959(e) PTEP;
• section 964(e) PTEP; and
• section 951(a)(1)(A) PTEP.

Section 959(c)(1) PTEP will consist of PTEP groups (1) through (9), and section 959(c)(2) PTEP will consist of PTEP groups (10) through (16). Once PTEP is assigned to a PTEP group within an annual PTEP account for the year of the income inclusion under Code Sec. 951(a)(1) or the year of application of Code Sec. 965(b)(4)(A), the PTEP will be maintained in an annual PTEP account with a year that corresponds to the year of the account from which the PTEP originated if PTEP is distributed or reclassified in a subsequent tax year.

Additionally, the new regulations are expected to provide that:

• to the extent a CFC has E&P in a PTEP group that is in more than one section 904 category, any distribution out of that PTEP group is made pro rata out of the earnings and profits in each such category;
• dollar basis must be tracked for each annual PTEP account, and, to the extent provided in the regulations, separately for each PTEP group within an annual account; and
• distributions from any PTEP group reduce the shareholder’s stock basis under Code Sec. 961(b)(1) without regard to how that basis was originally created.

The regulations also will provide transition rules for annual PTEP accounts maintained before the regulations’ applicability date.

Ordering of Earnings and Profits upon Distribution and Reclassification
The new regulations are expected to provide that:

• a distribution will be a distribution of PTEP only to the extent it would have otherwise been a dividend under Code Sec. 316;
• a "last in, first out" approach will be required for sourcing distributions from annual PTEP accounts, subject to the special priority rule for PTEP arising due to Code Sec. 965;
• PTEP attributable to income inclusions under Code Sec. 965(a) or by reason of Code Sec. 965(b)(4)(A) receive priority when determining the group of PTEP from which a distribution is made; and
• reclassifications of PTEP under Code Sec. 959(a)(2) will be sourced first from section 965(a) PTEP, then section 965(b) PTEP, and then, under a last-in, first-out approach, pro rata from the remaining section 959(c)(2) PTEP groups in each annual PTEP account, starting from the most recent annual PTEP account.

Adjustments Due to an Income Inclusion in Excess of Current Earnings and Profits
The new regulations are expected to provide that:

• current E&P are first classified as section 959(c)(3) E&P, and then section 959(c)(3) E&P are reclassified as section 959(c)(1) PTEP or section 959(c)(2) PTEP, as appropriate, in full, which may result in creating or increasing a deficit in section 959(c)(3) E&P; and
• if a foreign corporation has a current-year deficit in E&P, that deficit will solely reduce the foreign corporation’s section 959(c)(3) E&P without affecting the amount of its section 959(c)(1) PTEP or section 959(c)(2) PTEP.

Application
The new regulations are expected to apply to tax years of U.S. shareholders and successors in interest ending after December 14, 2018, and to tax years of foreign corporations ending with or within the U.S. shareholders’ tax years. Before the regulations are issued, a shareholder can rely on the rules provided in the announcement notice if the shareholder and each related shareholder apply the rules consistently regarding the PTEP of all foreign corporations in which they own stock for all tax years beginning with the shareholder’s or related shareholder’s tax year that includes the tax year end of any such foreign corporation to which Code Sec. 965 applies.

The IRS has proposed regulations on the limitation on the business interest expense deduction under Code Sec. 163(j), as amended by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). The IRS also has issued a safe harbor that allows taxpayers to treat certain infrastructure trades or businesses as real property trades or businesses solely for purposes of qualifying as an electing real property trade or business under Code Sec. 163(j)(7)(B).

The IRS has proposed regulations on the limitation on the business interest expense deduction under Code Sec. 163(j), as amended by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). The IRS also has issued a safe harbor that allows taxpayers to treat certain infrastructure trades or businesses as real property trades or businesses solely for purposes of qualifying as an electing real property trade or business under Code Sec. 163(j)(7)(B).

Business Interest Limitation
For tax years beginning after 2017, the deduction of interest paid or incurred on debt properly allocable to a trade or business is limited to the sum of:

30 percent of the taxpayer’s adjusted taxable income (but not less than zero);

the taxpayer’s business interest income (not including investment income); and

the taxpayer’s floor plan financing interest.

The proposed regulations provide general rules and definitions related to the limitation, as well as rules for calculating the limitation in consolidated group, partnership, and international contexts. The regulations affect taxpayers that have deductible business interest expense, other than certain small businesses, electing real property trades or businesses, electing farming businesses, and certain utility businesses. The IRS is also withdrawing a prior notice of proposed rulemaking on the disallowance of a deduction for certain interest paid or accrued by a corporation under former Code Sec. 163(j).

The proposed regulations will generally be effective for tax years ending after the date the Treasury Decision adopting them as final is published in the Federal Register. However, taxpayers can apply certain provisions to tax years beginning after December 31, 2017, so long as the rules are consistently applied.

Safe Harbor
Further, in Rev. Proc. 2018-59, a safe harbor is provided allowing taxpayers to treat certain infrastructure trades or businesses as electing real property trades or businesses not subject to the Code Sec. 163(j) business interest deduction limit. These include trades or businesses that are conducted in connection with the designing, building, managing, operating, or maintaining of certain core infrastructure projects for purposes of private activity bond financing proposals. If a taxpayer makes this election, the taxpayer must use the alternative depreciation system (ADS) to depreciate property. Taxpayers may apply the safe harbor to tax years beginning after December 31, 2017.

Comments Requested
Public comments to the proposed regulations should be submitted no later than 60 days after the date that the notice of proposed rulemaking is published in the Federal Register. Send submissions to: CC:PA:LPD:PR (REG-106089-18), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-106089-18), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, 20224, or sent electronically, via the Federal Rulemaking Portal at http://www.regulations.gov (indicate IRS and REG-106089-18).

A public hearing has been scheduled for February 25, 2019. It will be held on February 25, 2019, beginning at 10 a.m., in the Main IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC 20224.

A nonprofit corporation that operated a medical-marijuana dispensary legally under California law was not allowed to claim deductions for business expenses on its federal return. Code Sec. 280E, which prevents any trade or business that consists of trafficking in controlled substances from deducting any business expenses, applied.

A nonprofit corporation that operated a medical-marijuana dispensary legally under California law was not allowed to claim deductions for business expenses on its federal return. Code Sec. 280E, which prevents any trade or business that consists of trafficking in controlled substances from deducting any business expenses, applied.

Meaning of "Consists of"
The corporation argued that a business does not "consist of" drug trafficking within the meaning of Code Sec. 280E unless its activities relate exclusively with drug trafficking (i.e., selling marijuana). Since its dispensary offered services and goods to its clients other than the sale of medical marijuana, the corporation claimed that Code Sec. 280E does not apply to any of its activities.

The court rejected this argument, noting that it had previously considered and rejected the same argument in an earlier case involving a different taxpayer ( M. Olive, Dec. 59,146, aff’d, CA-9, 2015-2 ustc ¶50,377). Although the phrase "consists of" in common usage refers to an exhaustive or exclusive list, the court noted that the corporation’s interpretation would render Code Sec. 280E ineffective. For example, a drug dealer selling a single item that was not a controlled substance would not be covered by the provision. The court found that various dictionary definitions, certain usage in other Code Sections, and case law that considered the meaning of the phrase did not require an interpretation based on exclusiveness.

Non-Trafficking Trades or Businesses
Although Code Sec. 280E applied to deductions related to the corporation’s marijuana sales, the court had previously ruled that it does not apply to any separate, non-trafficking trades or businesses ( Californians Helping to Alleviate Med. Problems, Inc. (CHAMP), Dec. 56,935). The court considered whether any of the corporation’s non-trafficking activities were separate trades or businesses. According to the corporation, non-trafficking activities consisted of sales of products with no marijuana, therapeutic services, and brand development.

The court concluded that the sale of products other marijuana than at the corporation’s dispensaries was too closely linked to the sale of the marijuana itself to constitute a separate trade or business. The products generally related to the promotion or use of marijuana and were sold by the same staff that sold the marijuana. Similarly, free "holistic" services that were paid for with approximately one percent of the proceeds from its marijuana sales were not a separate trade or business. Finally, the corporation’s brand development activity was entirely entwined with the marijuana business and could not be treated as a separate enterprise.

Cost of Goods Sold
Although the corporation was not entitled to any business deductions, it was liable for tax only on its gross receipts as reduced by cost of goods sold. For purposes of determining cost of goods sold, the court determined that the corporation could not apply Code Sec. 263A to include indirect expenses. Code Sec. 263A(a)(2) specifically prohibits the capitalization of otherwise nondeductible costs, such as drug trafficking expenses. Therefore, only direct expenses (and a few specified indirect expenses) required to be included in cost of goods sold under the general rules of Code Sec. 471 could be taken into account. For purposes of applying Code Sec. 471, the corporation was considered a reseller rather a producer because it had no ownership in the plants from which the marijuana it sold was produced.

The IRS released the optional standard mileage rates for 2019. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

The IRS released the optional standard mileage rates for 2019. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,
• medical, and
• charitable purposes.

Some members of the military may also use these rates to compute their moving expense deductions.

2019 Standard Mileage Rates
The standard mileage rates for 2019 are:

• 58 cents per mile for business uses;
• 20 cents per mile for medical uses; and
• 14 cents per mile for charitable uses.

Taxpayers may use these rates, instead of their actual expenses, to calculate their deductions for business, medical or charitable use of their own vehicles.

FAVR Allowance for 2019
For purposes of the fixed and variable rate (FAVR) allowance, the maximum standard automobile cost for vehicles places in service after 2018 is:

• $50,400 for passenger automobiles, and
• $50,400 for trucks and vans.

Employers can use a FAVR allowance to reimburse employees who use their own vehicles for the employer’s business.

2019 Mileage Rate for Moving Expenses
The standard mileage rate for the moving expense deduction is 20 cents per mile. To claim this deduction, the taxpayer must be:

• a member of the Armed Forces of the United States,
• on active military duty, and
• moving under an military order and incident to a permanent change of station.

The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for all other taxpayers until 2026.

Unreimbursed Employee Travel Expenses
For most taxpayers, the Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee travel expenses. However, certain taxpayers may still claim an above-the-line deduction for these expenses. These taxpayers include:

• members of a reserve component of the U.S. Armed Forces,
• state or local government officials paid on a fee basis, and
• performing artists with relatively low incomes.

Notice 2018-3, I.R.B. 2018-2, 285, as modified by Notice 2018-42, I.R.B. 2018-24, 750, is superseded.

The IRS has provided guidance and examples for calculating the nondeductible portion of parking expenses. In addition, the IRS has provided guidance to tax-exempt organizations to help such organizations determine how unrelated business taxable income (UBTI) will be increased by the nondeductible amount of such fringe benefit expenses paid or incurred.

The IRS has provided guidance and examples for calculating the nondeductible portion of parking expenses. In addition, the IRS has provided guidance to tax-exempt organizations to help such organizations determine how unrelated business taxable income (UBTI) will be increased by the nondeductible amount of such fringe benefit expenses paid or incurred.

The IRS also has provided transitional estimated tax penalty relief to tax-exempt organizations that offer qualified transportation fringe benefit expenses and were not required to file a Form 990-T, Exempt Organization Business Income Tax Return, last filing season.

Parking Fringe Expenses
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) added Code Sec. 274(a)(4) to preclude employers from deducting Code Sec. 132(f) qualified transportation fringe benefits expenses paid or incurred after December 31, 2017. Qualified transportation fringe benefits include van pools, transit passes, bicycle commuting, and qualified parking.

There are two types of calculations. The first is for cases where the employer pays a third party for the use of its parking lot for the employer’s employees. The second is for cases where the employer owns or leases the parking lot.

Employer contracts with third party. When an employer contracts with a third party for the use of the parking lot, the disallowance under Code Sec. 274(a)(4) is generally the amount that the employer pays to the third party. However, if that monthly amount exceeds $260 an employee, the employer must treat the excess as additional compensation. Thus, the monthly amount in excess of $260 is excluded from the disallowance amount.

For example, if Employer A pays $300 per month for each of the employer’s ten employees to park, $31,200 (($260 x 10) x 12) is disallowed under Code Sec. 274(a)(4). The remaining $4,800 (($40 x 10) x 12) is not subject to the Code Sec. 274(a)(4) and remains deductible.

Employer owns or leases the parking lot. According to the IRS, until it issues further guidance, employers may use any reasonable method to calculate the Code Sec. 274(a)(4) disallowance in cases where the employer owns or leases the parking lot. The IRS has provided a four-step reasonable method:

• Calculate the disallowance for reserved employee spots.
• Determine the primary use of the remaining spots (for the general public (over 50 percent) or for employees).
• Calculate the allowance for reserved nonemployee spots.
• Determine the remaining use and allocable expenses.

For example, an Employer E, owns a surface parking lot adjacent to its plant. E incurs $10,000 of total parking expenses. E’s parking lot has 500 spots that are used by its visitors and employees. E has 50 spots reserved for management and has approximately 400 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. Additionally, E has 10 reserved nonemployee spots for visitors.

Step 1. Because E has 50 reserved spots for management, $1,000 ((50/500) x $10,000) is the amount of total parking expenses that is nondeductible for reserved employee spots.

Step 2. The primary use of the remainder of E’s parking lot is not to provide parking to the general public because 89% (400/450 = 89 percent) of the remaining parking spots in the lot are used by its employees. Therefore, expenses allocable to these spots are not excluded from the Code Sec. 274(a)(4)

Step 3. Because 2 percent (10/450) of E’s remaining parking lot spots are reserved nonemployee spots, the $200 allocable to those spots ($10,000 x 2 percent)) is not subject to the Code Sec. 274(a)(4) disallowance. That amount continues to be deductible.

Step 4. E must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expenses allocable to employee parking spots.

Further guidance will be issued on these and other issues in the form of proposed regulations at a later date.

Increase Unrelated Business Taxable Income
TCJA added Code Sec. 512(a)(7), which requires exempt organizations to increase UBTI by any amount for which a deduction is not allowable under Code Sec. 274 and which is paid or incurred after December 31, 2017, for any qualified transportation fringes and any parking facility used in connection with qualified parking.

The rules governing tax-exempt organizations mirror the rules for employers under Code Sec. 274(a)(4). Therefore, the expenses for a parking facility used in connection with qualified parking are treated as nondeductible qualified fringe benefit expenses. Thus, a tax-exempt organization must increase its UBTI under Code Sec. 512(a)(7) by the disallowed amount. In addition, until the IRS releases further guidance, a tax-exempt organization with only one unrelated trade or business can reduce the increase to UBTI under Code Sec. 512(a)(7) to the extent that the deductions directly connected with the carrying on of that unrelated trade or business exceed the gross income derived from such unrelated trade or business.

Estimated Tax Penalty Relief
An exempt organization may be subject to the unrelated business income tax under Code Sec. 511 at corporate rates. The organization reports its unrelated business income on Form 990-T, Exempt Organization Business Income Tax Return, if its gross income from unrelated business is $1,000 or more. Further, the organization must make quarterly estimated tax installment payments under Code Sec. 6655 if its estimated tax is expected to be $500 or more.

Code Sec. 6655 imposes an addition to tax for failure to make a sufficient and timely estimated income tax payment. To avoid the underpayment penalty, each installment generally must equal at least 25 percent of the lesser of:

• 100 percent of the tax shown on the current year's tax return or of the actual tax if no return is filed (current-year safe harbor); or
• 100 percent of the tax shown on the corporation's return for the preceding tax year, provided a positive tax liability was shown and the preceding tax year consisted of 12 months (preceding-year safe harbor).

The IRS has recognized that Code Sec. 512(a)(7) may cause some exempt organizations to owe unrelated business income tax and have to pay estimated income tax for the first time. These organizations would not be able to use the preceding-year safe harbor, and may need more time to develop knowledge and processes to comply with estimated tax payment requirements.

In light of this, the IRS is waiving the addition to tax for failure to make estimated income tax payments for an exempt organization that:

• provides qualified transportation fringes to an employee for which estimated income tax payments, affected by changes made by TCJA to Code Sec. 274 and Code Sec. 512, would otherwise be required to be made on or before December 17, 2018;
• was not required to file a Form 990-T, Exempt Organization Business Income Tax Return, for the tax year preceding the organization’s first tax year ending after December 31, 2017; and
• timely pays the amount reported for the tax year for which relief is granted.

Taxpayers that do not qualify for this relief can avoid an addition to tax for underpayment of estimated income tax if they meet one of the statutory safe harbor or exception provisions under Code Sec. 6654 or Code Sec. 6655.

To claim the waiver, the exempt organization must write "Notice 2018-100" on the top of its Form 990-T.

The IRS has released initial guidance on the new Code Sec. 83(i), added by the 2017 Tax Cuts and Jobs Act ( P.L. 115-97).

Code Sec. 83 generally provides for the federal income tax treatment of property transferred in connection with the performance of services. Code Sec. 83(i) allows certain employees to elect to defer recognition of income attributable to the receipt or vesting of qualified stock for up to five years.

The IRS has released initial guidance on the new Code Sec. 83(i), added by the 2017 Tax Cuts and Jobs Act ( P.L. 115-97).

Code Sec. 83 generally provides for the federal income tax treatment of property transferred in connection with the performance of services. Code Sec. 83(i) allows certain employees to elect to defer recognition of income attributable to the receipt or vesting of qualified stock for up to five years.

The guidance clarifies three key issues related to Code Sec. 83(i):

• the application of the requirement that eligible corporations must make grants to not less than 80 percent of all employees who provide services to the corporation in the United States;
• the application of federal income tax withholding to the deferred income related to the qualified stock; and
• the ability of an employer to opt out of permitting employees to elect the deferred tax treatment even if the requirements under Code Sec. 83(i) are otherwise met.

Code Sec. 83(i) applies to stock attributable to stock options exercised, or restricted stock units (RSUs) settled, after December 31, 2017. Further guidance will be issued on these and other issues in the form of proposed regulations at a later date.

Eligible Corporations
Companies who wish to be eligible corporations and offer the Code Sec. 83(i) election must have a written plan under which, in such calendar year, not less than 80 percent of all employees who provide services to the corporation in the United States (or any possession of the United States) are granted stock options, or are granted RSUs, with the same rights and privileges to receive qualified stock.

The IRS clarifies that the determination of whether a corporation qualifies as an eligible corporation is made "with respect to any calendar year." Furthermore, to meet the 80-percent requirement, the corporation must have granted "in such calendar year" stock options to 80 percent of its employees or RSUs to 80 percent of its employees. So the determination that the corporation is an eligible corporation must be made on a calendar-year basis, and whether the corporation has satisfied the 80-percent requirement is based solely on the stock options or the RSUs granted in that calendar year to employees who provide services to the corporation in the United States. In calculating whether the 80 percent requirement is satisfied, the corporation must take into account the total number of individuals employed at any time during the year in question as well as the total number of employees receiving grants during the year.

Employment Taxes
Employment taxes include Federal Insurance Contributions Act (FICA) taxes, Federal Unemployment Tax Act (FUTA) tax, and federal income tax withholding. FICA and FUTA taxes related to deferral stock remain unaffected.

Deferral stock are considered wages under Code Sec. 3402. When the wages are treated as paid, the employer must make a reasonable estimate of the value of the stock and make deposits of the amount of income tax withholding liability based on that estimate. The wages are subject to withholding at the maximum rate of tax, and withholding is determined without regard to the employee’s Form W-4. By January 31 of the following year, the employer must determine the actual value of the deferral stock on the date it is includible in the employee’s income, and report that amount and the withholding on Form W-2 and Form 941. With respect to income tax withholding for the deferral stock that the employer pays from its own funds, the employer may recover that income tax withholding from the employee until April 1 of the year following the calendar year in which the wages were paid. An employer that fails to deduct and withhold federal income tax is liable for the payment of the tax whether or not the employer collects it from the employee.

Not Eligible Stock
Code Sec. 83(i) imposes a number of requirements and limitations that must be met for an election to be allowed. Although the election, if allowed, may be made by an employee, the corporation is responsible for creating the conditions that would allow an employee to make the election. If a corporation does not intend to create the conditions that would allow an employee to make the election, the terms of a stock option or RSU may provide that no election under Code Sec. 83(i) will be available with respect to stock received upon the exercise of the stock option or settlement of the RSU. This designation would inform employees that no Code Sec. 83(i) election may be made with respect to stock received upon exercise of the option or settlement of the RSU, even if the stock is qualified stock.

Highly anticipated foreign tax credit regulations have been issued that provide guidance on the significant changes made to the foreign tax credit rules by the Tax Cuts and Jobs Act ( P.L. 115-97).

Highly anticipated foreign tax credit regulations have been issued that provide guidance on the significant changes made to the foreign tax credit rules by the Tax Cuts and Jobs Act ( P.L. 115-97). The proposed regulations address:

• allocation and apportionment of the deductions under Code Secs. 861 through 865, and adjustments to the foreign tax credit limitation under Code Sec. 904(b)(4);
• transition rules for overall foreign loss, separate limitation loss, and overall domestic loss accounts under Code Sec. 904(f) and (g), and for the carryover and carryback of unused foreign taxes under Code Sec. 904(c);
• addition of separate foreign tax credit limitation categories for foreign branch income and global intangible low-taxed income (GILTI), and other updates to the foreign tax credit limitation rules;
• calculation of the high-tax income exception from subpart F income;
• determination of the Code Sec. 960 deemed paid credits and the gross-up under Code Sec. 78; and
• the election under Code Sec. 965(n) not to apply the net operating loss deduction when calculating the Code Sec. 965 transition tax.

Deduction Allocation and Apportionment
The proposed regulations generally apply the existing approach of the expense allocation rules to income in the new Code Sec. 951A (GILTI) and foreign branch categories. The proposed regulations also provide for exempt income and exempt asset treatment for income in the GILTI category that is offset by the Code Sec. 250 deduction. This will reduce the amount of expenses apportioned to the GILTI category.

Rules are provided for the allocation and apportionment of the Code Sec. 250 deduction. A new rule addresses loans to partnerships by certain partners and their affiliates to prevent abusive borrowing arrangements that artificially increase foreign source income. Under the proposed regulations, interest income attributable to borrowing through a partnership is allocated across the foreign tax credit separate categories in the same manner as the associated interest expense.

The proposed allocation and apportionment regulations also revise the netting rule for controlled foreign corporations (CFCs), and provide rules for: valuing assets, characterizing stock for elections related to research and experimentation (R&E) expenses, and applying the Code Sec. 904(b)(4) adjustment.

Because the existing expense allocation rules have not been updated since 1988, the Treasury Department and IRS expect to reexamine existing approaches to allocating and apportioning expenses, including for example the rules for allocating interest, R&E expenses, stewardship and general and administrative expenses.

Limitations
The proposed regulations eliminate deadwood, and reflect statutory amendments made prior to the TCJA. New and transitional rules account for the separate categories for GILTI and foreign branch income. For example, foreign tax credit carryovers will by default remain in the general category, but taxpayers are allowed to allocate the transitional FTC carryovers to the foreign branch category. Also, the look-through rules are revised to clarify that nonpassive look-through payments cannot be assigned to a Code Sec. 951A category, and are generally assigned to the general category or the foreign branch category.

Additionally, changes are made to the rules relating to the passive category for high-taxed income, export financing income, and financial services income. Also addressed is the separate category for income resourced under a treaty, and rules for assigning the Code Sec. 78 gross-up and Code Sec. 986(c) gain or loss to a separate category.

Deemed Paid Tax Credits
The proposed regulations provide rules for determining a domestic corporation’s deemed paid taxes under Code Sec. 960, as revised by the TCJA. The proposed regulations treat a GILTI inclusion as a subpart F inclusion for purposes of Code Sec. 960(c). The proposed regulations also reflect the changes made by the TCJA to the Code Sec. 78 gross-up.

Proposed regulations provide much anticipated guidance on the base erosion and anti-abuse tax (BEAT) under Code Sec. 59A and related reporting requirements. The regulations are proposed to apply generally to tax years beginning after December 31, 2017, but taxpayers may rely on these proposed regulations until final regulations are published.

Proposed regulations provide much anticipated guidance on the base erosion and anti-abuse tax (BEAT) under Code Sec. 59A and related reporting requirements. The regulations are proposed to apply generally to tax years beginning after December 31, 2017, but taxpayers may rely on these proposed regulations until final regulations are published.

Code Sec. 59A was added by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) and imposes a tax on base erosion payments of taxpayers with substantial gross receipts. The tax is equal to the base erosion minimum tax amount for the tax year. The TCJA also added reporting obligations regarding the BEAT for 25-percent foreign-owned corporations subject to Code Sec. 6038A and foreign corporations subject to Code Sec. 6038C.

Proposed BEAT Rules
The proposed regulations generally provide rules for determining whether a taxpayer is an applicable taxpayer on which the BEAT may be imposed and rules for computing the taxpayer’s BEAT liability. In particular, the proposed regulations provide rules:

• for determining whether a taxpayer is an applicable taxpayer on which the BEAT may be imposed ( Proposed Reg. §1.59A-2);
• for determining the amount of base erosion payments (Proposed Reg. § 1.59A-3(b));
• for determining base erosion tax benefits arising from base erosion payments (Proposed Reg. §1.59A-3(c));
• for determining the amount of modified taxable income, which is computed in part by reference to a taxpayer’s base erosion tax benefits and base erosion percentage of any net operating loss deduction (Proposed Reg. §1.59A-4);
• for computing the base erosion minimum tax amount, which is computed by reference to modified taxable income (Proposed Reg. §1.59A-5);
• for applying the proposed regulations to partnerships (Proposed Reg. § 1.59A-7);
• that are specific to banks and registered securities dealers;
• that are specific to insurance companies;
• that disregard certain transactions having a principal purpose of avoiding Code Sec. 59A (anti-abuse rules) (Proposed Reg. § 1.59A-9);
• regarding the general application of the BEAT to consolidated groups (Proposed Reg. § 1.1502-59A);
• addressing limitations on a loss corporation’s items under Code Secs. 382 and 383 in the context of the BEAT (Proposed Reg. § 1.383-1); and
• regarding reporting and record keeping requirements under Code Sec. 6038A.

Proposed Applicability Dates
Consistent with the Code Sec. 59A applicability date, the proposed regulations (other than the proposed reporting requirements for qualified derivatives payments (QDP)) are proposed to apply to tax years beginning after December 31, 2017. However, taxpayers may rely on these proposed regulations for tax years beginning after December 31, 2017, until final regulations are published, provided the taxpayer and all related parties consistently apply the proposed regulations for all those tax years that end before the finalization date.

The proposed reporting requirements for QDPs apply to tax years beginning one year after the final regulations are published. However, the simplified QDP reporting requirements are proposed to apply to tax years beginning after December 31, 2017.

Any provision that is finalized after June 22, 2019, will apply only to tax years ending on or after the date of filing of the proposed regulations in the Federal register.

The IRS will grant automatic consent to accounting method changes to comply with new Code Sec. 451(b), as added by the Tax Cuts and Jobs Act ( P.L. 115-97). In addition, some taxpayers may make the accounting method change on their tax returns without filing a Form 3115, Application for Change in Accounting Method. These procedures generally apply to tax years beginning after December 31, 2017. Rev. Proc. 2018-31, I.R.B. 2018-22, 637, is modified.

The IRS will grant automatic consent to accounting method changes to comply with new Code Sec. 451(b), as added by the Tax Cuts and Jobs Act ( P.L. 115-97). In addition, some taxpayers may make the accounting method change on their tax returns without filing a Form 3115, Application for Change in Accounting Method. These procedures generally apply to tax years beginning after December 31, 2017. Rev. Proc. 2018-31, I.R.B. 2018-22, 637, is modified.

All Events Test
Under Code Sec. 451(b), the date that an accrual basis taxpayer takes an item into account as revenue in its applicable financial statement (AFS) is also the deadline for treating the item as satisfying the all events test. This rule also applies to any portion of an item, any other financial statement identified by the IRS, and income from a debt instrument with original issue discount (OID).

Automatic Consent
The automatic consent procedures apply to a taxpayer with an AFS that:

• wants to change to a method of accounting that complies with Code Sec. 451(b); and/or
• for the year of the change, is not adopting Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) financial accounting standards for revenue recognition, titled "Revenue from Contracts with Customers (Topic 606)" that were announced on May 28, 2014.

For income from a debt instrument having OID, the Code Sec. 481(a) adjustment period for the change is six tax years (year of change plus the next five tax years). However, this applies only for the taxpayer’s first tax year beginning after December 31, 2018.

The automatic consent procedures do not apply to a taxpayer that wants to make a change to a method that adopts the FASB/IASB standard, or to a special accounting method as described in Code Sec. 451(b)(2).

Streamlined Procedure
For its first tax year beginning after December 31, 2017, a qualified taxpayer can change its accounting method to comply with Code Sec. 451(b) without filing a Form 3115. An eligible taxpayer must either:

• meet the Code Sec. 448(c) gross receipts test for a small business taxpayers (i.e., taxpayer’s average annual gross receipts for the three prior tax years cannot exceed $25 million); or
• be making the change to comply with Code Sec. 451(b)(1)(A) and/or (b)(4), and the Code Sec. 481(a) adjustment for each of the changes is zero.

These streamlined procedures do not apply to a taxpayer that wants to make a change to a method that adopts the FASB/IASB standard, or to a special accounting method as described in Code Sec. 451(b)(2), or certain other concurrent accounting method changes. Tax shelters also are not eligible.

The IRS warns that consent granted under the streamlined procedures is not a determination that the new accounting method is permissible, and that taxpayers using the streamlined change method do not receive audit protection.

The IRS has issued transition relief from the "once-in-always-in" condition for excluding part-time employees under Reg. §1.403(b)-5(b)(4)(iii)(B). Under the "once-in-always-in" exclusion condition, once an employee is eligible to make elective deferrals, the employee may not be excluded from making elective deferrals in any later exclusion year on the basis that he or she is a part-time employee.

The IRS has issued transition relief from the "once-in-always-in" condition for excluding part-time employees under Reg. §1.403(b)-5(b)(4)(iii)(B). Under the "once-in-always-in" exclusion condition, once an employee is eligible to make elective deferrals, the employee may not be excluded from making elective deferrals in any later exclusion year on the basis that he or she is a part-time employee.

Part-Time Employee Exclusion Conditions Under Final 403(b) Regulations
The Department of the Treasury and the IRS issued final regulations under Code Sec. 403(b) that were generally effective starting after 2008. Part of the final regulations include Reg. §1.403(b)-5(b)(4)(iii)(B), which covers the conditions that an employer must satisfy before excluding a part-time employee from the plan. The IRS parses the regulation to impose three separate conditions for an employee to be excluded—

• a "first-year" exclusion condition, under which the employer must reasonably expect the employee to work fewer than 1,000 hours during the employee’s first year of employment;
• a "preceding-year" exclusion condition, under which the employee must have actually worked fewer than 1,000 hours in the preceding 12-month period; and
• the "once-in-always-in" exclusion condition, under which the employee may be excluded under the part-time exclusion if and only if, in the employee’s first year of employment, the employee meets the first-year exclusion condition, and, in each exclusion year ending after the first year of employment, the employee has met the preceding-year exclusion condition.

The effect of the once-in-always-in exclusion condition is that once an employee does not meet the part-time exclusion conditions, whether in the initial year of employment or for any exclusion year, the employee may no longer be excluded from making elective deferrals under the part-time exclusion.

Employers Surprised by Once-In-Always-In Condition
Employers requested transition relief because many were unaware that the part-time exclusion included the once-in-always-in exclusion condition. Many employers applied the first-year exclusion condition for an employee’s first year, and applied the preceding-year exclusion condition separately for each succeeding exclusion year, but did not apply the once-in-always-in exclusion condition to prevent an employee who failed to meet either the first-year exclusion condition or the preceding-year exclusion condition from being excluded in all subsequent exclusion years.

Transition Relief for Once-In-Always-In Condition
The IRS is providing transition relief, including—

• operations relief for a transition period referred to as the "Relief Period";
• relief regarding plan language; and
• a fresh-start opportunity after the "Relief Period" ends.

The operations "Relief Period" begins with tax years beginning after December 31, 2008. For plans with exclusion years based on plan years, the "Relief Period" ends for all employees on the last day of the last exclusion year that ends before December 31, 2019. For plans with exclusion years based on employee anniversary years, the "Relief Period" ends, with respect to any employee, on the last day of that employee’s last exclusion year that ends before December 31, 2019.

The IRS has provided interim guidance for the 2019 calendar year on income tax withholding from wages and withholding from retirement and annuity distributions. In general, certain 2018 withholding rules provided in Notice 2018-14, I.R.B. 2018-7, 353, will remain in effect for the 2019 calendar year, with one exception.

The IRS has provided interim guidance for the 2019 calendar year on income tax withholding from wages and withholding from retirement and annuity distributions. In general, certain 2018 withholding rules provided in Notice 2018-14, I.R.B. 2018-7, 353, will remain in effect for the 2019 calendar year, with one exception.

The IRS and the Treasury Department intend to develop income tax withholding regulations to reflect changes made by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), as well as other changes in the Code since the regulations were last amended, and certain miscellaneous changes consistent with current procedures.

Withholding Allowances
The IRS delayed the release of the 2018 Form W-4, Employee’s Withholding Allowance Certificate, in order to reflect changes made by the TCJA, such as changes in itemized deductions available, increases in the child tax credit, the new credit for other dependents, and the suspension of personal exemption deductions. Notice 2018-14 provided relief for employers and employees affected by the delay.

In June, the IRS released a draft 2019 Form W-4 and instructions, which incorporated changes that were meant to improve the accuracy of income tax withholding and make the withholding system more transparent. However, in response to stakeholders’ comments, the IRS later announced that the redesigned Form W-4 would be postponed until 2020. The IRS intends to release a 2019 Form W-4 before the end of 2018 that makes minimal changes to the 2018 Form W-4.

The 2019 Form W-4 and the computational procedures in IRS Publication 15 (Circular E), Employer’s Tax Guide, will continue to use the term "withholding allowances" and related terminology to incorporate the withholding allowance factors specified in Code Sec. 3402(f) and the additional allowance items in Code Sec. 3402(m). Until further guidance is issued, references to a "withholding exemption" in the Code Sec. 3402 regulations and guidance will be applied as if they were referring to a withholding allowance.

Changes in Status
The guidance provides that if an employee experiences a change of status on or before April 30, 2019, that reduces the number of withholding allowances to which he or she is entitled, and if that change is solely due to the changes made by the TCJA, the employee generally must furnish a new Form W-4 to the employer by May 10, 2019. However, if an employee no longer reasonably expects to be entitled to a claimed number of allowances due to a change in personal circumstances that is not solely related to TCJA changes, the employee must furnish his or her employer a new Form W-4 within 10 days after the change. Similarly, if an employee claims married filing status on Form W-4 but divorces his or her spouse, the employee must furnish the employer a new Form W-4 within 10 days after the change.

Failure to Furnish
The IRS and the Treasury Department intend to withdraw the regulations under Code Sec. 3401(e), and modify other regulations, so that an employee who fails to furnish a Form W-4 will be treated as "single" but entitled to the number of withholding allowances determined under computational procedures provided in IRS Publication 15. Until further guidance is issued, however, employees who fail to furnish a Form W-4 will be treated as single with zero withholding allowances.

Additional Allowances
Until further guidance is issued, a taxpayer may include his or her estimated Code Sec. 199A passthrough deduction in determining whether he or she can claim the additional withholding allowance under Code Sec. 3402(m) on Form W-4.

Alternative Procedure
The IRS and the Treasury Department intend to update the withholding regulations to explicitly allow employees to determine their Form W-4 entries by using the IRS withholding calculator ( www.irs.gov/W4App) or IRS Publication 505, Tax Withholding and Estimated Tax, instead of having to complete certain schedules included with the Form W-4. However, the regulations are expected to provide that an employee cannot use the withholding calculator if the calculator’s instructions state that it should not be used due to his or her individual tax situation. The employee will need to use Publication 505 instead.

Alternative Methods
The IRS and the Treasury Department intend to eliminate the combined income tax withholding and employee FICA tax withholding tables under Reg. §31.3402(h)(4)-1(b), due to this alternative procedure’s unintended complexity and burden.

Lock-In Letters
The IRS may issue a "lock-in letter" to an employer, which sets the maximum number of withholding allowances an employee may claim. If the employer no longer employs the employee, the employer must send a written response to the IRS office designated in the lock-in letter that the employee is not employed by the employer. The IRS and the Treasury Department intend to eliminate the written response requirement. Pending further guidance, employers should not send a written response to the IRS under Reg. §31.3402(f)(2)-1(g)(2)(iv).

Pension, Annuity Payments
The payor of certain periodic payments for pensions, annuities, and other deferred income generally must withhold tax from the payments as if they were wages, unless the individual payee elects not to have withholding apply. Before 2018, if a withholding certificate was not furnished to the payor, the withholding rate was determined by treating the payee as a married individual claiming three withholding exemptions. The TCJA amended this rule so that the rate "shall be determined under rules prescribed by the Secretary." The IRS has determined that, for 2019, withholding on periodic payments when no withholding certificate is in effect continues to be based on treating the payee as a married individual claiming three withholding allowances.

Comments Requested
The IRS and the Treasury Department request comments on both the interim guidance and the guidance that should be provided in regulations. Comments must be received by January 25, 2019. Comments should be submitted to: CC:PA:LPD:PR (Notice 2018-92), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2018-92), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C., 20224. Alternatively, taxpayers may submit comments electronically to Notice.comments@irscounsel.treas.gov (include "Notice 2018-92" in the subject line of any electronic submission).

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.