LIST OF SUBSTANTIVE CHANGES AND ADDITIONS. PPC s 1120 Deskbook. Twenty-seventh Edition (October 2017)

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1 Route To: j Partners j Managers j Staff j File LIST OF SUBSTANTIVE CHANGES AND ADDITIONS PPC s 1120 Deskbook Twenty-seventh Edition (October 2017) Highlights of this Edition Thefollowingaresomeoftheimportantupdatefeaturesofthe2017editionofPPC s 1120 Deskbook: Employee Retention Credit and Expanded Charitable Contribution Deduction. The Disaster Tax Relief and Airportand AirwayExtensionAct of 2017provides tax assistance for victims of Hurricanes Harvey, Irma, and Maria. Items that affect corporation returns include a new employee retention credit and the temporary suspension of the limitation on qualified charitable contribution deductions. This Deskbook discusses the requirements that must be met in order to benefit from these provisions. Disaster Relief Provisions. The IRS has extended the due date of making tax payments and filing tax returns for victims of Hurricanes Harvey, Irma, and Maria, and has provided additional resources for businesses. This Deskbook explains the process for claiming tax deductions for casualty losses to help businesses recover from these disasters. New Practice Aids. A new illustration explains and summarizes the economic performance rules in terms of the timing of service, payments, and deductions, including when the 2½, 3½, and 8½ rules apply. Passive Activity Rules. Recent favorable court cases and IRS guidance clarify when real estate professionals can deduct losses and how the grouping of activities can aid in utilizing suspended losses. Research Credit. This Deskbook includes an expanded discussion of the research credit to aid in taking this benefit, including offsetting the AMT or payroll taxes. In addition to these featured items, your Deskbook includes the following: 1 Personal Service Corporations 2 Tax Years 3 Accounting Methods 1. Expanded the discussion of risks associated with income stripping in PSCs. 2. Added a discussion of a Tax Court case ruling that an indirect health care provider was a PSC subject to the 35% tax rate. 1. Expanded the discussion of the extended due date for a short year when an acquired corporation joins a consolidated group. 1. Updated the chapter for the most recent Revenue Procedure on automatic changes in accounting methods. 2. Added a discussion of the AMT impact for contractors not using the percentage-of-completion method (PCM) for long-term contracts. Key Issue 1B Key Issue 1B Key Issue 2E Throughout Key Issue 3C t20p17sub 1

2 4 Inventory and Cost of Goods Sold 6 Sales/Exchanges of Capital Assets and Business Property 7 Other Income Issues 3. Added a discussion of a court case ruling that income recognition of a home builder under the percentage of completion method could be deferred until the final completion of common amenities, and the IRS nonacquiesced with the Circuit Court of Appeals. 4. Added a discussion of the return filing requirements for taxpayers using the two-year deferral method for certain advanced payments. 5. Added a discussion of a court case that determined that entering into a unilateral contract with customers provides instant liability and near certainty that the liability will be discharged, resulting in the all-events test for deducting the accrual being met. 6. Added a discussion explaining the cut-off method for certain automatic changes in accounting methods. 7. Added a discussion of the situations that can accelerate the four-year deferral of a positive Section 418(a) adjustment into the current year. 8. Added a new illustration that summarizes the economic performance rules in relation to the timing of service, payments, and deductions, including when the 2½, 3½, and 8½ rules apply. 1. Updated the chapter for the most recent Revenue Procedure on automatic changes in accounting methods. 1. Added a discussion of the relief provisions for Hurricanes Harvey, Irma, and Maria. 2. Added a discussion of a recently issued Revenue Procedure and temporary regulations for making or revoking the election under IRC Sec. 165(i) to deduct a casualty loss in the preceding tax year. 3. Added a discussion of deducting costs related to abandoned transactions, including transactions abandoned in favor of another transaction. 4. Added a discussion of a letter ruling that allowed a taxpayer to change the recovery period of an installment sale to avoid a large loss in the final year that may have been limited under the capital loss rules. 1. Updated the annual per diem limitation for periodic payments received under long-term care or life insurance contracts for a chronically ill individual. 2. Added a discussion, including an example, of the taxation of virtual currency. Key Issue 3C Key Issue 3E Key Issue 3E Key Issue 3G Key Issue 3G Illustration 3-2 Throughout Key Issue 6L Key Issue 6L Key Issue 6L Key Issue 6M Key Issue 7C Key Issue 7L 2

3 8 The Passive Activity Loss (PAL) and At-risk Rules 9 Domestic Producers Deduction 11 Bad Debt and Debt Modifications 12 Taxes and Interest 13 Charitable Contributions 1. Expanded the discussion of the material participation tests for real property trades or businesses. 2. Added a discussion of a tax court case that determined that the taxpayer was a real estate professional despite unreliable records of real estate revenue and expenses and a lack of records to substantiate the amount of time spent on real estate activities. 3. Added a discussion of a court case that determined that rental losses of a real estate professional were not automatically nonpassive based on the time spent on the activities. 4. In a TAM, the IRS office of Chief Counsel concluded that a doctor s passive investment in revenue from a surgery center could be offset with unrelated rental losses because the grouping was not done to circumvent the PAL rules. 5. In a Tax Court case, the taxpayer s reclassification of income as nonpassive to absorb some passive losses not previously taken was allowed because it was not done to circumvent the PAL rules. 1. Added a discussion of a CCA concluding that under the facts, equipment used to produce QPP was allocated entirely to non-dpgr since the equipment itself was not QPP. The loss did not reduce the taxpayer s QPAI. 2. Added a discussion of a legal advice memorandum and an example of whether receipts from cooperative advertising arrangements qualify as DPGR that may give rise to a domestic productions activities deduction. 1. Expanded the list of factors courts consider when determining whether a bona fide debt exists following a transfer between related parties. 2. Added a discussion of when a debt modification treated as a deemed exchange may qualify as a tax-free recapitalization under IRC Sec. 368(a)(1)(E). 3. Expanded the discussion of the factors influencing the classification of modified debt to include the creditor s behavior. 1. Expanded the discussion of the AHYDO rules for the dividend-equivalent portion of OID. 1. Added a discussion of the relief provisions for Hurricanes Harvey, Irma, and Maria that allow corporations to deduct qualified contributions up to 100% of taxable income. 2. Added a discussion of leave-based donation programs allowed by the IRS for the relief of victims of Hurricanes Harvey, Irma, and Maria. 3. Added a discussion of an IRS Notice that characterizes certain syndicated conservation easement donation transactions as listed transactions that require reporting under IRS Secs and Key Issue 8C Key Issue 8C Key Issue 8C Key Issue 8D Key Issue 8D Key Issue 9A Key Issue 9A Key Issue 11A Key Issue 11F Key Issue 11F Key Issue 12K Key Issue 13A Key Issue 13A Key Issue 13C 3

4 14 Depreciation 16 Pension and Profitsharing Plans and Other Benefits 17 T&E, Club Dues, Gifts, Directors Fees, Autos, and Airplanes 18 Net Operating Losses 19 Alternative Minimum Tax 21 Accumulated Earnings Tax 22 Credits 1. Updated the chapter for the most recent Revenue Procedure on automatic changes in accounting methods for depreciation. 2. Added a discussion of an Action on Decision concerning a case that determined when an asset is placed in service and can be depreciated. 3. Added a reference to a recent Revenue Proceudre that provides additional guidance on the depreciation provisions of the 2015 PATH Act. 4. Clarified when the de minimis safe harbor expensing election is available for amounts paid to acquire or produce tangible property. 1. Added a discussion of an IRS Letter Ruling enabling employees to contribute the dollar equivalent of their unused vacation time to their 401(k) accounts. 2. Clarified when and from what other types of retirement accounts an employee can roll over contributions to a SIMPLE retirement account tax-free. 3. Added a discussion of small employer health reimbursement arrangements, which are available under certain conditions to small employers who do not offer otherhealth insurance coverage to employees. 1. Clarified regulations under IRC Sec. 274 that the 50% deduction limitation on employeemealsandentertainment applies to the party that ultimately bears the expense. 2. Added a discussion of a Tax Court case that concluded that required pre-game meals provided to players and other team personnel were exempt from the 50% limitation on meals and entertainment. 3. Updated the inclusion amount used in valuing leased automobiles used for business for inflation. 1. Expanded and clarified the discussion of the tax impact of barred adjustments, including an example when a barred adjustment can be added to the net operating loss carryforward for future benefit when the loss is absorbed. 1. Clarified the discussion on when the AMT adjustment applies for property that qualifies for bonus depreciation. 1. Added a discussion of a chief counsel advice where the accumulated earnings tax applied to a corporation holding only partnership interests. 2. Expanded the discussion of consent dividends and the impact on the accumulated earnings tax. 1. Expanded the discussion of the enhanced oil recovery credit. 2. Added a discussion of the new employee retention credit for eligible employers affected by Hurricanes Harvey, Irma, and Maria. Throughout Key Issue 14E Key Issue 14I Key Issue 14L Key Issue 16D Key Issue 16E Key Issue 16G Key Issue 17D Key Issue 17D Key Issue 17F Key Issue 18E Key Issue 19C Key Issue 21B Key Issue 21D Key Issue 22A Key Issue 22A 4

5 23 Tax Payments 26 Controlled Groups 27 Consolidated Returns 29 Stock Purchases Treated as Asset Acquisitions (Sections 336 and 338) 30 Limitations Due to Ownership Changes (the Section382,383,and 384 Rules) 31 Sections 1244 and 1202 Stock 32 Incorporation 34 Filing Form Expanded the discussion of in-house software eligible for the research credit. 4. Expanded the discussion and clarified how controlled groups of corporations must calculate and allocate the research credit. 5. Expanded the discussion of the election a small business can make to claim a portion of their research credit against the AMT or payroll taxes. Illustration 22-5 Illustration 22-5 Illustration TheIRShasextendedtheduedatefortaxpaymentsfor Key Issue 23A victims of Hurricanes Harvey, Irma, and Maria. 2. Expanded the discussion of certain penalty abatements. Key Issue 23I 1. Expanded the discussion of final regulations applying the stock ownership attribution rules of IRC Sec. 1563(e)(5) to legally married, same sex couples. 2. Noted the types of stock that are excluded when applying the brother-sister controlled group tests. 3. Updated the dollar limitation for the Section 179 expense deduction for tax years beginning in Expanded the discussion of recommendations for a subsidiary extending a short-period return. 2. Added a discussion of the special provisions in the intercompany transaction regulations for successor assets and successor entities. 1. Expanded the discussion of the timing of short period returns that are generally due because of a Section 338 election. 1. Expanded the discussion of the rules when the SRLY rules overlap with the Section 382 rules. 1. Added a discussion of a letter ruling where Section 1202 treatment was allowed for LLC membership interests where the LLC elected to be taxed as a corporation for income tax purposes. 1. Added a discussion of the Section 351 rules that the property exchanged for stock has to be substantial to qualify as a tax-free transfer. 2. Expanded the discussion of the exchange of services for property and the availability of the Section 83 election. 1. TheIRShasextendedtheduedateforthefilingoftax returns for victims of Hurricanes Harvey, Irma, and Maria. 2. Updated the discussion of the registration of paid preparers. There is currently no fee for registration. Key Issue 26A Key Issue 26A Key Issue 26B Key Issue 27B Key Issue 27E Key Issue 29A Key Issue 30C Key Issue 31E Key Issue 32A Key Issue 32B Key Issues 34D Key Issue 34G 5

6 35 Amended Returns, Claims for Refunds, and Assessments of Tax 1. Updated the discussion of the extended statute of limitations for assessing tax from listed transactions, including the rules for filing Form 8886 and submitting the form to the Office of Tax Shelter Analysis. 2. Discussed a recent Circuit Court ruling that the taxpayer submitting the required form, and not the examiner s knowledge, triggers the one-year limitations period for assessing tax from listed transactions. 3. Addressed the 20% penalty for filing a claim for refund of an excessive amount, including situations where the penalty does not apply. 4. Explained when Circular 230 allows return preparers to charge a contingent fee for preparing a claim for refund. Key Issue 35A Key Issue 35A Key Issue 35G Key Issue 35G 6