AICPA Renews Call for new Section 199A Guidance. Deductible amount of QBI for a pass-through entity with business in net loss

Transcription

1 Tax Alerts May 2018 AICPA Renews Call for new Section 199A Guidance The American Institute of Certified Public Accountants (AICPA) has renewed its call for immediate guidance on the new 20% deduction under the Internal Revenue Code (IRC) Section 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act (P.L ). New Deduction The Tax Cuts and Jobs Act created IRC Section 199A. The deduction is temporary and begins this year. Generally, qualified taxpayers may deduct up to 20% of domestic QBI from a partnership, S corporation or sole proprietorship. Congress put in place a limitation based on wages paid, or on wages paid plus a capital element, among other requirements. Certain service trades or businesses generally may not take advantage of the deduction but there are exceptions. Almost immediately after passage of the new tax law, the AICPA and other tax professional groups urged the IRS to move quickly on guidance. Recently, the National Society of Accountants (NSA) reported that the IRS would issue guidance on IRC Section 199A this summer. Immediate Concern The AICPA identified several areas of immediate concern. They are: Definition of IRC Section 199A qualified business income Aggregation method for calculation of QBI of pass-through businesses Deductible amount of QBI for a pass-through entity with business in net loss Qualification of wages paid by an employee leasing company Application of IRC Section 199A to an owner of a fiscal year pass-through entity ending in 2018 Availability of deduction for Electing Small Business Trusts (ESBTs) Services The AICPA asked the IRS to describe what activities are included in the definition of a services trade or business. "The guidance should clarify that the definition of the term accounting services includes any services associated with the determination of tax liabilities, including preparation, tax planning, cost segregation services, services rendered with respect to tax credits and deductions, and similar consultative services, the AICPA told the Service. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 1

2 Trump and House Republicans Discussing Phase Two of Tax Reform A top House tax writer has confirmed that House Republicans and the Trump administration are working on a second phase of tax reform this year. House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an interview that the Trump administration and House Republicans "think more can be done." A Ways and Means spokesperson indicated that "there are opportunities in making individual tax cuts permanent, increasing innovation, [and] encouraging household savings. "Confirmation that House GOP tax writers are mulling over additional tax changes to the tax code comes just days after President Trump announced that he and House Republicans are very serious about working on a phase two of tax reform. Trump quipped that Brady is the "king of tax cuts." Individual Tax Cuts Among expected changes, in particular, the temporary individual tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) (P.L ) could be made permanent, a Ways and Means spokesperson said. For budgetary reasons, the cuts to individual tax rates and benefits were not made permanent under the new law. "While the tax cuts for families were long-term, they are not yet permanent, so we are going to address issues like that," Brady said. Criticism Democratic lawmakers remain largely united in their criticisms of the TCJA. House Minority Leader Nancy Pelosi, D-Calif., criticized the new tax law in a March 15 news conference for "giving 83% of the benefits to the top 1%, ultimately raising taxes for 86 million middle-class families while contending that it's a middle-class tax cut." To that end, across the U.S. Capitol, Senate Minority Leader Charles E. Schumer has said Democrats would be reluctant to work with Republicans in making any fixes to the new tax law unless Republicans would be willing to address Democrats concerns with the law, as well. "We don't have much of an inclination, unless they want to open up other parts of the tax bill that we think need changes, to just help them clean up the mess they made," Schumer said. Looking Forward "Mainstream optimism is at record levels; our economy is really gaining momentum and booming in a big way," Brady said. "We are always looking to improve the tax code," he said, adding that lawmakers are currently considering new ideas for tax reform. "We think there are some good ones." Lawmakers will not combine additional tax reform measures with technical corrections to the existing TCJA, according to Brady, emphasizing that any significant changes to come will be new ideas. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 2

3 IRS Issues Guidance on Transition Tax Filing and Payment Requirements The IRS has released Frequently Asked Questions (FAQs) to address a taxpayer s filing obligations and payment requirements with respect to the Internal Revenue Code (IRC) Section 965 transition tax, enacted as part of the Tax Cuts and Jobs Creation Act ( P.L ). The instructions in the FAQs are for filing 2017 returns with an amount of IRC Section 965 tax. Failure to follow the FAQs could result in difficulties in processing the returns. Taxpayers who were required to file electronically were asked to wait until April 2, 2018, to file returns so that the IRS can make system changes. In general, IRC Section 965 imposes a one-time tax on the untaxed post-1986 foreign earnings of foreign subsidiaries of U.S. shareholders by deeming the earnings to be repatriated. The foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5% rate, and remaining earnings are taxed at an 8% rate. The taxpayer may elect to pay the tax in installments over eight years. Amounts must be reported by a U.S. shareholder of deferred foreign income corporation (DFIC) or by a direct or indirect partner in a domestic partnership, a shareholder in an S corporation, or a beneficiary of another passthrough entity that is a U.S. shareholder of a DFIC. The appendix to question 2 in the IRS FAQs contains a table that describes, separately for individuals and entities, how items should be reported on the 2017 tax return. For example, an individual reports the IRC Section 965(a) amount on Form 1040, Line 21, with the notation SEC 965 on the dotted line to the left of the line. A person with income under IRC Section 965 is required to include an IRC 965 Transition Tax Statement with its return, signed under penalties of perjury, and, in the case of an electronically filed return, in pdf format with the filename 965 tax. A model statement is provided. Adequate records must be kept supporting the IRC Section 965 inclusion amount, the deduction under IRC Section 965(c), the net tax liability under IRC Section 965, and any other underlying calculations of these amounts. The FAQs provide details on how to make the multiple IRC Section 965 elections, including the election to pay the tax in installments over eight years. For each election, a statement must be attached to the return and signed under penalty of perjury, and, in the case of an electronically filed return, in pdf format. Form 5471 must also be filed with the 2017 return of a U.S. shareholder of a specified foreign corporation, regardless of whether the specified foreign corporation is a controlled foreign corporation. A statement containing information about the IRC Section 965(a) inclusion must be attached to the Schedules K-1 of domestic partnerships, S corporations, or other pass-through entities. Tax must be paid in two separate payments. One payment will reflect the tax owed, without IRC Section 965. The second payment is the IRC Section 965 payment. Both payments must be made by the due date of the applicable return (without extensions). Additional details for paying the tax are provided in the FAQs. Persons who have already filed a 2017 tax return should consider filing an amended return based on the information in these FAQs and appendices. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 3

4 Conviction for Obstructing Tax Administration Reversed The U.S. Supreme Court reversed an individual s conviction for obstructing tax law administration. The government failed to show that the individual knew that a "proceeding" was pending when he engaged in the obstructive conduct. Background The individual owned and operated a freight service that transported items to and from the United States and Canada. The government charged the individual with violating the "omnibus clause" of Internal Revenue Code (IRC) Section 7212(a), which imposes criminal liability on anyone who "in any other way corruptly obstructs or impedes, or endeavors to obstruct or impede, the due administration of" the Internal Revenue Code (Title 26). The government alleged that the individual obstructed tax administration because he: (1) failed to maintain corporate books and records; (2) failed to provide his accountant with complete and accurate tax information; (3) destroyed business records; (4) was hiding income; and (5) was paying employees with cash. At trial, the jury was instructed that it must unanimously find that he corruptly engaged in one of the practices listed. However, the jury was not instructed that it had to find that the individual knew he was under investigation and intended to interfere with that investigation. Subsequently, the jury convicted the individual on all counts. Then, the Second Circuit Court of Appeals affirmed his conviction. Tax Law Administration According to the Court, the verbs "obstruct" and "impede" require an object. Therefore, the taxpayer must hinder a particular person or thing. Moreover, the omnibus clause serves as a "catchall" for the obstructive conduct, not as a catchall for every violation that interferes with tax law administration. Nothing in the statute s history suggested that Congress intended the omnibus clause to apply to the entire IRC, including the routine processing of tax returns, tax payments and tax refunds. Further, if the omnibus clause applied to all tax law administration, many tax misdemeanors might turn into felonies and make specific criminal provisions in the Code redundant. Accordingly, the phrase "due administration of" the tax code referred only to some acts, not everything the IRS does. Overly Broad Interpretation A broad interpretation of the omnibus clause would also risk the lack of fair warning. Interpreted broadly, the provision could apply to a person who paid a babysitter in cash without withholding taxes, left a large cash tip in a restaurant, failed to keep donation receipts, or failed to provide every record to their accountant. Such individuals may know they are violating an IRS rule. However, they would not think they could be prosecuted for obstruction. Further, if Congress intended that outcome, it should have made that clear in the statute. Government s Argument Further, the Court rejected the government s argument that the need to show the obstructive conduct was 4

5 Conviction for Obstructing Tax Administration Reversed (continued) corrupt cured any overbreadth problem. However, a taxpayer who "willfully" violates the tax code intends that someone obtain an unlawful advantage. Moreover, relying upon prosecutorial discretion to narrow an otherwise overbroad statute puts too much power in the hands of the prosecutor, and risks undermining public confidence in the criminal justice system. Therefore, to secure a conviction under the omnibus clause, the government was required to show that there was a nexus between the individual s conduct and an investigation, audit or other targeted administrative action. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). Texas Tax Amnesty Program Available from May 1 through June 29, 2018 The Texas Tax Amnesty Program will, under certain circumstances, provide taxpayers with relief from penalties and interest on tax due. The tax amnesty program applies to periods prior to January 1, 2018 and only includes liabilities that have not been previously reported to the Texas Comptroller's Office. It does not apply to accounts that have been certified to the Office of the Attorney General; accounts that are presently in litigation; periods that are currently under audit or for which a notice of audit has been issued; or accounts that have been reduced to judgment. In addition, the amnesty does not apply to local motor vehicle tax, IFTA taxes, PUC gross receipts assessments or unclaimed property payments. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 5

6 IRS Issued 2018 Depreciation Dollar Limits for Passenger Autos The IRS has released the depreciation limits for business passenger automobiles placed in service by the taxpayer in 2018, taking into account the changes made by the Tax Cuts and Jobs Act (TCJA). The IRS has also released the annual income inclusion amounts for such vehicles first leased in For owners of passenger automobiles, Internal Revenue Code (IRC) Section 280F(a), as modified by the TCJA, imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. The TCJA extended the additional (bonus) first-year depreciation deduction for qualified property acquired and placed in service after September 27, 2017, and before January 1, Under the TCJA, a 100% bonus first-year deduction of the adjusted basis is generally allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, (For certain property with longer production periods, the end date is increased by one year). In later years, the first-year bonus depreciation deduction phases down, as follows: 80% for property placed in service after December 31, 2022 and before January 1, % for property placed in service after December 31, 2023 and before January 1, % for property placed in service after December 31, 2024 and before January 1, % for property placed in service after December 31, 2025 and before January 1, 2027 For the first tax year ending after September 27, 2017, a taxpayer can elect to claim 50% bonus first-year depreciation (instead of claiming a 100% first-year depreciation allowance). In the case of a passenger automobile, for qualified property acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer during 2018, the first-year depreciation is increased by $6,400. For qualified property acquired and placed in service after September 27, 2017, the first-year depreciation is increased by $8,000. The following are the annual depreciation dollar caps for vehicles that are subject to the luxury auto limits and are placed in service by the taxpayer in calendar year The TCJA provides the limits on depreciation for passenger automobiles placed in service during calendar year 2018; no adjustment for inflation applies to calendar year The depreciation limits for passenger automobiles acquired by the taxpayer before September 28, 2017, and placed in service by the taxpayer during calendar year 2018, for which the bonus first-year depreciation deduction applies, are: $16,400 for the placed-in-service year; $16,000 for the second tax year; $9,600 for the third tax year; and $5,760 for each succeeding year. 6

7 IRS Issued 2018 Depreciation Dollar Limits for Passenger Autos (continued) The depreciation limits for passenger automobiles acquired by the taxpayer after September 27, 2017, and placed in service by the taxpayer during calendar year 2018, for which the bonus first year depreciation deduction applies, are: $18,000 for the placed-in-service year; $16,000 for the second tax year; $9,600 for the third tax year; and $5,760 for each succeeding year. The depreciation limits for passenger automobiles placed in service during calendar year 2018 for which no first-year bonus depreciation deduction applies are: $10,000 for the placed-in-service year; $16,000 for the second tax year; $9,600 for the third tax year; and $5,760 for each succeeding year. Auto Lease Income Inclusion Tables A taxpayer that leases a business auto may deduct the part of the lease payment representing business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that lessees cannot avoid the effect of the luxury auto limits, however, they must include a certain amount in income during each year of the lease to partially offset the lease deduction, if the vehicle's fair market value (FMV) exceeds certain dollar limits. The income inclusion amount varies with the initial FMV of the leased auto and the year of the lease and is adjusted for inflation each year. Revenue Procedure carries the income inclusion tables for passenger autos for which the lease term begins during calendar year 2018 and the vehicle has a FMV over $50,000. Lessees of these passenger automobiles must use these tables to determine the inclusion amount for each tax year during which the passenger automobile is leased. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 7

8 Planning California Estimated Tax Payments This article is reproduced with permission from Spidell Publishing, Inc. Planning estimated taxes for 2018 federal returns is a serious challenge, with massive changes and many unknowns. For federal returns, relying on the prior-year safe harbors may result in an overpayment, but if the taxpayer is underpaid, there would be no penalty. With minor exceptions, California has not conformed to any of the federal changes. There has been no legislation introduced to conform to any of the federal changes. So, where does that leave us for California? It leaves us in the same place as any other year. In most cases, taxpayers can rely on the prioryear safe harbor (see next page). But there are some unique California exceptions that might cause problems or offer relief. Retroactive Law Change California law provides an exception to the estimated tax underpayment penalty that results when a law change retroactively increases a taxpayer's estimated tax payments. The exceptions only apply to California law changes chaptered during the taxable year of the underpayment, therefore; it does not apply to federal law changes that may create an underpayment of state tax. Prior-year Safe Harbor California conforms with modifications to Internal Revenue Code (IRC) Section 6654, which provides generally for the penalty for failure to pay estimated taxes. In addition, IRC Section 6654 provides for installment due dates, the amounts of the required installments, and exception including the annualized income installment method. California also conforms to these federal provisions (using California amounts and installment percentages): The "required annual payment" is 90% of the tax shown on the return for the taxable year or 100% of tax shown on the return for the preceding taxable year, and The 100% prior-year tax is increased to 110% if the taxpayer's prior-year adjusted gross income (AGI) exceeds $150,000 or $75,000 for married filing separately (using California AGI). However, individuals with AGI of $1 million ($500,000 for married filing separate) or more must pay 90% of their current-year tax and may not use the prior-year safe harbor for California purposes. Underpayment Penalty Nonconformity Loophole California does not assess an underpayment penalty on the current year if, in the prior year, the taxpayer had a liability (minus credits for withholding, but not including estimated tax payments) of $500 or less ($250 for married filing separately). This means that a taxpayer whose prior-year withholding covered the tax could have no withholding or estimates paid in the current year and owe no penalty. This provision also 8

9 Planning California Estimated Tax Payments (continued) applies to a taxpayer whose AGI equals or exceeds $1 million. The FTB has programed its computer system to consider this provision when assessing the penalty. Estimated Tax Installments for Individuals - California Percentages 1st quarter 30% 2nd quarter 40% 3rd quarter 0% 4th quarter 30% For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES ( ). 9

10 Windes is a recognized leader in the field of accounting, assurance, tax, and business consulting services. Our goal is to exceed your expectations by providing timely, high-quality, and personalized service that is directed at improving your bottom-line results. Quality and value-added solutions from your accounting firm are essential steps toward success in today s marketplace. You can depend on Windes to deliver exceptional client service on each engagement. For 92 years, we have gone beyond traditional services to provide proactive solutions and the highest level of expertise and experience. The Windes team approach allows you to benefit from a wealth of technical expertise and extensive resources. We service a broad range of clients, from high-net-worth individuals and nonprofit organizations to privately held businesses. We act as business advisors, working with you to set strategies, maximize efficiencies, minimize taxes, and elevate your business to the next level. Headquarters 111 West Ocean Boulevard Twenty-Second Floor Long Beach, CA Orange County Office Von Karman Avenue Suite 1060 Irvine, CA Los Angeles Office 601 South Figueroa Street Suite 4050 Los Angeles, CA Windes, Inc. All rights reserved.