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Just hours before government funding was set to expire, President Trump on March 23 signed the bipartisan Consolidated Appropriations Act, 2018, averting a government shutdown. The $1.3 trillion fiscal year 2018 omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions and increased IRS funding.

Just hours before government funding was set to expire, President Trump on March 23 signed the bipartisan Consolidated Appropriations Act, 2018, averting a government shutdown. The $1.3 trillion fiscal year 2018 omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions and increased IRS funding.

The House approved the spending bill by a 256-to-167 vote on March 22. The Senate cleared the measure by a 65-to-32 vote.

Grain Glitch
The so-called "grain glitch" addressed within the omnibus package aims to fix an unintended consequence in the "pass-through" income deduction. The deduction is provided in new Code Sec. 199A, which was enacted last December as part of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

Before the fix, grain and other agricultural products sold to cooperatives received a tax advantage because those sales were deductible from a farmer’s gross sales. Sales to companies other than cooperatives were deductible only from net business income. The inadvertent advantage had been given to cooperatives as part of a drafting error, according to several Republican lawmakers.

The appropriations bill repeals the provision in Code Sec. 199A that allowed farmers to deduct 20 percent of their gross sales to cooperatives. As modified, the deduction is now limited to 20 percent of farmers’ net income, excluding capital gains. "This legislation restores the competitive balance in the agricultural marketplace by leveling the tax burden on independent and cooperative farming businesses," Sen. Jerry Moran, R-Kan., said in a March 22 statement. The bill also modifies the deduction that is allowed to agricultural or horticultural cooperatives.

Low-Income Housing Tax Credit
Although Democrats have previously expressed an unwillingness to help Republicans correct issues within the new tax law, the parties agreed to the grain glitch fix in exchange for an expansion of the low-income house tax credit. The expansion is also included in the spending bill.

"This is the first increase in over a decade," Sen. Maria Cantwell, D-Wa., said on March 22. "Nearly $3 billion is a good start towards tackling the housing crisis in our cities and rural communities," she added. Cantwell spearheaded the efforts among Democrats for the credit’s expansion.

Technical Corrections
Numerous other technical corrections to previous tax bills spanning from 2004-2016 were included in the spending bill, none of which specifically address the TCJA. Included among the fixes are technical corrections to the partnership audit rules.

IRS Funding
The legislation provides the IRS with $11.43 billion in funding, close to $196 million more than currently enacted levels. $320 million is allocated specifically for implementation of the TCJA. The Trump administration had requested $397 million for implementation of the new tax law. According to Treasury Secretary Steven Mnuchin, the increased resources would provide an update to antiquated telephone systems and technology.

White House
President Trump rattled Capitol Hill on March 23 when he announced just hours before government funding was set to expire that he may not sign the government spending bill. Although Mick Mulvaney, Director of the Office of Management and Budget (OMB) said on March 22 that the President would sign the omnibus package, President Trump took to Twitter on March 23 to suggest otherwise. "I am considering a veto of the omnibus spending bill…," Trump said in a tweet.

While Trump did, in fact, wind up signing the spending bill, which tops 2,200 pages, he told reporters at the White House that he was "unhappy" to do so. Trump criticized the $1.3 trillion omnibus package for being the second largest in history. "I say to Congress, I will never sign another bill like this again. I’m not going to do it again. Nobody read it. It’s only hours old," Trump said.

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

New Deduction
The Tax Cuts and Jobs Act created Code Sec. 199A. The deduction is temporary and begins this year.

Generally, qualified taxpayers may deduct up to 20 percent 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 on the IRS to move quickly on guidance. Recently, the National Society of Accountants (NSA) reported that the IRS would issue guidance on Code Sec. 199A this summer.

Immediate Concern
The AICPA identified several areas of immediate concern. They are:

• Definition of Code Sec. 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 Code Sec. 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.

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 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 told Wolters Kluwer on March 15 that "there are opportunities in making individual tax cuts permanent, increasing innovation, [and] encouraging household savings."Confirmation that House GOP tax writers are mulling 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. 115-97) could be made permanent, a Ways and Means spokesperson told Wolters Kluwer. 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’re 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 percent of the benefits to the top 1 percent, 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’re 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.

The House Ways and Means Tax Policy Subcommittee held a March 14 hearing in which lawmakers and stakeholders examined the future of various temporary tax extenders post-tax reform. Over 30 tax breaks, which included energy and fuel credits, among others, were retroactively extended for the 2017 tax year in the Bipartisan Budget Act ( P.L. 115-123) enacted in February.

The House Ways and Means Tax Policy Subcommittee held a March 14 hearing in which lawmakers and stakeholders examined the future of various temporary tax extenders post-tax reform. Over 30 tax breaks, which included energy and fuel credits, among others, were retroactively extended for the 2017 tax year in the Bipartisan Budget Act ( P.L. 115-123) enacted in February.

Both Republican and Democratic lawmakers have varying views on specific temporary tax provisions, but in general, seem to have largely been in agreement that year-end tax extenders are not good policy. New to the discussion, however, is whether such provisions are worthwhile now that business tax rates have been lowered along with full and immediate expensing under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

New Path Forward
The Ways and Means Committee is "charting a new path forward on temporary tax provisions,"Chairman Kevin Brady, R-Tex., said in his opening statement. "Temporary measures are rarely good tax policy."

According to Brady, numerous tax extenders only exist because of the previously outdated tax code and high tax rates. But now that tax reform has been enacted, these temporary tax breaks may serve less of a purpose. "Starting now, we’re going to apply a rigorous test to these temporary provisions,"Brady said.

To that end, Tax Policy Subcommittee Chairman Vern Buchanan, R-Fla., said that any temporary tax provision determined as no longer necessary post-tax reform should be eliminated. And, as for those that continue to serve an important role and enhance tax reform, permanence should be considered.

Tax Policy Subcommittee ranking member Lloyd Doggett, D-Tex., also weighing in on the issue, said that any temporary tax provisions that will remain need to be paid for moving forward. Additionally, Doggett criticized Republicans for not holding enough hearings on the TCJA, as well as the specific tax extenders currently under review. Doing so, he added, would enable needed discussion on relevancy as well as pay-fors.

Panels
Witnesses at the hearing were grouped into four panels, three of which consisted of several representatives from various industries including fuel, energy, and real estate. The other included witnesses from several think tanks and research organizations.

Generally, industry stakeholders argued that many of these temporary tax breaks remain important, even after tax reform. Buchanan, however, repeatedly asked witnesses why additional incentives were needed after tax cuts and full expensing were provided through tax reform under the TCJA. Several Republican lawmakers, including Buchanan, stated that tax provisions only add to the uncertainty of the tax system.

Several industry witnesses argued, in essence, that not all tax extenders are created equally and should thus be evaluated individually. Barry Grooms, testifying on behalf of the National Association of Realtors, told lawmakers that the tax exclusion for forgiven mortgage debt is unique and should be made a permanent part of our tax law. "Since it was first added to the Internal Revenue Code in 2007, this provision has provided much-needed financial relief for millions of distressed households,"Grooms testified. This exclusion makes the tax system fairer, Grooms added, stating that it provides assistance to families experiencing hardships.

Policy
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told lawmakers that tax extenders are generally poor policy and that most should be allowed to sunset. According to MacGuineas, not only do tax extenders add to the federal deficit, the temporary nature of tax extenders makes it difficult for businesses and individuals to plan and invest. "To be sure, there are sometimes legitimate reasons for temporary tax policy – to respond to a natural disaster or economic downturn, to test effectiveness, or to provide transition relief – but most of the tax extenders are temporary simply to hide their budgetary cost," MacGuineas testifed.

Likewise, David Burton, senior fellow in economic policy at The Heritage Foundation, spoke to the costliness of tax extenders. Burton testified that 13 energy tax extenders are unwarranted. "At roughly $53 billion over ten years, the revenue lost from these provisions is substantial," Burton included in his written testimony. Additionally, Burton told lawmakers that tax extenders make the tax system less fair.

Seth Hanlon, senior fellow at the Center for American Progress, criticized Congress for not addressing tax extenders in the TCJA. Furthermore, Hanlon told lawmakers that tax extenders not only make the tax code more unstable and add to the federal deficit, but also complicate the IRS’s job during filing season.

"Congress should have ended the gimmicky routine on tax extenders long ago, and certainly should have done so in legislation that was billed as a once-in-a-generation tax reform," Hanlon testified. "But, better late than never."

The IRS has released Frequently Asked Questions (FAQs) to address a taxpayer’s filing obligations and payment requirements with respect to the Code Sec. 965 transition tax, enacted as part of the Tax Cuts and Jobs Creation Act ( P.L. 115-97). The instructions in the FAQs are for filing 2017 returns with an amount of Code Sec. 965 tax. Failure to follow the FAQs could result in difficulties in processing the returns. Taxpayers who are required to file electronically are asked to wait until April 2, 2018, to file returns so that the IRS can make system changes.

The IRS has released Frequently Asked Questions (FAQs) to address a taxpayer’s filing obligations and payment requirements with respect to the Code Sec. 965 transition tax, enacted as part of the Tax Cuts and Jobs Creation Act ( P.L. 115-97). The instructions in the FAQs are for filing 2017 returns with an amount of Code Sec. 965 tax. Failure to follow the FAQs could result in difficulties in processing the returns. Taxpayers who are required to file electronically are asked to wait until April 2, 2018, to file returns so that the IRS can make system changes.

In general, Code Sec. 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 percent rate, and remaining earnings are taxed at an 8 percent rate. The taxpayer may elect to pay the tax in installments over eight years.

Amounts must be reported by a U.S. shareholders 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 Q&A 2 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 Code Sec. 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 Code Sec. 965 is required to include with its return an IRC 965 Transition Tax Statement, 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 Code Sec. 965 inclusion amount, the deduction under Code Sec. 965(c), the net tax liability under Code Sec. 965, and any other underlying calculations of these amounts.

The FAQs provide details on how to make the multiple Code Sec. 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 the penalties 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 Code Sec. 965(a) inclusion must be attached to the Schedule K-1s of domestic partnerships, S corporations, or other passthrough entities.

Tax must be paid in two separate payments. One payment will reflect the tax owed, without Code Sec. 965. The second payment is the Code Sec. 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.

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.

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 Code Sec. 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
The Supreme Court reversed and remanded. 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 Internal Revenue Code, 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 corrupt cured any overbreath problem. However, a taxpayer who "willfully" violates the tax code intends someone to 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.

Reversing and remanding a CA-2 decision 2016-2 ustc ¶50,453.

Individuals may contribute up to $5,500 to a traditional and a Roth IRA for 2016. This is the same limit as 2015. An individual age 50 and older can make a catch-up contribution of an additional $1,000 for the year. The contribution is limited to the taxpayer’s taxable compensation for the year, minus contributions to all non-Roth IRAs.

Individuals may contribute up to $5,500 to a traditional and a Roth IRA for 2016. This is the same limit as 2015. An individual age 50 and older can make a catch-up contribution of an additional $1,000 for the year. The contribution is limited to the taxpayer’s taxable compensation for the year, minus contributions to all non-Roth IRAs.

Taxpayers can contribute to a Roth IRA as long as the taxpayer’s adjusted gross income for the year is less than:

• $193,000 for married filing jointly or qualifying widow(er),
• $131,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
• $10,000 for married filing separately and you lived with your spouse at any time during the year.

Unlike traditional IRAs, the owner of a Roth IRA can make contributions to the IRA after turning age 70 ½ and does not have to begin taking contributions at that age. The mandatory distribution rules that normally begin at age 70 ½ do not apply until the owner dies.

Although contributions to a Roth IRA are not deductible, income accumulates tax-free and “qualified” distributions will also be tax-free, if certain conditions are satisfied:

• The distribution must be made after the owner turns 59 ½, unless the owner is disabled or the payment is made to a beneficiary after the owner’s death; and
• The amount contributed must be held in the Roth IRA for at least five years.

Taxpayers can also roll over benefits from an eligible retirement plan to a Roth IRA, without the rollover being counted against the annual contribution limit, provided the payment from the retirement plan is an eligible rollover distribution. The retirement plan can be qualified plan, 401(k) plan, tax-sheltered annuity, or governmental deferred contribution plan. The payment will still be taxable, since contributions to a Roth IRA are not deductible and must be made with after-tax dollars.

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made permanent many popular but previously temporary tax breaks for individuals and businesses. The PATH Act also enhanced many incentives. These enhancements should not be overlooked in tax planning both for 2016 and future years. Some of the enhancements are discussed here. If you have any questions about these or other tax breaks in the PATH Act, please contact our office. 

The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) made permanent many popular but previously temporary tax breaks for individuals and businesses. The PATH Act also enhanced many incentives. These enhancements should not be overlooked in tax planning both for 2016 and future years. Some of the enhancements are discussed here. If you have any questions about these or other tax breaks in the PATH Act, please contact our office.

Business incentives

Code Sec. 179 expensing. The PATH Act made permanent the Code Sec. 179 $500,000 dollar limit and $2 million investment limit. For tax years beginning after 2015 these amounts are adjusted for inflation. The IRS has announced that 2016 will not see any increase in the $500,000 limit and only a slight rise to $2,010,000 for the investment limit.

Enhancements, for tax years only beginning after 2015, include allowing the Code Sec. 179 expense deduction for air conditioning and heating units. Additionally, the $250,000 limitation on the amount of Code Sec. 179 property that can be attributable to qualified real property is eliminated, with a corresponding removal of carryforwards of disallowed amounts.

Bonus depreciation. Under the PATH Act, bonus depreciation is available at its 50 percent level starting in 2015 through 2017. However, the bonus rate is reduced from 50 percent to 40 percent for property placed in service in 2018 and to 30 percent for property placed in service 2019, after which it sunsets (ending after 2020, in the case of certain noncommercial aircraft and property with a longer production period). Effective for property placed in service after 2015, bonus depreciation for qualified leasehold improvement property is replaced with a bonus depreciation deduction for "qualified improvement property" made to the interior portion of a nonresidential building whether or not the building is subject to a lease; and the improvement need not be made only more than three years after the building was placed in service.

Research tax credit. The PATH Act made permanent the research tax credit. Effective for tax years beginning after December 31, 2015, a qualified small business during a tax year may elect to apply a portion of its research credit against the 6.2 percent payroll tax imposed on the employer’s wage payments to employees. The research credit is also added to the list of general business credit components designated as "specified credits" that may offset alternative minimum tax (AMT) as well as regular tax.

Work Opportunity Tax Credit. The Work Opportunity Tax Credit (WOTC) is extended through December 31, 2019 by the PATH Act. The WOTC also is expanded and made available to employers that hire individuals who are qualified long-term unemployment recipients beginning work for the employer after December 31, 2015.

Film/TV/live theatrical productions. The special expensing provision for qualified film and television productions is expanded by the PATH Act to apply to qualified live theatrical productions. These productions must commence after December 31, 2015, and before January 1, 2017.

Incentives for individuals

Exclusion from gross income of discharges of acquisition indebtedness on principal residences. The PATH Act extended for two additional years (through December 31, 2016) the exclusion from gross income for discharges of qualified principal residence indebtedness. The provision also provided for an exclusion from gross income in the case of those taxpayers whose qualified principal residence indebtedness was discharged on or after January 1, 2017, if the discharge was pursuant to a binding written agreement entered into prior to January 1, 2017.

Code Sec. 25C credit. The PATH Act extended and modified the popular Code Sec. 25C credit for energy-efficient improvements. For property placed in service after December 31, 2015, the standards for energy efficient building envelope components are modified to meet new conservation criteria.

Teachers’ classroom expense deduction. The $250 annual limit for the now permanent above-the-line deduction for classroom expenses under the PATH Act is inflation-adjusted starting in 2016. Due to low inflation, the $250 limit will not rise for 2016. Starting in 2016, expenses for professional development are added to the list of eligible expenses.

Your tax planning needs to respond to changes in the tax laws. Please contact our office and we can discuss how these and other changes in recent tax legislation may impact your comprehensive tax planning.

The IRS always urges taxpayers to pay their current tax liabilities when due, to avoid interest and penalties. Taxpayers who can’t pay the full amount are urged to pay as much as they can, for the same reason. But some taxpayers cannot pay their full tax liability by the normal April 15 deadline (April 18^th in 2016 because of the intersection of a weekend and a District of Columbia holiday).

The IRS always urges taxpayers to pay their current tax liabilities when due, to avoid interest and penalties. Taxpayers who can’t pay the full amount are urged to pay as much as they can, for the same reason. But some taxpayers cannot pay their full tax liability by the normal April 15 deadline (April 18^th in 2016 because of the intersection of a weekend and a District of Columbia holiday). 

One alternative is to enter into an installment payment agreement with the IRS, where taxpayers agree in writing to make monthly payments to the IRS and to reduce their tax liability to zero over a reasonable period of time. The IRS may also agree to an installment payment arrangement for back taxes. Penalties and interest may continue to accrue, although the IRS may reduce the penalties. While the IRS is authorized to enter into a partial payment installment agreement for a portion of the taxpayer’s liability, the agency has been reluctant to do this.

Form 9465 

Taxpayers who cannot pay the tax liability reported on their current income tax return should submit Form 9465, Installment Agreement Request, to the IRS, to request a monthly installment plan. A taxpayer who owes more than $50,000 should provide Form 433-F, Collection Information Statement, along with the request. Taxpayers can enter into different types of agreements, including:

• A traditional agreement, where they agree to make their monthly payment by check, money order, or credit card;
• A direct debit installment agreement, to make automatic payments from a bank account; or
• A payroll deduction agreement, with payments made by the employer from a paycheck.

The IRS charges a user fee for entering into an agreement: $120 for a traditional agreement; or $52 for a direct debit agreement. Qualifying low-income taxpayers pay a fee of $43, regardless of the type of agreement. If the agreement is restructured (because of a change in the taxpayer’s financial condition, for example), or if the IRS terminates the agreement and then agrees to reinstate it, the IRS will charge a fee of $50.

Different agreements

The IRS’s procedures include different kinds of agreements, depending on the taxpayer’s circumstances:

• Taxpayers can use Form 9465 to apply for a streamlined agreement. The taxpayer must owe $50,000 or less and must pay all their taxes within 72 months or by the expiration of the collection statute of limitations (generally 10 years).
• Instead of using Form 9465, taxpayers can apply for an online payment agreement, provided the taxpayer owes $50,000 or less in taxes, interest and penalties, or provided the taxpayer owns a business and owes $25,000 or less in total. A taxpayer cannot apply online for this agreement if the taxpayer owes more than $50,000.
• Taxpayers who owe $10,000 or less (without interest or penalties) can enter into a guaranteed installment agreement if the taxpayer agrees to pay all taxes within three years. The taxpayer must have filed all returns and paid all taxes due for the past five years, and cannot have entered into an installment agreement in the same period.
• A taxpayer who can make full payment within 120 days should not use Form 9465 but should instead call the IRS phone line to make arrangements. There is no user fee.

As the 2016 filing season gets underway, many individuals will be receiving new information returns from their employers and/or health insurance providers. The information returns reflect new reporting requirements put in place by the Affordable Care Act. Some taxpayers will need to wait to file their returns until they receive their information returns, but most taxpayers will not.

As the 2016 filing season gets underway, many individuals will be receiving new information returns from their employers and/or health insurance providers. The information returns reflect new reporting requirements put in place by the Affordable Care Act. Some taxpayers will need to wait to file their returns until they receive their information returns, but most taxpayers will not.

Background

The ACA generally requires certain employers, insurance providers and the Health Insurance Marketplaces to provide statements to covered individuals about their health insurance coverage. Under the ACA, all individuals must carry minimum essential health insurance coverage or make a shared responsibility payment, unless exempt. Individuals who obtain coverage through the Health Insurance Marketplace may qualify for a special tax credit, the Code Sec. 36B credit, to help offset the cost of coverage.

Forms

The IRS has developed new forms for ACA reporting

• Form 1095-A, Health Insurance Marketplace Statement, the Health Insurance Marketplaces provide Form 1095-A to individuals enrolled in coverage, with information about the coverage, who was covered, and when.
• Form 1095-B, Health Coverage, health insurance providers (for example, health insurance companies) send this form to individuals they cover, with information about who was covered and when.
• Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, Certain employers send this form to certain employees, with information about what coverage the employer offered. Generally these are “applicable large employers.”                                                                                                        

This is the second year that the Health Insurance Marketplaces have provided Forms 1095-A to enrollees. However, this is the first year that health insurance providers and certain employers have furnished Forms 1095-B and 1095-C to covered individuals.

Deadlines

Health Insurance Marketplaces must provide enrollees with Form 1095-A by February 1, 2016. This year, the IRS has given health insurance providers and certain employers more time to furnish Forms 1095-B and 1095-C to covered individuals. The deadline to provide Forms 1095-B and 1095-C is March 31, 2016. Forms 1095-A, 1095-B and 1095-C will be mailed to recipients or provided electronically if the recipient has agreed to electronic delivery. Health insurance providers and certain employers also must file information returns with the IRS (Forms 1094-B and 1094-C) but those forms have different deadlines.

Returns

The IRS has instructed taxpayers who have coverage through the Health Insurance Marketplaces to wait to file their 2015 tax return until they receive Form 1095-A. Many enrollees in Marketplace coverage have received advance payments of the Code Sec. 36B credit and will need to reconcile the advance payments when they file their 2015 tax returns. These individuals will use the information on Form 1095-A to complete a separate form (Form 8962, Premium Tax Credit). Form 1095-A is not attached to a taxpayer’s return but retained for his or her records. As always, our office is here to provide assistance.

Individuals with employer-provided health insurance and other qualifying minimum essential health care coverage do not need to wait to file their 2015 tax return until they receive Forms 1095-B or 1095-C, the IRS has instructed. While the information on Forms 1095-B and 1095-C may assist in preparation of a tax return, they are not required, the IRS explained. Individuals may use other forms of documentation, in lieu of the information on Forms 1095-B and 1095-C, to show insurance coverage, such as insurance cards or payroll statements reflecting health insurance deductions, the IRS further explained. Like Form 1095-A, Forms 1095-B and 1095-C are not attached to the taxpayer’s return but are retained for his or her records.

If you have any questions about Forms 1095-A, 1095-B or 1095-C and the information they report, please contact our office.

In recent years, identity theft has mushroomed and as the filing season starts, tax-related identity theft is especially prevalent. Identity thieves typically file fraudulent returns early in the filing season, before unsuspecting taxpayers file their legitimate returns. Criminals gamble that the IRS will not detect the false return and will issue a fraudulent refund.

In recent years, identity theft has mushroomed and as the filing season starts, tax-related identity theft is especially prevalent. Identity thieves typically file fraudulent returns early in the filing season, before unsuspecting taxpayers file their legitimate returns. Criminals gamble that the IRS will not detect the false return and will issue a fraudulent refund.

Background

Tax-related identity theft occurs when criminals use stolen identification information to file a return claiming a fraudulent refund. According to the U.S. Department of Justice, tax-related identity theft is on the increase and is also becoming more organized. Tax-related identity theft is often perpetrated by criminal enterprises, involving multiple individuals.

In 2015, the IRS held several high-level meetings with state tax authorities and tax preparation software providers. These security summits focused on ways to improve cybersecurity and curb tax-related identity theft. All three sectors have agreed to share more information, where allowed by law, to combat tax-related identity theft. The IRS has made a number of upgrades to its return processing filters and taken other behind-the-scenes measures to flag fraudulent returns.

Identity validation for taxpayers using tax preparation software has been enhanced. These steps are intended to protect taxpayer accounts by creating security questions and device identity recognition, the IRS explained. All these actions for 2016, the IRS has explained, will serve as the baseline for additional improvements for the 2017 filing season.

Steps

The IRS has described the steps taxpayers should take if they suspect their identities have been stolen and a fraudulent return has been filed in their name:

• Taxpayers should contact the IRS and alert the agency that their identity has been stolen.
• Taxpayers should file a paper return if they are unable to e-file (for example, the fraudulent return was e-filed).
• Taxpayers should complete and file Form 14039, Identity Theft Affidavit, with their return.

After the taxpayer’s return and Form 14039 are received for processing by the IRS, the agency’s Identity Theft Victim Assistance (IDTVA) function will handle the case. This special unit will assess the scope of the issues to determine if the case affects one or more tax years as well as determining if there are other victims, who may be unknown to the taxpayer, listed on the fraudulent return. The IRS will mark the taxpayer’s account with an identity theft indicator and the taxpayer will receive an Identity Protection Personal Identification Number (IP PIN). According to the IRS, most tax-related identity theft cases are handled within 120 days but more complex cases may require additional time.

Verification of identity

Sometimes, the IRS may ask a taxpayer to verify his or her identity. This request is done by letter. The IRS explained that most verifications of identity can be done online or by telephoning the agency, but the IRS may request that an individual come in person to a Taxpayer Assistance Center to verify his or her identity.

If you have any questions about tax-related identity theft, please contact our office. If you believe your identity has been stolen or you have received a letter from the IRS asking you to verify your identity, please contact our office immediately. Our office can help you work with the IRS.

Everyone in business must keep records. Among other things, good records will help a business prepare the business tax returns, and will support items reported on tax returns. Taxpayers also must keep their business records available for inspection by the IRS.

Everyone in business must keep records. Among other things, good records will help a business prepare the business tax returns, and will support items reported on tax returns. Taxpayers also must keep their business records available for inspection by the IRS.

In order to claim any deduction, a business owner, like any taxpayer, must prove two things: what expenses were for and that the expense was in fact paid or incurred. Supporting documents may include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. The documents should show the amount paid and the reason for the expense. Businesses must keep their records as long as needed to qualify under the Tax Code. Generally, this means until the period of limitations for auditing the return expires.

Special expenses

There are special recordkeeping requirements and strict documentation rules for certain expenses. These expenses include:

• expenses for travel away from home (including meals and lodging while traveling),
• meal and entertainment expenses,
• business gifts, and
• cars and other means of transportation.

For these expenses, taxpayers must keep receipts and must also substantiate each individual expense as to (1) the amount, (2) time and place, and (3) business purpose. For entertainment and gift expenses, taxpayers must also provide the business relationship of the person(s) being entertained or receiving a gift. For vehicle expenses, taxpayers must keep a mileage log.

Reimbursed Expenses

Businesses that give reimbursements and allowances to their employees for employment-related travel and entertainment expenses must generally treat these amounts as income to the employees. However, there is no income inclusion if: (1) the employee is required to account for the expenses to the employer; (2) the employee does not deduct the expenses; and (3) the total expenses equal the total reimbursements and allowances.

Accounting for expenses means giving the employer documentary evidence and an account book or statement to verify each expense’s amount, time, place and business purpose. An employee is treated as having accounted for expenses if the employer provided a fixed allowance, and the employee verifies the time, place, and business purpose of each expense. A fixed allowance includes the standard mileage rate for cars and the federal per diem rate for travel away from home.

Accountable Plan

A reimbursement arrangement is considered an accountable plan if it meets the following three requirements:

1. It provides advances, allowances or reimbursements for business expenses paid or incurred by an employee;
2. Each business expense must be substantiated to the employer within a reasonable period of time; and
3. The employee must return any excess reimbursement within a reasonable period of time.

If the arrangement is an accountable plan, the reimbursements are excluded from the employee's wages and exempt from employment taxes. Any excess reimbursement that is not returned within a reasonable period is treated as paid under a nonaccountable plan.

The IRS has issued the 2016 optional standard mileage rates for calculating the deductible costs of operating an automobile for business, charitable, medical, and moving purposes (Notice 2016-1; IR-2015-137). The decline in gas prices appeared to spur the drop in the optional rates.

The IRS has issued the 2016 optional standard mileage rates for calculating the deductible costs of operating an automobile for business, charitable, medical, and moving purposes (Notice 2016-1; IR-2015-137). The decline in gas prices appeared to spur the drop in the optional rates.

The optional standard mileage rate for business will drop from 57.5 cents a mile (for 2015) to 54 cents a mile for 2016, a decrease of 3.5 cents, and the lowest rate in five years. The optional standard mileage rates for medical and moving expenses drops from 23 cents for 2015 to 19 cents per mile for 2016, a decrease of four cents and, again, the lowest rate in five years. The optional standard mileage rate for charitable expenses, which is set by statute, remains at 14 cents per mile for 2016.

Rules for use

Rev. Proc. 2010-51 provides rules for computing deductible costs of operating an automobile, including the use of the optional standard rates. The business standard mileage rate is a substitute for all the costs of an automobile for business use, including depreciation, maintenance and repairs, and gasoline.

However, a taxpayer may not use the business standard mileage rate after using a depreciation method under Code Sec. 168 or after claiming the Code Sec. 179 deduction for that vehicle. Furthermore, a taxpayer may not use the business rate for more than four vehicles at a time.

To compute the allowance under a fixed and variable rate plan, the standard automobile cost may not exceed $28,000 for cars or $31,000 for trucks and vans.

Depreciation

For automobiles used for business, a taxpayer must use 24 cents per mile as the portion of the standard mileage rate treated as depreciation for 2016. For prior years, these amounts are 24 cents for 2015, 22 cents for 2014, and 23 cents for both 2012 and 2013. These amounts are used to calculate basis reductions for depreciation taken under the standard mileage rate.

A business that has employees must withhold income taxes on payments to each employee. Each employee must first fill out Form W-4, Employee’s Withholding Allowance Certificate, and provide it to the employer. On the form the employee can claim exemptions, such as the personal exemption or an exemption for a spouse or child, and determine the number of withholding allowances for the employee. Based on that information, the employer calculates the employee’s income tax withholding for the year.

A business that has employees must withhold income taxes on payments to each employee. Each employee must first fill out Form W-4, Employee’s Withholding Allowance Certificate, and provide it to the employer. On the form the employee can claim exemptions, such as the personal exemption or an exemption for a spouse or child, and determine the number of withholding allowances for the employee. Based on that information, the employer calculates the employee’s income tax withholding for the year.

The employer next must select a withholding method. The amount of taxes withheld can be determined using the percentage method; the wage bracket method; the alternative formula table method; or any other method that produces substantially the same amount as the wage bracket method. These methods are based upon tables produced by the IRS and available in IRS publication Circular E, Employer’s Tax Guide.

Percentage Method

The employer must select one of eight tables, based on the payroll period used by the employer, such as weekly, monthly, annually, etc. If the employer does not use a payroll period, it should use the daily or miscellaneous table. Each table is divided into two parts: one for single people, and one for married people.

After determining the appropriate table, the employer must determine the amount of wages to use as the base calculation. This amount is determined by subtracting the number of withholding allowances from the employee’s total gross wages for the payroll period. The result is net wages subject to withholding. The result is used in the withholding tables to determine the withholding amount.

Wage Bracket Method

For each employee, the employer again must determine the payroll period, wages paid during the period, withholding exemptions, and marital status. The wage bracket tables calculate the income tax to deduct and withhold by using gross wages, with no deduction for an exemption amount. This method is supposed to produce similar results to the percentage method.

The wage bracket method cannot be used if the payroll period is quarterly, semiannual, or annual, because there are no tables for these periods.

Other methods

The third method—alternative formula tables—is for employers using computerized accounting systems. The fourth method is allowed if it produces substantially similar results to the wage bracket method. The IRS provides a table for determining whether a result is substantially similar.

Other Employment Taxes

Employers must also determine FICA (Federal Insurance Contributions Act [Social Security]) and Federal Unemployment Tax Act (FUTA) taxes.

FICA consists of two taxes: the old-age, survivors and disability insurance (OASDI) tax, equal to 6.2 percent on both the employer and employee; and the hospital insurance (HI) tax, equal to 1.45 percent on both the employer and the employee. FICA taxes thus have a combined rate of 7.65 percent. The OASDI tax is subject to a wage limit, set at $118,500 for 2015 and 2016, but subject to increase. Wages above that limit are exempt from the OASDI tax. However, there is no limit on the HI tax; all wages are taxed 1.45 percent. The IRS provides tables to determine FICA taxes.

If the employee has wages in excess of $200,000, the employer must also withhold the Additional 0.9 percent Medicare tax from all wages above that threshold.

FUTA tax is 6 percent of all wages paid during the calendar year, up to a $7,000 wage limit. These amounts are owed by the employer and are not deducted from the employee’s wages. The employer can claim a credit for contributions to state unemployment insurance funds. The maximum credit is 90 percent of the 6 percent rate, or 5.4 percent.

After acknowledging earlier this year that hackers breached one of its popular online apps, the IRS has promised more identity theft protections in the 2016 filing season. The IRS, along with partners in the tax preparation community, has identified and tested more than 20 new data elements on returns to help detect and prevent identity-theft related filings. The agency is also working to prevent criminals from accessing tax-time financial products.

After acknowledging earlier this year that hackers breached one of its popular online apps, the IRS has promised more identity theft protections in the 2016 filing season. The IRS, along with partners in the tax preparation community, has identified and tested more than 20 new data elements on returns to help detect and prevent identity-theft related filings. The agency is also working to prevent criminals from accessing tax-time financial products.

Identity theft

Combatting identity theft is on ongoing process as criminals continue to create new ways of stealing personal information and using it for their gain. Tax-related identity theft typically peaks early in the filing season. Criminals file bogus returns early so taxpayers remain unaware you have been victimized until they try to file a return and learn one already has been filed. Between 2011 and 2015, the IRS identified 19 million suspicious returns and prevented the issuance of some $60 billion in fraudulent refunds. During the 2015 filing season, the IRS detected and stopped more than 3.8 million suspicious returns.

However, criminals continue to probe for weaknesses. In May, the IRS discovered that criminals had breached its Get Transcript app. Return information of as many as 300,000 taxpayers may have been compromised, the IRS reported.

New protections

In March, the IRS began working with the return preparation community and the tax software industry to develop a coordinated response to tax-related identity theft. The stakeholders, the IRS reported, have focused on a number of areas including improved validation of the authenticity of taxpayers and information on returns, increased information sharing to improve refund fraud detection and expand prevention, as well as more sophisticated threat assessment and strategy development to prevent risks and threats.

One outgrowth of the process is the creation of new data elements that can be shared at the time of filing with the IRS to help authenticate a taxpayer's identity. The IRS explained that there are more than 20 new data components. They will be submitted with electronic return transmissions during the 2016 filing season. Some of the data elements are

• Reviewing the transmission of the tax return, including the improper and/or repetitive use of internet addresses from which the return is originating;
• Reviewing the time it takes to complete a tax return, so computer mechanized fraud can be detected.
• Capturing metadata in the computer transaction that will allow review for identity theft related fraud.

"We are taking new steps upfront to protect taxpayers at the time they file and beyond," IRS Commissioner John Koskinen said at a news conference in Washington, D.C. "Thanks to the cooperative efforts taking place between the industry, the states and the IRS, we will have new tools in place this January to protect taxpayers during the 2016 filing season."

Financial products

Previously, the IRS announced that it would limit the number of direct deposit refunds to a single financial account or pre-paid debit card to three. Fourth and subsequent valid refunds will convert to paper checks and be mailed to the taxpayer. The IRS emphasized that it will continue to bolster its efforts to curb tax-time financial product fraud.

If you have any questions about tax-related identity theft, please contact our office.

IR-2015-117, FS-2015-23

Eleventh-hour votes in Congress in December renewed a package of tax extenders for 2014, created new savings accounts for individuals with disabilities, cut the IRS’ budget, and more. At the same time, the votes helped to set the stage for the 114th Congress that convenes this month. Republicans have majorities in the House and Senate and have indicated that taxes are one of the top items on their agenda for 2015.

Eleventh-hour votes in Congress in December renewed a package of tax extenders for 2014, created new savings accounts for individuals with disabilities, cut the IRS’ budget, and more. At the same time, the votes helped to set the stage for the 114th Congress that convenes this month. Republicans have majorities in the House and Senate and have indicated that taxes are one of the top items on their agenda for 2015.

Extenders

The Tax Increase Prevention Act of 2014, signed into law by President Obama in December extends more than 50 individual, business and energy tax incentives retroactively to January 1, 2014. As a result, taxpayers can claim these incentives on their 2014 returns filed in 2015. The Act includes all of the popular incentives for individuals, such as the state and local sales tax deduction and higher education tuition deduction, as well as many business incentives, including the research tax credit, bonus depreciation and enhanced Code Sec. 179 expensing. A handful of extenders were not renewed, mostly targeted to energy efficiency. If you have any questions about the renewal of the extenders for 2014, please contact our office.

ABLE Act

As part of the extenders package, Congress approved the Achieving a Better Life Experience (ABLE) Act of 2014. The Act establishes ABLE accounts for individuals with disabilities. Funds in ABLE accounts may be used for qualified expenses of persons with disabilities. To fund these accounts, the Act:

• Adjusts for inflation some civil tax penalties
• Authorizes the IRS to certify qualifying professional employer organizations
• Excludes dividends from controlled foreign corporations from the definition of personal holding company income
• Increases the IRS’ levy authority on payments to Medicare providers
• Raises the Inland Waterways Trust Fund financing rate

IRS budget

The IRS goes into the 2015 filing season with a reduced budget. The omnibus spending agreement, signed into law by President Obama on December 16, cuts the IRS’ fiscal year (FY) 2015 budget by some $345 million. The omnibus spending agreement also instructs the IRS to improve its response times in helping victims of identity theft and reduce refund fraud. In response to the budget cuts, IRS Commissioner John Koskinen said the agency will freeze hiring and take other steps to reduce expenses. Koskinen also cautioned that revenue collection and tax enforcement could be impaired by the budget cuts as the agency will have to make do with less. Taxpayer audits were singled out by Koskinen as one area where cutbacks could have a negative effect.

Affordable Care Act

Congress also clarified the status of so-called expatriate health plans under the Affordable Care Act. These plans cover very specific groups of people, including participants in a group health plan who are aliens residing outside the United States and U.S. nationals about whom there is a good faith expectation of being abroad, in connection with his or her employment, for at least 180 days in a 12-month period.

The omnibus spending agreement exempts expatriate health plans, employer sponsors of these plans, and insurance issuers providing coverage under these plans from the health care coverage requirements of the Affordable Care Act. Additionally, the omnibus spending agreement treats these plans as providing minimum essential coverage for purposes of the Affordable Care Act’s individual mandate.

Multi-employer pension plans

The extenders package and the omnibus spending agreement amend the rules governing multi-employer pension plans. The provisions, supporters argued, are intended to shore-up many struggling plans. Opponents countered that the changes weaken protections for beneficiaries. The amendments to the multi-employer pension rules are very technical. Please contact our office for more details

114th Congress

The Tax Increase Prevention Act did not extend the extenders beyond 2014. As of January 1, 2015, they all expired again. During 2014, proposals to extend the incentives for two years or make them permanent were floated in Congress. The GOP-controlled House vote to make permanent bonus depreciation, enhanced Code Sec. 179 expensing and some charitable giving breaks, but these bills were not taken up by the Democratic-controlled Senate. This could change in the 114th Congress. The new leaders of the tax-writing committees, Rep. Paul Ryan, R-Wisc., chair of the House Ways and Means Committee, and Sen. Orrin Hatch, R-Utah, chair of the Senate Finance Committee, have both indicated their interest in addressing the extenders as part of comprehensive tax reform.

Any movement toward comprehensive tax reform will require cooperation between the White House and the Republican-controlled Congress. In December, President Obama said that he would be willing to work with Republicans on corporate tax reform but any decrease in the corporate tax rate would need to be paid for by revenue raisers elsewhere. The President also said that he wants to preserve and make permanent some temporary enhancements to individual tax breaks, such as the earned income credit. New Senate Majority Leader Mitch McConnell, R-Ky., also said in December that he could work with the White House.

Please contact our office if you have any questions about the 2014 year-end legislation or the new Congress.

An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.

An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.

"Check-the-Box" Election

An LLC with more than one member can elect tax status as:

• Partnership
• Corporation
• S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

An LLC with only one member can elect tax status as:

• Disregarded entity
• Corporation
• S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

The IRS will assign the following classifications if no entity election is filed for an LLC (the default rules):

• any business entity that is not a corporation is classified as a partnership
• any entity that is wholly-owned by a single person will be disregarded as an entity separate from its owner (taxed as a sole proprietorship).

Typically, an LLC with more than one member will elect to be taxed as a partnership, whereas a single-member LLC will elect to be disregarded and taxed as a sole proprietorship.

If you have any questions relating to LLCs, their benefits, drawbacks, or their treatment under the Tax Code, please contact our offices.

When starting a business or changing an existing one there are several types of business entities to choose from, each of which offers its own advantages and disadvantages. Depending on the size of your business, one form may be more suitable than another. For example, a software firm consisting of one principal founder and several part time contractors and employees would be more suited to a sole proprietorship than a corporate or partnership form. But where there are multiple business members, the decision can become more complicated. One form of business that has become increasingly popular is called a limited liability company, or LLC.

When starting a business or changing an existing one there are several types of business entities to choose from, each of which offers its own advantages and disadvantages. Depending on the size of your business, one form may be more suitable than another. For example, a software firm consisting of one principal founder and several part time contractors and employees would be more suited to a sole proprietorship than a corporate or partnership form. But where there are multiple business members, the decision can become more complicated. One form of business that has become increasingly popular is called a limited liability company, or LLC.

The LLC combines several favorable characteristics of a traditional partnership, in which all members are entitled to participate in the management and operation of the business, with those of a corporation, in which the owners, directors, and shareholders are generally shielded from liability for the corporation's debts. The means that in an LLC, just as in a corporation, the personal assets of the business owners' would generally be protected if the business failed, lost a lawsuit, or faced some other catastrophe. Members are only liable to the extent of their capital contribution to the business. In addition, members can fully participate in the management of the business without endangering their limited liability status.

When filing season begins, the profits (or losses) from the LLC pass through to its members, who pay tax on any income when filing their individual returns. In other words, income from the LLC is taxed at the individual tax rates. Income from corporations, on the other hand is taxed twice, once at the corporate entity level and again when distributed to shareholders. Because of this, more tax savings often results if a business formed as an LLC rather than a corporation.

Taxpayers should note, however, that Congress recently increased the top marginal individual income tax rate to 39.6 percent, has placed a .09 percent additional Medicare tax on wages over $200,000 (single taxpayers), and has imposed a 3.8 percent net investment income tax on higher-income taxpayers. At the same time, there is strong talk among members of both political parties of lowering the corporate rate from the current 35 percent to something around 28 or 25 percent to make the United States more competitive with foreign nations. If this happens, many highly profitable LLC businesses may need to rethink their situation and consider switching to a corporate form.

Forming an LLC involves many requirements, but the benefits can be substantial. Please call our offices if you have any questions.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS cites that over three million taxpayers in recent tax years have claimed deductions for business use of a home, which normally requires the taxpayer to fill out the 43-line Form 8829. Under the new procedure, a significantly simplified form is used. The new method is expected to reduce paperwork and recordkeeping for small businesses by an estimated 1.6 million hours annually, according to the IRS. The new optional deduction is limited to $1,500 per year, based on $5 per square foot for up to 300 square feet.

The simplified method is not effective for 2012 tax year returns being filed during the current 2013 filing season, but it will become effective for 2013 tax year returns filed in 2014. Taxpayers may want to investigate now whether they could benefit from the election for the 2013 tax year. Acting IRS Commissioner Steven Miller advised upon announcement of the safe harbor that "The IRS … encourages people to look at this option as they consider tax planning in 2013."  A final decision on the election need not be made until 2014, when 2013 returns are filed.

Basic home office deduction rule

Under Code 280A, which governs the home office deduction rules on the simplified method election, a taxpayer may deduct expenses that are allocable to a portion of the dwelling unit that is exclusively used on a regular basis. This generally means usage as:

• The taxpayer's principal place of business for any trade or business
• A place to meet with the taxpayer's patients, clients, or customers in the normal course of the taxpayer's trade or business, or
• In the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer's trade or business.

The new simplified method does not remove the requirement to keep records that prove exclusive use, on a regular basis, for one of the three designated uses listed above. It does help, however, in other ways.

Simplified safe harbor

Using the new simplified safe harbor method, a taxpayer determines the amount of deductible expenses for qualified business use of the home for the tax year by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the portion of a home used in a qualified business use of the home, but not to exceed 300 square feet. The prescribed rate is $5.00 per square foot.

Taxpayers who itemize their returns and use the safe harbor method may also deduct, to the extent allowed by the Tax Code and regs, any expense related to the home that is deductible without regard to whether there is a qualified business use of the home for that tax year, the IRS explained. As a result, they will be able to claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A of Form 1040. These deductions do not need to be allocated between personal and business use, as is required under the regular method.

Depreciation

Taxpayers using the safe harbor cannot deduct any depreciation for the portion of the home that is used in a qualified business use of the home for that tax year. For many taxpayers, depreciation is the largest component of the home office deduction under the regular method that must be sacrificed if the new safe harbor method is used.  Depending upon the value of your home and the space devoted to an office at home, using the regular method may prove to be the far better choice than electing the simplified method.

Election

Taxpayers may elect from tax year to tax year whether to use the safe harbor method or actual expense method. Once made, an election for the tax year is irrevocable.  The IRS has provided rules for calculating the depreciation deduction if a taxpayer uses the safe harbor for one year and actual expenses for a subsequent year. The deduction of expenses that are not related to the home, such as wages and supplies, is unaffected and those deductions are still available to those using the new method.

Limitations

The IRS set various limits on the safe harbor, including:

• Taxpayers with more than one qualified business use of the same home for a tax year and who elect the safe harbor must use the safe harbor for each qualified business use of the home.
• Taxpayers with qualified business uses of more than one home for a tax year may use the safe harbor for only one home for that tax year.
• A taxpayer who has a qualified business use of a home and a rental use of the same home cannot use the safe harbor for the rental use.

If you are currently claiming a home office deduction, or if you have considered taking the deduction in the past but were discouraged by all of the paperwork and calculations required, you should consider whether the new, simplified safe harbor method is right for you. Please feel free to contact this office for further details.