President Donald Trump signed into law the bipartisan Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142) on June 5. The legislation aims to expand usability of the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s ( P.L. 116-136) headliner small business loan program.

President Donald Trump signed into law the bipartisan Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142) on June 5. The legislation aims to expand usability of the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s ( P.L. 116-136) headliner small business loan program.

PPP in the House
The bipartisan, bicameral-crafted P.L. 116-142 makes several changes to the rapidly implemented Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). The bill, authored by House Reps. Chip Roy, R-Tex., and Dean Phillips, D-Minn., was approved in the House by a 417-to-1 vote on May 27. After a brief stall in the Senate, P.L. 116-142 cruised through the upper chamber by voice vote on June 3.

Most notably, the legislation includes some of the following PPP changes:

• Extends the expense forgiveness period from eight weeks to 24 weeks;
• Reduces the 75 percent payroll ratio requirement to 60 percent;
• Eliminates the two-year loan repayment restrictions for future borrowers;
• Allows payroll tax deferment for PPP recipients; and
• Extends the June 30, 2020, rehiring deadline to December 31, 2020.

Questions Remain
However, riding shotgun with the measure’s increased PPP flexibility is a list of remaining unanswered questions and potential issues. While policymakers and stakeholders alike await more Treasury and SBA guidance, additional legislative text is already in the works to iron out certain wrinkles in past PPP legislation and related IRS guidance.

"Our colleagues have continued to track the program’s [PPP] operation and recommend further tweaks where necessary. In recent days, Senator Collins helped strengthen and improve the House’s proposed PPP modifications before they passed the bill and sent it to us. And I know the senior Senator from Maine has already identified several more technical fixes for the new legislation that I hope Congress will address," Senate Majority Leader Mitch McConnell, R-Ky., said on June 4 from the Senate floor.

Looking Ahead to PPP Technical Corrections, Enhancements
Although the ink may still be drying on the PPP Flexibility Act, Sen. Susan Collins, R-Me., co-architect of the small business loan program, said on June 4 that her staff is currently drafting a PPP technical corrections bill. The next bill is expected to address concerns with P.L. 116-142 60 percent "cliff", among other items.

"Two of my priorities would be to correct what I believe to be a drafting error in the House bill that eliminates partial forgiveness for small businesses with PPP loans who have been unable to retain, recall, or pay their full number of employees due to circumstances beyond the employer’s control," Collins said in a June 4 statement. "The House bill contains a cliff: even if a small employer spent 59 percent out of the 60 percent of the funding designated to pay their employees, none of the loan would be forgiven. The employer would be saddled with debt." Additionally, Collins noted the next PPP bill would allow for overhead funding to be used for masks and other protective gear for employees.

Fellow PPP policy architect Senate Small Business Committee Chair Marco Rubio, R-Fla., on June 4 also alluded to another PPP bill. "I appreciate the Administration’s flexibility and commitment to address the bill’s inadvertent technical errors that could create unintended consequences for small businesses as they seek forgiveness," Rubio said in a June 4 statement. "If the Administration cannot address these issues, Congress will need to fix them through additional legislation…," Rubio said.

Tax Treatment of Ordinary Business Expenses
Additionally, Sen. John Cornyn, R-Tex., told reporters on June 4 that Senate leadership is trying to take up the bipartisan Small Business Expense Protection Bill (S. 3612). The bill would clarify that receipt and forgiveness of a PPP loan does not affect the tax treatment of ordinary business expenses.

However, according to controversial IRS Notice 2020-32, businesses that qualify for PPP loan forgiveness will not be able to deduct certain expenses, including wages, paid for by the loan. "The money coming in the PPP is not taxable. So, if the money that is coming is not taxable, you cannot double dip," Mnuchin said. But Congress’s top, bipartisan tax writers immediately voiced disapproval of IRS and Treasury’s position, stating that the IRS guidance goes against congressional intent.

"[A]s was expressed to Treasury during the development of the PPP, we did not intend to deny the deductibility of ordinary and necessary business expenses, nor did these small businesses expect to lose deductions for their business expenses when they applied for a PPP loan," Senate Finance Committee Chairman Chuck Grassley, R-Iowa, ranking member Ron Wyden, D-Ore., and House Ways and Means Committee Chair Richard Neal, D-Mass., wrote in a recent letter to Mnuchin.

And while many business groups are also commending Congress’s approval of P.L. 116-142, their leadership is also calling for more PPP-related legislation. "The PPP changes passed by both chambers are another important step in providing relief to small businesses that otherwise will not survive until the economic recovery phase," U.S. Travel Association Executive Vice President of Public Affairs and Policy Tori Emerson Barnes said in a statement. However, the Travel Association, similar to other industry trade groups, has called for additional PPP enhancements.

"While this measure does a good job making the PPP work better for businesses that are eligible, other PPP enhancements will be needed to make sure all the key pieces are in place when the recovery begins—in particular, extending eligibility to non-profit and quasi-governmental entities that are vital drivers of local and regional economic development," Barnes said.

To that end, it remains unclear at this time whether additional PPP changes, enhancements, and clarifications will come by way of Treasury and SBA guidance, another stand-alone bill, or catch a ride with the next round of economic relief legislation. However, prior to the Senate’s approval of P.L. 116-142, McConnell submitted to the congressional record per Sen. Ron Johnson's, R-Wisc., hold on the bill, a letter from the measure’s bipartisan, bicameral authors and policy architects clarifying congressional intent for PPP loans covered period extension.

"The extension of the covered period in P.L. 116-142 is to allow borrowers who received PPP loans before June 30, 2020, to continue to make expenditures for allowable uses until December 31, 2020," the record states. "The extension of the covered period does not authorize the [SBA] to issue any new PPP loans after June 30, 2020, as this date remains fixed by section 1102(b) of the CARES Act."

PPP Disclosures
Meanwhile, in the spirit of PPP transparency, Rubio and Senate Small Business Committee ranking member Ben Cardin, D-Md., sent a letter this week to Treasury Secretary Mnuchin and SBA Administrator Jovita Carranza calling for more public disclosures of information related to PPP loans and borrowers. "Given the grave nature of this crisis and the unprecedented level of funding that has been appropriated, it is critical that the public and Congress have timely and complete information about where these funds are going, and the committee expects an increased level of transparency and accountability from the SBA," Rubio and Cardin wrote.

Some of the items Rubio and Cardin have requested be made publicly available on the SBA’s website include the following:

• name of business or nonprofit borrower and address,
• business type,
• lender and address,
• loan or grant amount,
• congressional district, and
• number of jobs supported.

In consultation with Treasury Department, the Small Business Administration (SBA) has issued...

In consultation with Treasury Department, the Small Business Administration (SBA) has issued:

• new and revised guidance for the Paycheck Protection Program (PPP);
• revised PPP application forms;
• a revised PPP loan forgiveness application; and
• a new "EZ" PPP loan forgiveness application.

New, Revised PPP Guidance
The guidance implements the Paycheck Protection Program Flexibility Act (PPPFA) ( P.L. 116-142), which President Trump signed on June 5, 2020. The PPPFA aims to expand usability of the PPP for small businesses provided in the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136).

The updated guidance expands PPP eligibility for business owners who have past felony convictions. Further, to implement the PPPFA, the SBA revised its first PPP interim final rule that was issued in April. As noted in Treasury’s recent announcement issued on June 8, the new rule reflects updates related to loan maturity, deferral of loan payments, and forgiveness.

The new and revised PPP guidance can be found at https://home.treasury.gov/system/files/136/PPP-IFR--Additional-Revisions-to-First-Interim-Final-Rule.pdf.

Revised PPP Applications
The SBA has issued revised the PPP application forms to conform with the changes in the guidance.

The revised Borrower application form can be found at https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form-Revised-June-12-2020.pdf.

For the revised Lender application form, see https://home.treasury.gov/system/files/136/PPP-Lender-Application-Form-Revised-June-12-2020.pdf.

Senators Request PPP Forgiveness Simplification
In a bipartisan effort, a group of over 40 senators have requested that Treasury and the SBA simplify the PPP loan forgiveness application for certain small business loans. Specifically, the senators urged Treasury and the SBA to revise the form so that it is no longer than one page for any loan under $250,000.

"While the Small Business Administrator was also given the ability to require additional documentation necessary to verify proper use of PPP funds, we believe it is beyond the program’s intent to require the information solicited in the 11-page forgiveness application that the SBA recently released," the senators wrote in a recent letter addressed to Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza. "We appreciate the interest in appropriately auditing the use of government money. However, the loan forgiveness application – which understandably needs more information for loans worth significantly more than $250,000 – is three times longer than the original application for the PPP."

On the heels the senators’ request, the SBA has released both a revised, full PPP loan forgiveness application, and a new "EZ" forgiveness application (Form 3508EZ). The new EZ loan forgiveness application can be used by:

• borrowers that are self-employed and have no employees;
• borrowers that did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; or
• borrowers that experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

Both the full forgiveness application and the EZ forgiveness application give borrowers the option of using the original 8-week covered period (if their loan was made before June 5, 2020) or the PPPFA’s extended 24-week covered period. The EZ application requires fewer calculations and less documentation for eligible borrowers.

The new EZ forgiveness application can be found at https://home.treasury.gov/system/files/136/PPP-Forgiveness-Application-3508EZ.pdf.

The revised, full forgiveness application can be found at https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf.

The IRS is postponing deadlines for certain time-sensitive actions due to the Coronavirus Disease 2019 (COVID-19) emergency. This relief affects employment taxes, employee benefit plans, exempt organizations, individual retirement arrangements (IRAs), Coverdell education savings accounts, health savings accounts (HSAs), and Archer and Medicare Advantage medical saving accounts (MSAs).

The IRS is postponing deadlines for certain time-sensitive actions due to the Coronavirus Disease 2019 (COVID-19) emergency. This relief affects employment taxes, employee benefit plans, exempt organizations, individual retirement arrangements (IRAs), Coverdell education savings accounts, health savings accounts (HSAs), and Archer and Medicare Advantage medical saving accounts (MSAs).

With certain exceptions, the relief postpones deadlines for certain actions due to be performed on or after March 30, 2020, and before July 15, 2020. The revised deadline for an affected taxpayer to perform a time-sensitive action described in the relief is July 15, 2020, unless a different revised deadline is specified.

Qualified Retirement Plans
For employee benefit plans (including a section 403(b) plan, a governmental section 457(b) plan, a SEP plan described in section 408(k), or a SIMPLE IRA plan described in section 408(p)), or any sponsor, administrator, participant, beneficiary, disqualified person, or other person with respect to the plan, the relief affects applying for a funding waiver under Code Sec. 412(c) for a defined benefit pension plan that is not a multiemployer plan.

For multiemployer defined benefit pension plans, the relief affects actions due to be performed on or before the dates in (1) Code Sec. 432(b)(3) for certification of funded status and related notice to interested parties; (2) Code Sec. 432(c)(1) and (e)(1) for adopting a funding improvement plan or rehabilitation plan (and the notification to the bargaining parties of the schedules thereunder); or (3) Code Sec. 432(c)(6) and (e)(3) for the annual update of a funding improvement plan or a rehabilitation plan, and its contribution schedules, and the filing of those updates with the Form 5500 annual return.

For cooperative and small employer charity pension (CSEC) plans, the relief affects actions to be performed on or before the dates in (1) Code Sec. 433(c)(9) for making the contribution required to be made for the plan year; (2) Code Sec. 433(f)(3)(B) for making required quarterly installments; (3) Code Sec. 433(j)(3) for the adoption of a funding restoration plan; or (4) Code Sec. 433(j)(4) for the certification of funded status.

For filing Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and payment of the associated excise taxes, the period beginning on March 30, 2020, and ending on July 15, 2020, will be disregarded in calculating any interest or penalty for failure to file the Form 5330 or pay the excise tax postponed under the relief. Interest and penalties on postponed filing and payment obligations will begin to accrue on July 16, 2020.

Other relief related to qualified retirement plans affects:

• extension of initial remedial amendment period for section 403(b) plans;
• certain actions affecting pre-approved defined benefit plans;
• the Employee Plans Compliance Resolution System (EPCRS); and
• requests for approval of a substitute mortality table.

Form 5498 Series
For filers of Form 5498, IRA Contribution Information, Form 5498-ESA, Coverdell ESA Contribution Information, and Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, the due date for filing and furnishing the forms is postponed to August 31, 2020, and the period beginning on the original due date of those forms and ending on August 31, 2020, will be disregarded in calculating any penalty for failure to file those forms. Penalties on the postponed filing will begin to accrue on September 1, 2020.

Employers and CPEOs
The relief applies to employers who perform correct employment tax reporting errors using the interest-free adjustment process under Code Secs. 6205 and 6413.

For certified professional employer organizations (CPEOs), the relief provides a temporary waiver of the requirement that CPEOs must file certain employment tax returns and their accompanying schedules electronically. The relief for CPEOs applies only to (1) Forms 941 filed for the second, third, and fourth quarter of 2020; and (2) Forms 943 filed for calendar year 2020. CPEOs can file paper versions of these forms and their schedules if they so choose. The waiver applies to all CPEOs, and individual waiver requests do not need to be submitted.

Exempt Organizations
For exempt organizations, the relief applies to electronic submissions of Form 990-N under Code Sec. 6033(i), and filing suits for declaratory judgment under Code Sec. 7428.

Effect on Other Documents
Rev. Proc. 2017-18, I.R.B. 2017-5, Rev. Proc. 2017-55, I.R.B. 2017-43, Announcement 2018-5, I.R.B. 2018-13, Rev. Proc. 2019-19, I.R.B. 2019-19, Rev. Proc. 2019-39, I.R.B. 2019-42, and Rev. Proc. 2020-10, I.R.B. 2020-10, are modified. Notice 2020-18, I.R.B. 2020-15, Notice 2020-20, I.R.B. 2020-16, and Notice 2020-23, I.R.B. 2020-18, are amplified.

The IRS has issued guidance on coronavirus-related distributions and plan loans.

The IRS has issued guidance on coronavirus-related distributions and plan loans. The guidance

• presents the rules set out in Act Sec. 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136);
• adds three new categories to the list of individuals who qualify due to adverse financial consequences;
• provides analysis and examples of repayments reporting; and
• includes safe harbors for employee certification and the plan loan payment suspension period.

Background: Coronavirus-Distributions and Plan Loan Relief
The CARES Act provides that qualified individuals may treat up to $100,000 in distributions made from their eligible retirement plans (including IRAs) between January 1, 2020, and December 30, 2020, as "coronavirus-related" distributions. A coronavirus-related distribution is not subject to the 10-percent additional tax that otherwise generally applies to distributions made before an individual reaches age 59-1/2. In addition, a coronavirus-related distribution can be included in income in equal installments over a three-year period, and an individual has three years to repay a coronavirus-related distribution to a plan or IRA and undo the tax consequences of the distribution.

In addition, the CARES Act provides that plans may implement certain relaxed rules for qualified individuals relating to plan loan amounts and repayment terms. In particular, plans may suspend loan repayments that are due from March 27, 2020, through December 31, 2020, and the dollar limit on loans made between March 27, 2020, and September 22, 2020, is raised from $50,000 to $100,000.

New Categories of Qualified Individuals
One of the categories of individuals who qualify for coronavirus-related distributions are those who experience adverse financial consequences as a result of coronavirus. As laid out in the CARES act, these consequences may include:

• being quarantined, being furloughed or laid off, or having work hours reduced due to such virus or disease;
• being unable to work due to lack of child care due to such virus or disease; or
• closing or reducing hours of a business owned or operated by the individual due to such virus or disease.

The CARES Act authorizes the Treasury Department to add to this list. Under the guidance, a qualified individual also includes an individual who experiences adverse financial consequences as a result of:

• a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
• the individual’s spouse or a member of the individual’s household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
• closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.

Recontributions: Recognizing Income in Year of Distribution
The new guidance goes into detail on recontributions. Individuals have up to three years to recontribute qualified distributions. Recontributed dollars are not taxed, so earlier returns may have to be amended. The rules differ depending on whether the individual is recognizing income over three years or entirely in the year of distribution.

If a taxpayer includes all coronavirus-related distributions received in a year in gross income for that year and recontributes any portion during the three-year recontribution period, the amount of the recontribution will reduce the amount of the related distribution included in gross income for the year of the distribution.

Example 1. Bob receives a $45,000 coronavirus distribution from his employer plan on November 1, 2020. Bob recontributes $45,000 to an IRA on March 31, 2021. Bob reports the recontribution on Form 8915-E, and files the 2020 federal income tax return on April 10, 2021. No portion of the coronavirus-related distribution is includible as income for the 2020 tax year. [Note: The guidance states that Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, is expected to be available before the end of 2020.]

Example 2. The facts are the same as in Example 1, except that Bob timely requests an extension of time to file the 2020 federal income tax return and makes a recontribution on August 2, 2021, before filing the 2020 federal income tax return. Bob files the 2020 federal income tax return on August 10, 2021. As in Example 1, no portion of the coronavirus-related distribution is includible in income for the 2020 tax year because Bob made the recontribution before the timely filing of the 2020 federal income tax return.

Example 3. Cynthia receives a $15,000 distribution from an employer plan on March 30, 2020. Cynthia elects out of the 3-year ratable income inclusion on Form 8915-E and includes the entire $15,000 in gross income for the 2020 tax year. On December 31, 2022, she recontributes $15,000 to her employer plan. Cynthia will need to file an amended federal income tax return for the 2020 tax year to report the amount of the recontribution and reduce the gross income by $15,000 with respect to the coronavirus-related distribution included on the 2020 original federal income tax return.

Recontributions: Recognizing Income Over Three Years
If a qualified individual includes a coronavirus-related distribution ratably over a three-year period and the individual recontributes any portion to an eligible retirement plan at any date before the timely filing of the individual’s federal income tax return (that is, by the due date, including extensions) for a tax year in the three-year period, the amount of the recontribution will reduce the ratable portion of the coronavirus-related distribution that is includible in gross income for that tax year.

Example 4. Dan receives $75,000 from his employer plan on December 1, 2020. Dan uses the three-year ratable income inclusion method. Dan makes one recontribution of $25,000 to the plan on April 10, 2022. Dan files his 2021 federal income tax return on April 15, 2022. Without the recontribution, Dan should include $25,000 in income with respect to the coronavirus-related distribution on each of his 2020, 2021, and 2022 federal income tax returns. However, as a result of the recontribution, Dan should include $25,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return, $0 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return, and $25,000 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.

Example 5. The facts are the same as in Example 4, except Dan recontributes $25,000 to the plan on August 10, 2022. Dan files the 2021 federal income tax return on April 15, 2022, and does not request an extension of time to file that federal income tax return. As a result of the recontribution, Dan should include $25,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return, $25,000 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return, and $0 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.

Carryovers. If the taxpayer recontributes an amount for a tax year in the three-year period that exceeds the amount that is otherwise includible in gross income for that tax year, the excess amount of the recontribution may be carried forward to reduce the amount of the distribution includible in gross income in the next tax year in the three-year period. Alternatively, the qualified individual is permitted to carry back the excess amount of the recontribution to a prior tax year or years in which the individual included income attributable to a coronavirus-related distribution. The individual will need to file an amended federal income tax return for the prior tax year or years to report the amount of the recontribution on Form 8915-E and reduce his or her gross income by the excess amount of the recontribution.

Example 6. Eliza receives a distribution of $90,000 from her IRA on November 15, 2020. Eliza ratably includes the $90,000 distribution in income over a three-year period. Without any recontribution, Eliza will include $30,000 in income with respect to the coronavirus-related distribution on each of the 2020, 2021, and 2022 federal income tax returns. Eliza includes $30,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return. Eliza then recontributes $40,000 to an IRA on November 10, 2021 (and makes no other recontribution in the three-year period). Eliza may do either of the following:

• Option 1: Include $0 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return. Carry forward the excess recontribution of $10,000 to 2022, and include $20,000 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.
• Option 2: Include $0 in income with respect to the coronavirus-related distribution on the 2021 tax return and $30,000 in income on the 2022 federal income tax return. Also, file an amended federal income tax return for 2020 to reduce the amount included in income as a result of the coronavirus-related distribution to $20,000 (that is, the $30,000 original amount includible in income for 2020 minus the remaining $10,000 recontribution that is not offset on either the 2021 or 2022 federal tax return).

Safe Harbor for Plan Loans
The CARES Act provides that in the case of a qualified individual with a loan from a qualified employer plan outstanding on or after March 27, 2020, if the due date for any repayment with respect to the loan occurs during the period beginning on March 27, 2020, and ending on December 31, 2020, the due date shall be delayed for one year.

Under a safe harbor provided in the guidance, a qualified employer plan will satisfy this requirement if a qualified individual’s obligation to repay a plan loan is suspended under the plan for any period beginning not earlier than March 27, 2020, and ending not later than December 31, 2020. The loan repayments must resume after the end of the suspension period, and the term of the loan may be extended by up to one year from the date the loan was originally due to be repaid.

The IRS has released guidance that provides temporary administrative relief to help certain retirement plan participants or beneficiaries who need to make participant elections by allowing flexibility for remote signatures. Specifically, the guidance provides participants, beneficiaries, and administrators of qualified retirement plans and other tax-favored retirement arrangements with temporary relief from the physical presence requirement for any participant election (1) witnessed by a notary public in a state that permits remote notarization, or (2) witnessed by a plan representative using certain safeguards. The guidance accommodates local shutdowns and social distancing practices and is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, as permitted by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136).

The IRS has released guidance that provides temporary administrative relief to help certain retirement plan participants or beneficiaries who need to make participant elections by allowing flexibility for remote signatures. Specifically, the guidance provides participants, beneficiaries, and administrators of qualified retirement plans and other tax-favored retirement arrangements with temporary relief from the physical presence requirement for any participant election (1) witnessed by a notary public in a state that permits remote notarization, or (2) witnessed by a plan representative using certain safeguards. The guidance accommodates local shutdowns and social distancing practices and is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, as permitted by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136).

Conditions for Participant Elections
Reg. §1.401(a)-21 sets forth standards for the use of an electronic medium to provide applicable notices to recipients or to make participant elections with respect to a retirement plan, an employee benefit arrangement, or an individual retirement plan. Reg. §1.401(a)-21(e)(6) defines a participant election as any consent, election, request, agreement, or similar communication made by or from a participant, beneficiary, alternate payee, or an individual entitled to benefits under a retirement plan, employee benefit arrangement, or individual retirement plan. Reg. §1.401(a)-21(d) sets forth the following conditions for participant elections:

• The individual must be effectively able to access the electronic medium used to make the participant election;
• The electronic system must be reasonably designed to preclude any person other than the appropriate individual from making the participant election;
• The electronic system must provide the individual making the participant election with a reasonable opportunity to review, confirm, modify, or rescind the terms of the election before it becomes effective; and
• The individual making the participant election, within a reasonable time, must receive confirmation of the election through either a written paper document or an electronic medium under a system that satisfies the applicable notice requirements under Reg. §1.401(a)-21.

Applicability
While this temporary relief, which covers the period from January 1, 2020, through December 31, 2020, is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, as permitted by section 2202 of the CARES Act, the temporary relief applies to any participant election that requires the signature of an individual to be witnessed in the physical presence of a plan representative or notary.

The IRS has released a revenue procedure that describes temporary safe harbors for the purpose of determining the federal tax status of certain arrangements that hold real property as trusts in response to the COVID-19 emergency. Specifically, the Service has provided temporary relief to arrangements that are treated as trusts under Reg. §301.7701-4(c) which are, or have tenants who are, experiencing financial hardship as a result of COVID-19, to allow them to make certain modifications to their mortgages loans and their lease agreements, and to accept additional cash contributions without jeopardizing their tax status as grantor trusts. This revenue procedure also indicates that a cash contribution from one or more new trust interest holders to acquire a trust interest or a non-pro rata cash contribution from one or more current trust interest holders must be treated as a purchase and sale under Code Sec. 1001 of a portion of each non-contributing (or lesser contributing) trust interest holder’s proportionate interest in the trust’s assets.

The IRS has released a revenue procedure that describes temporary safe harbors for the purpose of determining the federal tax status of certain arrangements that hold real property as trusts in response to the COVID-19 emergency. Specifically, the Service has provided temporary relief to arrangements that are treated as trusts under Reg. §301.7701-4(c) which are, or have tenants who are, experiencing financial hardship as a result of COVID-19, to allow them to make certain modifications to their mortgages loans and their lease agreements, and to accept additional cash contributions without jeopardizing their tax status as grantor trusts. This revenue procedure also indicates that a cash contribution from one or more new trust interest holders to acquire a trust interest or a non-pro rata cash contribution from one or more current trust interest holders must be treated as a purchase and sale under Code Sec. 1001 of a portion of each non-contributing (or lesser contributing) trust interest holder’s proportionate interest in the trust’s assets.

Applicability
This revenue procedure applies to arrangements that are trusts under Reg. §301.7701-4(c) and Rev. Rul. 2004-86, 2004-2 CB 191, and that hold real property and engage in one or more of the actions described in sections 6.02, 6.03, or 6.04 of this revenue procedure.

Background
The IRS and the Treasury Department received comments addressing arrangements organized as trusts under Reg. §301.7701-4(c) and Rev. Rul. 2004-86 that hold rental real property. The commenters reported that many of these arrangements and their tenants are experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency.

Rev. Proc. 2020-26
The IRS and the Treasury Department issued certain safe harbors in Rev. Proc. 2020-26, I.R.B. 2020-18, 753. Under the safe harbors, certain modifications of mortgage loans in connection with forbearance programs described in that guidance are not treated as replacing the unmodified obligation with a newly issued obligation, as giving rise to prohibited transactions, or as manifesting a power to vary.

In the case of mortgage loans held by real estate mortgage investment conduits (REMICs) and investment trusts, Rev. Proc. 2020-26 applies to—

• Forbearance (and all related modifications) of a federally backed mortgage loan or a federally backed multifamily mortgage loan, if the forbearance is provided under section 4022 or 4023, respectively, of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136) (CARES Act Forbearances); and
• Forbearances (and all related modifications) that are not CARES Act Forbearances, that are agreed to by the borrower of any Federally backed or non-Federally backed mortgage loan, and that are provided by a holder or servicer of the loan under a forbearance program for borrowers experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency.

The forbearance programs covered are those (a) which are identical or similar to those described in section 2.07 of Rev. Proc. 2020-26; and (b) pursuant to which, between March 27, 2020, and December 31, 2020, inclusive, the borrower requests or agrees to the forbearance (and all related modifications).

The IRS has announced various extensions of deadlines for qualified opportunity funds and their investors due to the Coronavirus pandemic.

The IRS has announced various extensions of deadlines for qualified opportunity funds and their investors due to the Coronavirus pandemic.

180-Day Investment Period
Generally taxpayers must reinvestment capital gain in a qualified opportunity fund (QOF) within 180 days after the gain is realized from a sale or exchange. Under the guidance, if the last day of the 180-day investment period falls on or after April 1, 2020, and before December 31, 2020, the last day of the investment period is automatically postponed to December 31, 2020.

90-Percent Investment Standard
The guidance also provides that a QOF’s failure to hold 90 percent of its assets in qualified opportunity zone property on any semi-annual testing date that falls on or after April 1, 2020 and ends on or before December 31, 2020 is due to reasonable cause on account of the COVIS-19 pandemic. Therefore, the failure to satisfy the 90-percent test does not affect an entity’s status as a QOF or prevent an investment in the entity from being a qualified investment. Penalties due to failure to satisfy the 90-percent investment standard during this period are waived.

30-month Substantial Improvement Period Tolled
The 30-month period during which property held by a QOF or qualified opportunity zone business must be substantially improved is tolled during the period beginning on April 1, 2020, and ending on December 31, 2020.

24-Month Extension of Working Capital Safe Harbor Spending Deadline
Qualified opportunity zone businesses holding working capital intended to be covered by the 31-month working capital safe harbor before December 31, 2020, receive up to an additional 24 months to spend the working on qualifying property. This extension is allowed under the QOF regulations on account of the prior declaration of a Federally declared disaster relating to the pandemic effective on January 20, 2020.

12-Month Extension of Reinvestment Period for QOFs
Finally, if any part of the 12-month period during which a QOF may reinvest returns of capital and proceeds from the sale of qualified opportunity property in other qualified opportunity zone property includes January 20, 2020, the reinvestment period is extended up to an additional 12 months. Again, this extension is allowed under the QOF regulations due to the disaster declaration.

Notice 2020-23, I.R.B. 2020-18, 742 is modified.

The IRS has issued proposed regulations clarifying the definition of a qualifying relative for various tax benefits for tax years 2018 through 2025 in which the dependent exemption amount is zero. During these years, the exemption amount will be inflation adjusted as provided in annual IRS guidance in determining whether an individual is a qualifying relative such as for head of household filing status and $500 child tax credit.

The IRS has issued proposed regulations clarifying the definition of a qualifying relative for various tax benefits for tax years 2018 through 2025 in which the dependent exemption amount is zero. During these years, the exemption amount will be inflation adjusted as provided in annual IRS guidance in determining whether an individual is a qualifying relative such as for head of household filing status and $500 child tax credit.

Qualifying Relative
A taxpayer may claim a qualifying relative as a dependent on his or her return provided certain requirements are met, including that the individual’s gross income is less than the exemption amount for the tax year. The exemption amount is zero (-$0-) for tax years beginning in 2018 through 2025 and no deduction may be claimed for a dependency exemption. However, the rules for determining who is a qualifying relative remain applicable for claiming other tax benefits in 2018 through 2025.

Inflation-Adjustment Exemption Amount
Consistent with Notice 2018-70, I.R.B. 2018-38, 441, the proposed regulations provide that in determining whether an individual is a qualifying relative for purposes of various tax provisions in 2018 through 2025 the exemption amount will be the inflation-adjusted. The IRS will publish the exemption amount annually in guidance. For example, the exemption amount is $4,200 for 2019 ( Rev. Proc. 2018-57, I.R.B. 2018-49, 827) and $4,300 for 2020 ( Rev. Proc. 2019-44, I.R.B. 2019-47, 1093).

Proposed regulations provide guidance regarding the elimination of the deduction for expenses related to qualified transportation fringe benefits (QTFs) provided to an employee. The Tax Cuts and Jobs Act (P.L. 115-97) eliminated the deduction, effective for amounts paid or incurred after December 31, 2017.

Proposed regulations provide guidance regarding the elimination of the deduction for expenses related to qualified transportation fringe benefits (QTFs) provided to an employee. The Tax Cuts and Jobs Act (P.L. 115-97) eliminated the deduction, effective for amounts paid or incurred after December 31, 2017.

In general, the proposed regulations refine guidance previously provided in Notice 2018-99, 2018-52 I.R.B. 1067. They provide a general rule and three simplified methodologies to determine the amount of QTF parking expense that is nondeductible when a parking facility is owned or leased by an employer. Additionally, the proposed regulations address the disallowance of deductions for expenses related to providing employees transportation in a commuter highway vehicle and transit passes.

The proposed regulations include definitions from Notice 2018-99, with modifications in response to public comments, as well as new definitions to clarify application of the rules.

If an employer pays a third party for its employee’s QTF, the disallowance is generally calculated as the taxpayer’s total annual cost of the QTF paid to the third party.

In valuing a QTF relating to employee-owned or leased parking facilities, an employer may choose to apply the general rule or any of the three simplified methods for each tax year and each parking facility: the "qualified parking limit methodology," the "primary use methodology," or the "cost per space methodology." Statistical sampling may be used with the general rule or simplified methodologies.

The general rule allows a taxpayer to calculate the disallowed amount based on a reasonable interpretation of the statute. However, the actual expense paid or incurred in providing the QTF must be used. The value of the QTF to the employee is ignored. In addition, the employee must allocate parking expenses to reserved employee spaces, and properly apply the exception for parking made available to the general public. Parking spaces may be aggregated by geographical location.

Special rules explain how to allocate mixed parking expenses, aggregate parking spaces by geographic location, and remove inventory/unusable spaces from available parking spaces. Five or few reserved parking spaces may be disregarded if the reserved spaces are 5 percent or less of total parking spaces.

Effective Date
The proposed regulations will apply in tax years beginning on or after the date they are published as final regulations. However, a taxpayer may rely on the proposed regulations for expenses paid or incurred in tax years beginning after December 31, 2017. Alternatively, a taxpayer may rely on the guidance provided in Notice 2018-99 until the regulations are published as final.

Proposed regulations would define expenditures for direct primary care arrangements and health care sharing ministry memberships as amounts paid for medical care. Thus, amounts paid for those arrangements may be deductible medical expenses. The proposed regulations also clarify that amounts paid for certain arrangements and programs, such as health maintenance organizations (HMO) and certain government-sponsored health care programs, are amounts paid for medical insurance.

Proposed regulations would define expenditures for direct primary care arrangements and health care sharing ministry memberships as amounts paid for medical care. Thus, amounts paid for those arrangements may be deductible medical expenses. The proposed regulations also clarify that amounts paid for certain arrangements and programs, such as health maintenance organizations (HMO) and certain government-sponsored health care programs, are amounts paid for medical insurance.

President Trump's Executive Order 13877, "Improving Price and Quality Transparency in American Healthcare to Put Patients First" (84 FR 30849) directed Treasury to treat expenses related to these types of arrangements as eligible medical expenses.

These regulations are proposed to apply for tax years that begin on or after the date of publication of a Treasury Decision adopting these rules as final regulations.

Caution: Characterization of direct primary care arrangements and health care sharing ministry memberships as medical insurance may affect eligibility to contribute to a health savings account (HSA). For an individual in a direct primary care arrangement, the type of coverage provided by the arrangement will affect eligibility. Membership in a health care sharing ministry would preclude an individual from contributing to an HSA.

Direct Primary Care Arrangement
A direct primary care arrangement is a contract between an individual and one or more primary care physicians under which the physician or physicians agree to provide medical care for a fixed annual or periodic fee without billing a third party.

The IRS requests comments on whether to expand the definition to include a contract with nurse practitioners, clinical nurse specialists, or physician assistants who provide primary care services. The IRS also requests comments on whether the final regulations should clarify the treatment of other types of arrangements that are similar to direct primary care arrangements, such as an agreement between a dentist and a patient to provide dental care, or a physician and patient to provide specialty care.

Health Care Sharing Ministry
The proposed regulations define a health care sharing ministry as an organization:

• that is described in Code Sec. 501(c)(3) and is exempt from taxation under Code Sec. 501(a);
• members of which share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs and without regard to the state in which a member resides or is employed;
• members of which retain membership even after they develop a medical condition;
• which (or a predecessor of which) has been in existence at all times since December 31, 1999, and medical expenses of its members have been shared continuously and without interruption since at least December 31, 1999; and
• that conducts an annual audit performed by an independent certified public accounting firm in accordance with generally accepted accounting principles and that is made available to the public upon request.

The proposed regulations provide that medical insurance under Code Sec. 213(d)(1)(D) includes health care sharing ministries that share expenses for medical care under Code Sec. 213(d)(1)(A). This proposal does not affect whether a health care sharing ministry is considered an insurance company, insurance service, or insurance organization (health insurance issuer) for other purposes of the Code, ERISA, the Public Health Service Act (PHS Act), or any other federal or state law.

Fees for HMO Membership and Government-Sponsored Programs
The proposed regulations incorporate the longstanding IRS position of treating amounts paid for membership in an HMO as medical insurance premiums. Amounts paid to an HMO or a provider to cover coinsurance, copayment, or deductible obligations under an HMO’s terms are payments for medical care. In either case, such payments are eligible for the medical expense deduction.

Amounts paid for coverage under certain government-sponsored health care programs are also treated as amounts paid for medical insurance. The proposed regulations:

• incorporate the guidance in Code Sec. 213(d)(1)(D) and Rev. Rul. 79-175 that Medicare Parts A and B are medical insurance;
• clarify that Medicare Parts C and D are medical insurance; and
• provide that Medicaid, the Children’s Health Insurance Program (CHIP), TRICARE, and certain veterans’ health care programs are medical insurance.

Thus, to extent individuals pay premiums or enrollment fees for coverage under these programs, those amounts would be eligible for deduction as a medical expense.

The IRS requests comments on whether amounts paid for other government-sponsored health care programs should be treated as amounts paid for medical insurance.

Proposed reliance regulations clarify the definitions of "real property" that qualifies for a like-kind exchange, including incidental personal property. Under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), like-kind exchanges occurring after 2017 are limited to real property used in a trade or business or for investment. Comments are requested.

Proposed reliance regulations clarify the definitions of "real property" that qualifies for a like-kind exchange, including incidental personal property. Under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), like-kind exchanges occurring after 2017 are limited to real property used in a trade or business or for investment. Comments are requested.

Real Property Defined for Like-Kind Exchanges
Under the proposed regulations, real property includes:

• land and improvements to land,
• unsevered crops and other natural products of land, and
• water and air space superjacent to land.

This real property definition language is very similar to the language in many other regulations, but it also includes necessary differences. As under pre-TCJA law, local law definitions are not controlling.

Real Property Includes Improvements and Inherently Permanent Structures
As mentioned above, real property includes improvements to land. Improvements include:

• inherently permanent structures, and
• the structural components of inherently permanent structures.

Each distinct asset must be analyzed separately to determine if it land, an inherently permanent structure, or a structural component of an inherently permanent structure. The regs identify several specific items, assets and systems as distinct assets, and provides factors for identifying other distinct assets.

Inherently Permanent Structures: Buildings and Machinery
Inherently permanent structures include any building or other structure that is permanently affixed to real property and that will ordinarily remain affixed for an indefinite period of time. A building is any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. Buildings also include several distinct assets if permanently affixed, such as houses, hotels, enclosed stadiums shopping malls, factory and office buildings, and warehouse.

The proposed regulations also identify other structures that qualify as inherently permanent structures, and provide factors that must be used to determine if other property is an inherently permanent structure.

Property that is in the nature of machinery or is essentially an item of machinery or equipment is generally not an inherently permanent structure unless it serves the inherently permanent structure and does not produce or contribute to the production of income other than for the use or occupancy of space.

Inherently Permanent Structures: Structural Components
Structural components of inherently permanent structures are improvements to land and, thus, are real property. A structural component is any distinct asset that is a constituent part of, and integrated into, an inherently permanent structure. If interconnected assets work together to serve an inherently permanent structure (for example, systems that provide a building with electricity, heat, or water), the assets are analyzed together as one distinct asset that may qualify as a structural component.

However, a structural component may qualify as real property only if the taxpayer holds its interest in the component together with a real property interest within the physical space of the inherently permanent structure. Customization of a distinct asset in connection with the rental of space does not affect whether the asset is a structural component.

The proposed regulations list properties that are structural components, and provide factors for determining whether other components are structural components. The proposed regs also address tenant improvements to a building, and property produced for sale that is not real property in the hands of the producing taxpayer.

Unsevered Natural Products are Real Property
The proposed regulations provide that unsevered natural products of land are generally real property. These include growing crops, plants, and timber, as well as mines, wells and other natural deposits. Natural products and deposits, such as crops, timber, water, ores, and minerals, cease to be real property when they are severed, extracted, or removed from the land.

Intangible Assets as Real Property
An intangible asset is real property or an interest in real property to the extent that the asset:

• derives its value from real property or an interest in real property,
• is inseparable from that real property or interest in real property, and
• does not produce or contribute to the production of income other than consideration for the use or occupancy of space.

For instance, a license, permit, or other similar right generally is an interest in real property if (1) it is solely for the use, enjoyment, or occupation of land or an inherently permanent structure, and (2) it is in the nature of a leasehold, easement, or fee ownership. In contrast, a license or permit is not an interest in real property if it produces or contributes to the production of income other than consideration for the use and occupancy of space.

Incidental Personal Property and Qualified Intermediaries
The proposed regs provide that personal property that is incidental to replacement real property is disregarded in determining whether a taxpayer's rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by a qualified intermediary are expressly limited as provided in Reg. §1.1031(k)-1(g)(6).

Personal property is incidental to real property acquired in an exchange if:

• in standard commercial transactions, the personal property is typically transferred together with the real property; and
• its aggregate fair market value does not exceed 15 percent of the aggregate fair market value of the replacement real property.

This incidental property rule in the proposed regulations is based on the existing rule in Reg. §1.1031(k)-1(c)(5), which provides that certain incidental property is ignored in determining whether a taxpayer has properly identified replacement property.

Effective Dates
The regulations are proposed to apply to like-kind exchanges that begin on or after the date they are published as final regs. However, taxpayers may rely on them for exchanges of real property beginning after December 31, 2017, if the proposed regs are followed consistently and in their entirety.

House and Senate lawmakers have started their August recess, leaving pending tax legislation for after Labor Day. In past years, September has been a busy month for tax legislation and this year is likely to be the same. Before leaving Capitol Hill, lawmakers took actions in several areas related to tax reform.

House and Senate lawmakers have started their August recess, leaving pending tax legislation for after Labor Day. In past years, September has been a busy month for tax legislation and this year is likely to be the same. Before leaving Capitol Hill, lawmakers took actions in several areas related to tax reform.

House action

In the House, the  Budget Committee approved along party lines a fiscal year (FY) 2018 budget resolution. The resolution calls for:

• Simplifying the tax code to promote fairness for American families and businesses;
• Lowering tax rates for individuals and consolidating the seven tax brackets into fewer brackets;
• Repealing the alternative minimum tax (AMT); and
• Reducing the corporate tax rate.

The budget resolution does not set out specific tax changes or include legislative language. Rather, according to GOP leaders in the House, the budget resolution will serve as the vehicle for tax legislation at a future date.  House Budget Committee Chair Diane Black, R-Tennessee, predicted that tax reform will be "deficit neutral" and will "reduce tax rates and simplify the tax code." Budget Committee Ranking Member John Yarmuth, D-Kentucky, said that the resolution "adopts the worst extremes of the President's proposals by cutting taxes for millionaires and billionaires at the expense of everyone else."

Administration discussions

Since May, White House and Treasury Department officials have been meeting with business leaders, representatives of business and taxpayer groups, and other stakeholders in "listening sessions" about changes to the tax code. In July, Treasury Secretary Steven Mnuchin, after meeting with representatives from the agriculture sector, predicted that tax reform "would be done this year." Mnuchin said that "tax reform is one of our most important areas of focus.”

Bipartisan bills

Meanwhile, some stand-along tax bills have either passed committee or have been introduced. In July, the House Ways and Means Committee approved bipartisan legislation to overhaul the IRS's forfeiture authority. The Clyde-Hirsch-Sowers RESPECT Bill (HR 1843) was sponsored by Ways and Means Tax Policy Subcommittee Chair Peter Roskam, R-Illinois, and Democratic Caucus Chair Joe Crowley, D-New York. The RESPECT Act generally prohibits the IRS from seizing funds relating to a structuring transaction unless the  property to be seized is from an illegal source.

In the Senate, the Senate Finance Committee may take up a bipartisan bill to encourage retirement savings by enhancing growth of S corporations owned by employee stock ownership plans (ESOPs). The Promotion and Expansion of Private Employee Ownership Bill was introduced by Sen. Ben Cardin, D-Maryland, and Sen. Pat Roberts, R-Kansas. The lawmakers explained that their bill would amend the tax code to eliminate barriers that business owners face in establishing or expanding S corporation ESOPs. Similar bipartisan legislation is pending in the House.

Other pending tax bills include:

• HR 3068, which would enhance the research tax credit for domestic manufacturers.
• HR 3126, which would provide a tax credit to individuals for legal expenses paid  to establish guardianship of a family member with disabilities.
• HR 3138, which would generally treat Native American governments in the same manner as state governments for certain federal tax purposes.

Treasury tax position

The Treasury Department's top tax professional is the assistant secretary for tax policy. That position has been vacant since January 20. In July, the Senate Finance Committee unanimously approved President Trump’s nomination of David Kautter to serve as Treasury assistant secretary for tax policy. "This position is particularly important in the current environment as the administration is engaging with Congress on comprehensive tax reform," SFC Chair Orrin Hatch, R-Utah, said. Ranking member Ron Wyden, D-Oregon, said "it’s my hope that Mr. Kautter can help to bring Democrats and Republicans together." Kautter has worked at several major accounting firms over the past 30 years.

Please contact our office if you have any questions about tax legislation.

Taxpayers that plan to operate a business have a variety of choices. A single individual can operate as a C corporation, an S corporation, a limited liability company (LLC), or a sole proprietorship. Two or more individuals can form a partnership, a corporation (C or S), or an LLC.

Taxpayers that plan to operate a business have a variety of choices. A single individual can operate as a C corporation, an S corporation, a limited liability company (LLC), or a sole proprietorship. Two or more individuals can form a partnership, a corporation (C or S), or an LLC.

Nontax considerations

State law and nontax considerations are an important consideration in choosing the form of the business and may play a decisive role. A general partner of a partnership has unlimited liability for the debts of the business. This can be modified by using a limited partnership (LP), which must have at least one general partner and at least one limited partner. The general partner still have unlimited liability, but a limited partner's liability is limited to its contribution to the partnership. A corporation has limited liability; shareholders generally are not responsible for the liabilities of the corporation beyond their contributions to the entity.

Federal tax considerations

At the same time, it is crucial to consider federal tax requirements and consequences when choosing the form of business entity. A primary federal tax consideration is avoiding a double layer of tax on business income. This can be accomplished by operating as a passthrough entity, such as a partnership or S corporation. Income is not taxed at the entity level. It passes through to partners and shareholders and is taxed at their rates.

In contrast, C corporations are taxable entities. Furthermore, when a C corporation pays a dividend to its shareholders, this generally is taxable to the shareholder. It must be noted that income of a passthrough entity is allocable and taxable to its owners, whether or not the income is actually distributed to the partner or shareholder. Dividends are not taxed unless there is an actual distribution.

While a partnership is organized under state law, an S corporation is a creature of the federal tax system. The S corporation is a regular corporation for state law purposes.

Advantages of partnerships

Unlike an S corporation shareholder, anyone or any entity can be a partner. S corporations are limited to 100 shareholders; only certain individuals, estates and trusts are eligible to be shareholders. C corporations and nonresident aliens cannot be shareholders of an S corporation.

S corporations are limited to a single class of stock; income and losses must be allocated on the same basis to each shareholder. Having only one class of stock may affect the corporation's ability to raise capital. A partnership can have different classes of partners and has more flexibility for allocating income and losses to different types of partners.

Partnership liabilities can increase a partner's basis in the partnership, offsetting distributions of cash and reducing their taxation. The increased basis allowed partners to use losses generated by the partnership. Liabilities of an S corporation do not create stock basis; separate bases in stock and debt must be calculated. This lack of basis may limit the use of losses generated by the S corporation.

Contributions of appreciated property by a partner to the partnership generally are not taxable, even if the partner is not part of a group controlling the partnership. Contributions by a shareholder to a corporation are tax-free only if the shareholders are part of a group controlling 80 percent of the corporation after the contribution. However, a partnership must follow special allocation rules for handling built-in gain on contributed property, whereas S corporations do not have special allocation rules in this circumstance.

Conclusion

In general, a partnership offers more flexibility than an S corporation in the treatment of taxes. However, S corporation shareholders do have limited legal liability, while general partners are not insulated from the partnership's debts and liabilities.

Since 2009, the IRS has operated an Offshore Voluntary Disclosure Program (OVDP) for U.S. taxpayers who have failed to disclose foreign assets or report foreign income from those assets to the IRS or Treasury. The program provides reduced penalties and other benefits, thus giving taxpayers an opportunity to address their past noncompliance and "become right" with the government.

Since 2009, the IRS has operated an Offshore Voluntary Disclosure Program (OVDP) for U.S. taxpayers who have failed to disclose foreign assets or report foreign income from those assets to the IRS or Treasury. The program provides reduced penalties and other benefits, thus giving taxpayers an opportunity to address their past noncompliance and "become right" with the government.

The IRS reports that 45,000 taxpayers have made voluntary disclosures since 2009 and have paid $6.5 billion in back taxes, interest, and penalties. In 2014, the IRS made important changes to the OVDP, with the expectation that the revised program will lead to a significant increase in the number of U.S. taxpayers who participate in the OVDP and report their undisclosed foreign assets.

Reporting obligations

U.S. taxpayers, including U.S. citizens living abroad, must report and pay taxes on their worldwide income, including income from foreign assets. Taxpayers must report foreign accounts on Form 1040, Schedule B; if their value exceeds certain thresholds, they must report on Form 8938, Statement of Foreign Financial Accounts. Taxpayers with accounts worth more than $10,000 must report the accounts on the Report of Foreign Bank and Financial Accounts (FBAR), which is filed with Treasury (not the IRS).

The IRS provided temporary OVDPs in 2009 and 2011. In 2012, it opened another OVDP that it continues to offer. Under the 2012 program, taxpayers must enter into a closing agreement with the IRS, provide updated returns for the prior eight years, and pay a penalty as high as 27.5 percent. In return, the IRS agrees not to pursue criminal penalties against taxpayers who may have willfully failed to report their foreign assets and/or income. In 2012, the IRS also unveiled a "streamlined procedures" program, with lighter penalties for U.S. taxpayers residing abroad who were nonwillful evaders.

2014 revisions

The revised streamlined procedures program has been expanded to taxpayers living in the United States. Participants are no longer required to have an unpaid tax balance of $1,500 or less per year. Participants self-certify that their noncompliance was not willful; the IRS will review their circumstances. Taxpayers must pay taxes on any unreported income from the past three years and must file required FBAR reports for the previous six years. Participants living abroad pay no penalty, while U.S. residents pay a miscellaneous offshore penalty of five percent.

The OVDP program for potentially willful evaders has been tightened. Taxpayers must provide increased information and must pay the 27.5 percent penalty at the time of application. In light of the expanded streamlined program, the IRS eliminated reduced penalties (five and 12.5 percent) that had been offered to nonwillful OVDP participants. To increase the pressure on nonfilers, the IRS increased the penalty from 27.5 percent to 50 percent for taxpayers who used a foreign financial institution or a facilitator that the IRS or Justice Department publicly acknowledges to be under investigation.

Taxpayers are advised to consult with their tax adviser about these programs and choose carefully. A taxpayer cannot participate in both the streamlined and the OVDP programs; it is an either/or proposition. If a taxpayer is confident that his or her noncompliance was not willful, the streamlined program is a reasonable choice. However, this program provides no protection from criminal prosecution, further audits, or proposed tax increases, if the IRS decides that the taxpayer acted willfully.

In 2012, many taxpayers will have additional considerations when analyzing whether to sell investments before the end of the year or retain them in 2013. First, the Bush-era tax cuts are scheduled to expire at the end of 2012. This affects ordinary income rates, as well as rates on capital gains and dividends. Second, under the health care law, a new 3.8 percent Medicare tax on unearned income, including interest, dividends and capital gains, will take effect in 2013. Together, these real and potential changes may add up to hefty new taxes in 2013, unless Congress takes action otherwise.

In 2012, many taxpayers will have additional considerations when analyzing whether to sell investments before the end of the year or retain them in 2013. First, the Bush-era tax cuts are scheduled to expire at the end of 2012. This affects ordinary income rates, as well as rates on capital gains and dividends. Second, under the health care law, a new 3.8 percent Medicare tax on unearned income, including interest, dividends and capital gains, will take effect in 2013. Together, these real and potential changes may add up to hefty new taxes in 2013, unless Congress takes action otherwise.

Income tax rates

Current income tax rates continue through the end of 2012.  These include the overall individual income tax rates, currently at 10, 15, 25, 28, 33 and 35 percent. If Congress does not take any action, these rates revert to the higher rates that used to apply: 15, 28, 31, 36, and 39.6 percent. Republicans favor retaining all of the Bush-era rates. President Obama and many Democrats support retaining the 10, 15, 25, and 28 percent rates for lower- and middle-income taxpayers, while reinstating the 36 and 39.6 percent rates for taxpayers with income over $200,000 (single taxpayers) or $250,000 for joint filers.

Additionally, there are calls for tax reform and for an overall lowering of income tax rates, in exchange for ending unspecified tax deductions and benefits. For example, House Republicans have called for replacing current income tax rates with two brackets, of 10 and 25 percent.

Capital gains and dividends

Current income tax rates that extend through the end of 2012 also include the 15 percent rate on capital gains and qualified dividends for qualified taxpayers. If Congress does not act, these rates revert to much higher ordinary income rates, in the case of dividends, and to the 20 percent rate that formerly applied to capital gains. Again, the President and the Republicans would both extend the current rates, but disagree on whether to apply the extensions to all taxpayers (the Republicans) or only to lower- and middle-income taxpayers under the $200,000/$250,000 thresholds (the President).

3.8 percent tax

Adding to the mix is the impending 3.8 percent tax on unearned income. Under the health care law, this tax will apply to 2013 income (and beyond) of single taxpayers with income exceeding $200,000 and joint filers with income exceeding $250,000. The tax is imposed on the lesser of net investment income or the excess of adjusted gross income about the $200,000/$250,000 thresholds.

Net investment income also includes rents, royalties, gain from disposing of property used in a passive activity, and income from a trade or business that is a passive activity. The tax does not apply to distributions from retirement plans and IRAs. Taxpayers cannot necessarily avoid the tax by moving assets to a trust, because the tax will apply if trust income exceeds a threshold currently set at only $11,200.

Sell or hold

Generally, taxpayers should make investment decisions based on economics, holding on to a "good" investment and selling a "bad" investment. This involves looking at past performance and perhaps gazing into a crystal ball. Taxpayers that are debating whether to sell appreciated assets or assets that pay qualified dividends may want to act in 2012, when income tax rates are lower and before the 3.8 percent tax takes effect. Taxpayers considering the sale of declining assets may want to consider holding off until 2013, when losses can offset more highly-taxed gains and reduce the income potentially subject to the 3.8 percent tax.

Because the 3.8 percent tax does not apply to tax-free income, such as municipal bonds and distributions from a Roth IRA, taxpayers may want to shift some of their investments to yield nontaxable income. While the income from converting a traditional IRA to a Roth IRA would be included in the income calculations, qualifying distributions after the conversion would not be included.

Again, the decision must make economic sense. If the taxpayer expects an asset to continue to decline in value during 2012, he or she should sell the asset soon and not wait until 2013. Another consideration is the bunching of income. Taxpayers that sell substantial capital gains assets in 2013 may push their income up to the $200,000/$250,000 thresholds that trigger higher taxes. If the taxpayer is considering a sell-off of assets, it may make more sense to sell assets before 2013.

If a taxpayer wants to shift to more conservative investments, income yields may decline, but so will the incidence of the dividend, capital gains, and unearned income taxes described above. On the other hand, taxpayers looking at more speculative investments should understand that a successful investment may generate income taxed at higher rates in 2013.

Please contact our office if you have any questions.

Stock is a popular and valuable compensation tool for employers and employees. Employees are encouraged to stay with the company and to work harder, to enhance the value of the stock they will earn. Employers do not have to make a cash outlay to provide the compensation, yet they still are entitled to a tax deduction.

Stock is a popular and valuable compensation tool for employers and employees. Employees are encouraged to stay with the company and to work harder, to enhance the value of the stock they will earn. Employers do not have to make a cash outlay to provide the compensation, yet they still are entitled to a tax deduction.

Employers may make a direct transfer of stock to an employee as compensation for services performed. In the simplest case, the employee's rights in the stock are vested upon receipt. Under Code Sec. 83, the employee has income, equal to the fair market value of the stock, less any amount paid for the stock. The employer can take a compensation deduction under Code Sec. 162 for the amount included in the employee's income.

Risk of forfeiture

The employer may decide to impose certain conditions on the employee's right to the stock (such as a requirement that the employee continue to work for the company for two years before the stock "vests"). In this situation, the stock is subject to a substantial risk of forfeiture (or is "nonvested") until the two-year period elapses. After two years, the stock vests, and the employee recognizes income for the excess of the stock's value (at the time of vesting) over the amount paid. If the employee leaves the company within two years, the employee forfeits the stock.

An employee who receives stock subject to a substantial risk of forfeiture may anticipate that he or she will stay with the company for the required two years. The employee may also anticipate (or at least hope) that the stock will appreciate in value. Rather than wait two years and have to recognize income when the stock vests, an employee may elect under Code Sec. 83(b) to treat the property as vested upon receipt and to recognize compensation income (if any) at the time of receipt.

83(b) election

The employee may be required to pay for the stock when received. If the employee paid the fair market value of the stock, making a Code Sec. 83(b) election is particularly advantageous, because the employee will not recognize any income on the election.

Example.  Widget Corporation transfers 10 shares of its common stock to Hal, an employee, subject to a requirement that Hal work for two years before the stock vests. The stock is worth $5 a share. Hal is required to pay $5 a share upon receipt of the stock. By making a Code Sec. 83(b) election, Hal will not recognize any income, because the value and the cost of the stock are the same. If Hal did not have to pay any money for the shares, and made an election, Hal would have $50 of compensation income (10 shares times $5 a share).

After making an election, if the employee then works for two years, and the stock appreciates, the employee does not recognize any further compensation income, because the employee has already been taxed under Code Sec. 83.  By making the election, the employee is treated as owning the stock. When the employee sells the stock, the employee will recognize capital gain or loss, measured by the difference between the amount received and the value of the stock when it vested.

Election formalities

To make an election under Code Sec. 83(b), an employee must file a statement with the IRS, within 30 days of the transfer of the property to the employee. The statement must be filed with the Internal Revenue Service Center where the employee would file his or her income tax return. A copy of the statement must be provided to the employer, who is entitled to a compensation deduction when the election is made. A copy must also be attached to the employee's income tax return.

IRS regulations prescribe the requirements for an election. In Rev. Proc. 2012-29, the IRS also provided sample language for employees to use to make the election. The IRS advised that the sample language is not required. The election must identify the taxpayer, the property being transferred, the date of the transfer, the restrictions on the property, the property's value at the time of transfer (generally determined without the restrictions), the amount paid by the employee, and the amount of compensation income (the value minus the amount paid). The employee must also sign the election.

The election cannot be revoked without the IRS's consent. The IRS will not ordinarily grant consent unless there has been a mistake of fact as to the underlying transaction.

If you have any questions about making a Code Sec. 83(b) election, please contact our office.

Some individuals must pay estimated taxes or face a penalty in the form of interest on the amount underpaid. Self-employed persons, retirees, and nonworking individuals most often must pay estimated taxes to avoid the penalty. But an employee may need to pay them if the amount of tax withheld from wages is insufficient to cover the tax owed on other income. The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners.

Some individuals must pay estimated taxes or face a penalty in the form of interest on the amount underpaid. Self-employed persons, retirees, and nonworking individuals most often must pay estimated taxes to avoid the penalty. But an employee may need to pay them if the amount of tax withheld from wages is insufficient to cover the tax owed on other income. The potential tax owed on investment income also may increase the need for paying estimated tax, even among wage earners.

The trick with estimated taxes is to pay a sufficient amount of estimated tax to avoid a penalty but not to overpay. The IRS will refund the overpayment when you file your return, but it will not pay interest on it. In other words, by overpaying tax to the IRS, you are in essence choosing to give the government an interest-free loan rather than invest your money somewhere else and make a profit.

When do I make estimated tax payments?

Individual estimated tax payments are generally made in four installments accompanying a completed Form 1040-ES, Estimated Tax for Individuals. For the typical individual who uses a calendar tax year, payments generally are due on April 15, June 15, and September 15 of the tax year, and January 15 of the following year (or the following business day when it falls on a weekend or other holiday).

Am I required to make estimated tax payments?

Generally, you must pay estimated taxes in 2012 if (1) you expect to owe at least $1,000 in tax after subtracting tax withholding (if you have any) and (2) you expect your withholding and credits to be less than the smaller of 90 percent of your 2012 taxes or 100 percent of the tax on your 2011 return.  There are special rules for higher income individuals.

Usually, there is no penalty if your estimated tax payments plus other tax payments, such as wage withholding, equal either 100 percent of your prior year's tax liability or 90 percent of your current year's tax liability. However, if your adjusted gross income for your prior year exceeded $150,000, you must pay either 110 percent of the prior year tax or 90 percent of the current year tax to avoid the estimated tax penalty. For married filing separately, the higher payments apply at $75,000.

Estimated tax is not limited to income tax. In figuring your installments, you must also take into account other taxes such as the alternative minimum tax, penalties for early withdrawals from an IRA or other retirement plan, and self-employment tax, which is the equivalent of Social Security taxes for the self-employed.

Suppose I owe only a relatively small amount of tax?

There is no penalty if the tax underpayment for the year is less than $1,000. However, once an underpayment exceeds $1,000, the penalty applies to the full amount of the underpayment.

What if I realize I have miscalculated my tax before the year ends?

An employee may be able to avoid the penalty by getting the employer to increase withholding in an amount needed to cover the shortfall. The IRS will treat the withheld tax as being paid proportionately over the course of the year, even though a greater amount was withheld at year-end. The proportionate treatment could prevent penalties on installments paid earlier in the year.

What else can I do?

If you receive income unevenly over the course of the year, you may benefit from using the annualized income installment method of paying estimated tax. Under this method, your adjusted gross income, self-employment income and alternative minimum taxable income at the end of each quarterly tax payment period are projected forward for the entire year. Estimated tax is paid based on these annualized amounts if the payment is lower than the regular estimated payment. Any decrease in the amount of an estimated tax payment caused by using the annualized installment method must be added back to the next regular estimated tax payment.

Determining estimated taxes can be complicated, but the penalty can be avoided with proper attention. This office stands ready to assist you with this determination. Please contact us if we can help you determine whether you owe estimated taxes.

On June 28, the U.S. Supreme Court issued its long-awaited landmark decision on the Patient Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation Act (HCERA). In a 5 to 4 decision of historic proportions, the nation's highest court upheld the law – except for a certain Medicaid provision involving state funding.  Key to the Court's approval of President Obama's signature health care law was the finding that the linchpin individual mandate was constitutional.  The requirement under the individual mandate that individuals pay a penalty if they fail to carry minimum essential health insurance coverage was declared within the Constitution based upon Congress's power to tax.

The Supreme Court's decision preserves all of the far-reaching tax provisions and health insurance reforms that were part of the overall health care reform legislation as passed in 2010. In coming months, lawmakers and legal scholars will examine all of the nuances of the Court's highly complex decision.  More immediately, individuals and businesses are concerned about what steps they need to take next.

Role of taxes

To a large extent, the Obama administration's health care law is driven by tax provisions, to provide the carrot, the stick and adequate funding in alternating quantities. The role played by taxes in the new health care provisions is also underscored by the predominate part that the IRS will play in its administration.

Under the health care law, a number of tax provisions are scheduled to take effect in 2013 and beyond. The court's decision allows the numerous tax provisions within the health care laws to move forward on schedule. Some important provisions have already taken effect; others will take effect in 2013 and 2014. One provision, the excise tax on high-cost employer-sponsored coverage, will not take effect until 2018.

Main provisions/effective dates

PPACA and HCERA include the following tax provisions (not a complete list):

• Small employer Sec. 45R credit, effective for tax years beginning in 2010 – the government will provide a credit of 35 percent of health insurance premiums to small employers (25 percent for tax-exempt organizations. The credit expires after 2015.
• Economic substance doctrine, effective after March 30, 2010 – the economic substance test was codified as a two-prong test, requiring that the transaction change the taxpayer's economic position in a meaningful way, and that the taxpayer has a substantial business purpose for the transaction.
• Over-the-counter limitations for health accounts, effective for tax years beginning after December 31, 2010 – health accounts, such as flexible spending arrangements, health reimbursement arrangements, health savings accounts, and Archer Medical Savings Accounts, can only reimburse expenses for medicine and drugs if the item is a prescription drug (or insulin).
• Indoor tanning services excise tax, effective on or after July 1, 2010 – amounts paid for indoor tanning services are subject to a 10-percent excise tax. Tanning salons must collect the tax and pay it quarterly.
• Itemized deduction for medical expenses, effective for tax years beginning after December 31, 2012 – the threshold for deducting medical expenses as an itemized deduction is raised from 7.5 percent to 10 percent of adjusted gross income.
• Additional 0.9% Medicare tax, effective after December 31, 2012 – an additional 0.9 percent Medicare tax is imposed on wages and self-employment income of higher-income individuals: individuals – above $200,000; married filing jointly – above $250,000; married filing separately – above $125,000.
• 3.8% Medicare contribution tax, effective after December 31, 2012 – a 3.8 percent Medicare tax is imposed on unearned income for higher-income individuals, including interest, dividends, annuities, royalties, rents and other passive income.
• Medical device excise tax, effective for sales after December 31, 2012 – a 2.3 percent excise tax is imposed on sales of certain medical devices by manufacturers, producers and importers. Retail items such as eyeglasses are excluded from the tax.
• Employer shared responsibility, effective after December 31, 2013 – the "employer mandate": an applicable large employer (50 or more full-time employees) must make a payment if any full-time employee can receive the premium tax credit. The payment is required if the employer does not offer minimum essential coverage, or offers coverage that is not affordable.
• Branded prescription drug fees, effective for calendar years beginning after December 31, 2010 – an annual fee imposed on manufacturers and importers with receipts from branded prescription drug sales.
• Sec. 36B premium assistance credit, effective for tax years ending after December 31, 2013 – lower-income individuals who obtain health insurance coverage through an insurance exchange may qualify for the credit, unless they are eligible for other minimum essential coverage.
• Excise tax on high-dollar insurance, effective for tax years beginning after December 31, 2017 – employer-sponsored health coverage whose cost exceeds a threshold amount ($10,200 for self-on coverage; $27,500 for other coverage) will be subject to a 40-percent excise tax.

Looking ahead

Employers, taxpayers – indeed everyone – must prepare for sweeping changes in health care in coming years.  Many of the provisions in the PPACA have already been implemented or are in the process of being implemented.  Other provisions, as the above list indicated, are scheduled to take effect after 2012.  The Supreme Court's upholding of the PPACA clears the way for full implementation of the new law (unless a future Congress votes to repeal the law, which at this point would be an uphill battle). Our office will keep you posted of developments and the steps you need to take in the coming months.

In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program.  It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation before the IRS or Department of Labor initiates an examination.

The distinction between independent contractors and employees is significant for employers, especially when they file their federal tax returns. While employers owe only the payment to independent contractors, employers owe employees a series of federal payroll taxes, including Social Security, Medicare, Unemployment, and federal tax withholding. Thus, it is often tempting for employers to avoid these taxes by classifying their workers as independent contractors rather than employees.

If, however, the IRS discovers this misclassification, the consequences might include not only the requirement that the employer pay all owed payroll taxes, but also hefty penalties. It is important that employers be aware of the risk they take by classifying a worker who should or could be an employee as an independent contractor.

“All the facts and circumstances”

The IRS considers all the facts and circumstances of the parties in determining whether a worker is an employee or an independent contractor. These are numerous and sometimes confusing, but in short summary, the IRS traditionally considers 20 factors, which can be categorized according to three aspects: (1) behavioral control; (2) financial control; (3) and the relationship of the parties.

Examples of behavioral and financial factors that tend to indicate a worker is an employee include:

• The worker is required to comply with instructions about when, where, and how to work;
• The worker is trained by an experienced employee, indicating the employer wants services performed in a particular manner;
• The worker’s hours are set by the employer;
• The worker must submit regular oral or written reports to the employer;
• The worker is paid by the hour, week, or month;
• The worker receives payment or reimbursement from the employer for his or her business and traveling expenses; and
• The worker has the right to end the employment relationship at any time without incurring liability.

In other words, any existing facts or circumstances that point to an employer’s having more behavioral and/or financial control over the worker tip the balance towards classifying that worker as an employee rather than a contractor. The IRS’s factors do not always apply, however; and if one or several factors indicate independent contractor status, but more indicate the worker is an employee, the IRS may still determine the worker is an employee.

Finally, in examining the relationship of the parties, benefits, permanency of the employment term, and issuance of a Form W-2 rather than a Form 1099 are some indicators that the relationship is that of an employer–employee.

Conclusion

Worker classification is fact-sensitive, and the IRS may see a worker you may label an independent contractor in a very different light. One key point to remember is that the IRS generally frowns on independent contractors and actively looks for factors that indicate employee status.

Please do not hesitate to call our offices if you would like a reassessment of how you are currently classifying workers in your business, as well as an evaluation of whether IRS’s new Voluntary Classification Program may be worth investigating.

Under a flexible spending arrangement (FSA), an amount is credited to an account that is used to reimburse an employee, generally, for health care or dependent care expenses. The employer must maintain the FSA. Amounts may be contributed to the account under an employee salary reduction agreement or through employer contributions.

Use-it or lose-it

The general rule is that no contribution or benefit from an FSA may be carried over to a subsequent plan year. Unused benefits or contributions remaining at the end of the plan year (or at the end of a grace period) are forfeited. This is known as the “use it or lose it” rule. The plan cannot pay the unused benefits back to the employee, and cannot carry over the unused benefits to the following calendar year.

Example. An employer maintains a cafeteria plan with a health FSA. The plan does not have a grace period. Arthur, an employee, contributes $250 a month to the FSA, or a total of $3,000 for the calendar year. At the end of the year (December 31), Arthur has incurred medical expenses of only $1,200 and makes claims for those expenses. He has $1,800 of unused benefits. Under the “use it or lose it” rule, Arthur forfeits the $1,800. 

Grace period

Because the “use it or lose it” rule seemed harsh, the IRS gave employers the option to provide a grace period at the end of the calendar year. The grace period may extend for 2½ months, but must not extend beyond the 15^th day of the third month following the end of the plan year. Medical expenses incurred during the grace period may be reimbursed using contributions from the previous year.

Example. Beulah contributes $3,000 to her health FSA for 2010. The FSA is on January 1 through December 31 calendar year.  On December 31, 2010, Beulah has $1,800 of unused contributions. Her employer provides a grace period through March 15, 2011. On January 20, 2011, Beulah incurs $1,500 of additional medical expenses. Because these expenses were incurred during the grace period, Beulah can be reimbursed the $1,500 from her 2010 contributions. On March 15, 2011, she has $300 of unused benefits from 2010 and forfeits this amount.

Exceptions

There are other exceptions to the prohibition against deferred compensation within the operation of an FSA. A cafeteria plan is permitted, but not required, to reimburse employees for orthodontia services before the services are provided, even if the services will be provided over a period of two years or longer. The employee must be required to pay in advance to receive the services. 

Another exception is provided for durable medical equipment that has a useful life extending beyond the health FSA’s period of coverage (the calendar year, plus any grace period). For example, a health FSA is permitted to reimburse the cost of a wheelchair for an employee.

If you have any questions on setting up an FSA, whether as an employer or an employee, and which benefits must be covered and which are optional, please do not hesitate to call this office.

Job-hunting expenses are generally deductible as long as you are not searching for a job in a new field. This tax benefit can be particularly useful in a tough job market. It does not matter whether your job hunt is successful, or whether you are employed or unemployed when you are looking.

Expenses directly connected with a job search are deductible as a miscellaneous itemized deduction. You can deduct job-hunting expenses if the amount of all your so-called miscellaneous itemized deductions exceeds two percent of your adjusted gross income. However, if you claim the standard deduction, you cannot deduct job-hunting expenses. Therefore, as a practical matter for many job seekers, job hunting expenses do not materialize as a tax deduction.

For those who are able to use job seeking expenses as a deduction, it can be difficult to determine what a new field is. A professional photographer who pursues a job in the retail industry clearly is searching in a new field and cannot deduct any of his or her job-hunting expenses. But there are exceptions. The IRS has allowed persons who retired from the military to search for jobs in new fields and claim their job-hunting expenses. Taking a temporary job while searching for permanent employment in your current field will not be considered a job change that disqualifies your job-hunting expenses.

Persons entering the job market for the first time, such as college students, and persons who have been out of the job market for a long period of time, such as parents of young children, cannot deduct their job-hunting expenses. However, a college student who worked in a particular field while in school may be able to deduct job-hunting expenses.

Deductible expenses include typing, printing and mailing a resume. Long-distance phone calls are also deductible. You can deduct travel costs for going on a job search or an interview, including air transportation, railroad, or car expenses. The standard rate for car expenses for business is 55 cents per mile for 2012. Amounts you pay to a job counselor, employment agency or job referral service are all deductible.

It is important to keep records of your costs. While your individual expenses may not be substantial, your total expenses can add up to a significant amount.

A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.

The main advantage of an LLC is that in general its members are not personally liable for the debts of the business. Members of LLCs enjoy similar protections from personal liability for business obligations as shareholders in a corporation or limited partners in a limited partnership. Unlike the limited partnership form, which requires that there must be at least one general partner who is personally liable for all the debts of the business, no such requirement exists in an LLC.

A second significant advantage is the flexibility of an LLC to choose its federal tax treatment. Under IRS's "check-the-box rules, an LLC can be taxed as a partnership, C corporation or S corporation for federal income tax purposes. A single-member LLC may elect to be disregarded for federal income tax purposes or taxed as an association (corporation).

LLCs are typically used for entrepreneurial enterprises with small numbers of active participants, family and other closely held businesses, real estate investments, joint ventures, and investment partnerships. However, almost any business that is not contemplating an initial public offering (IPO) in the near future might consider using an LLC as its entity of choice.

Deciding to convert an LLC to a corporation later generally has no federal tax consequences. This is rarely the case when converting a corporation to an LLC. Therefore, when in doubt between forming an LLC or a corporation at the time a business in starting up, it is often wise to opt to form an LLC. As always, exceptions apply. Another alternative from the tax side of planning is electing "S Corporation" tax status under the Internal Revenue Code.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Basic rules

The "basic" rules governing estimated tax payments are not always synonymous with "straightforward" rules. The following addresses some basic rules regarding estimated tax payments by corporations and individuals:

Corporations. For calendar-year corporations, estimated tax installments are due on April 15, June 15, September 15, and December 15. If any due date falls on a Saturday, Sunday or legal holiday, the payment is due on the first following business day. To avoid a penalty, each installment must equal at least 25 percent of the lesser of:

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

A lower installment amount may be paid if it is shown that use of an annualized income method, or for corporations with seasonal incomes, an adjusted seasonal method, would result in a lower required installment.

Individuals. For individuals (including sole proprietors, partners, self-employeds, and/or S corporation shareholders who expect to owe tax of more than $1,000), quarterly estimated tax payments are due on April 15, June 15, September 15, and January 15. Individuals who do not pay at least 90 percent of their tax through withholding generally are required to estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year. The required annual payment is generally the lesser of:

• 90 percent of the tax ultimately shown on your return for the 2015 tax year, or 90 percent of the tax due for the year if no return is filed;
• 100 percent of the tax shown on your return for the preceding (2014) tax year if that year was not for a short period of less than 12 months; or
• The annualized income installment.

For higher-income taxpayers whose adjusted gross income (AGI) shown on your 2014 tax return exceeds $150,000 (or $75,000 for a married individual filing separately in 2015), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.

Adjusting estimated tax payments

If you expect an uneven income stream for 2015, your required estimated tax payments may not necessarily be the same for each remaining period, requiring adjustment. The need for, and the extent of, adjustments to your estimated tax payments should be assessed at the end of each installment payment period.

For example, a change in your or your business's income, deductions, credits, and exemptions may make it necessary to refigure estimated tax payments for the remainder of the year. Likewise for individuals, changes in your exemptions, deductions, and credits may require a change in estimated tax payments. To avoid either a penalty from the IRS or overpaying the IRS interest-free, you may want to increase or decrease the amount of your remaining estimated tax payments.

Refiguring tax payments due

There are some general steps you can take to reconfigure your estimated tax payments. To change your estimated tax payments, refigure your total estimated tax payments due. Then, figure the payment due for each remaining payment period. However, be careful: if an estimated tax payment for a previous period is less than one-fourth of your amended estimated tax, you may be subject to a penalty when you file your return.

If you would like further information about changing your estimated tax payments, please contact our office.

Under the Patient Protection and Affordable Care Act (PPACA) enacted in March 2010, small employers may be eligible to claim a tax credit of 35 percent of qualified health insurance premium costs paid by a taxable employer (25 percent for tax-exempt employers). The credit is designed to encourage small employers to offer health-insurance to their employees.

Under the Patient Protection and Affordable Care Act (PPACA) enacted in March 2010, small employers may be eligible to claim a tax credit of 35 percent of qualified health insurance premium costs paid by a taxable employer (25 percent for tax-exempt employers). The credit is designed to encourage small employers to offer health-insurance to their employees.

Employees and wages

An employer can claim the maximum 35 percent credit if it has no more than 10 full-time equivalent (FTE) employees receiving average annual wages of $25,000 or less. The credit is phased out as the number of FTEs increases to 25 and as average annual wages increase to $50,000.  An employer with 25 or more employees, or paying average annual wages of $50,000 or more per employee, will not receive a credit.

In counting FTEs, the employer should not include owners and family members.  Seasonal employees are not counted unless they work at least 120 days during the year. In determining average annual wages, employers must count all wages, bonuses, commissions or other compensation, including sick leave and vacation leave.

Applicable years

The credit took effect in 2010.  It did not expire at the end of 2010 but can be claimed from year to year.  The credit applies at the 35/25 percent levels for four years, through 2013. After 2013, the maximum credit increases to 50 percent for for-profit employers and 35 percent for tax-exempt employers, but only for two years. Thus, the credit can be claimed every year for the six years from 2010 and 2015.  The credit is recalculated every year based on the total health insurance premiums paid. Only non-elective employer premiums are counted; salary reduction contributions paid through a cafeteria plan or other arrangement are not counted.

Premiums

An employer must pay at least 50 percent of the premium cost of health insurance coverage, and must pay the same uniform percentage of costs for each employee who obtains health insurance through the employer. A transition rule for 2010 treats an employer as satisfying the uniformity rule as long as the employer pays at least 50 percent of the coverage costs of each employee, based on the cost of employee-only (single) coverage, even if the employer does not pay the same percentage of costs for each employee.

The premiums must be paid for qualified health insurance, such as a hospital or medical service plan or health maintenance organization. It includes coverage for dental, vision, long-term care, nursing home care, and coverage for a specified disease or illness.  Coverage does not accident insurance, disability income insurance, and workers' compensation.

Claiming the credit

The credit is determined on Form 8941, Credit for Small Employer Health Insurance Premiums. For-profit employers report the amount of the credit on Form 3800, General Business Credit, and attach the forms to their income tax return. As a general business credit, any unused credit (in excess of taxable income) can be carried back one year (except for a credit arising in 2010, the first year) or carried forward 20 years.  For-profit employers deduct the credit from the premiums paid for health insurance, when computing the deduction for health insurance premiums.

Tax-exempt employers report the credit on Form 990-T, Exempt Organization Business Income Tax Return, regardless of whether the organization is subject to tax on unrelated business income. The credit is refundable for tax-exempt employers, provided it does not exceed the employer’s income tax withholding and Medicare taxes. The credit is not refundable if the employer does not claim the credit on Form 990-T.

The IRS is moving quickly to alert employers about a new tax credit for health insurance premiums. The recently enacted health care reform package (the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010) created the small employer health insurance tax credit. The temporary credit is targeted to small employers that offer or will offer health insurance coverage to their employees. The credit, like so many federal tax incentives, has certain qualifications. Please contact our office and we can arrange to review in detail how the credit may cut the cost of your business's health insurance premiums. The dollar benefits of the credit are substantial and they apply immediately to 2010 premium costs.

Outreach

The IRS is sending postcards to more than four million small businesses in coming weeks. The postcards briefly describe the new tax credit and are just one part of the IRS's outreach campaign to educate employers about the credit. The IRS has also created a special page on its web site on the credit along with a fact sheet and frequently asked questions and answers.

Maximum credit

The new health care credit is effective immediately so employers need to plan now to take advantage of it. The credit, which is available over the next five years, also rises over time but the enhanced credit comes with some additional requirements.

For tax years beginning in 2010 through 2013, the maximum credit reaches 35 percent of qualified premium costs paid by for-profit employers. The maximum credit is 25 percent of qualified premium costs paid by tax-exempt employers.

The maximum credit climbs to 50 percent of qualified premium costs paid by for-profit employers (35 percent for tax-exempt employers) for tax years beginning in 2014 through 2015. However, Congress imposed some additional requirements. An employer may claim the credit only if it offers one or more qualified health plans through a state insurance exchange. The health care reform package requires states to create insurance exchanges by January 1, 2014.

Example. ABC Co. employs nine individuals with average annual wages of $23,000 for each employee in 2010. ABC pays $72,000 in health care premiums for its employees. This amount does not exceed the average premium for the small group market in the state in which ABC offers coverage and ABC otherwise meets the requirements for the credit. ABC's credit for 2010 is $25,200 (35 percent x $72,000).

Tax-exempt employers have additional limitations. If the amount of their credit exceeds the amount of payroll taxes of the tax-exempt employer during the calendar year in which the tax year begins, the credit is limited to the amount of payroll taxes.

FTEs

The maximum credit is available to qualified employers with no more than 10 full-time equivalent (FTE) employees paying average annual wages of $25,000 or less. The credit completely phases out if an employer has 25 or more FTEs or pays $50,000 or more in average annual wages. Effectively, a small employer can have exactly 25 FTEs or pay average annual compensation of exactly $50,000 and not receive a credit under the phase-out rules. The monetary amounts are adjusted for inflation after 2013.

The health care reform package explains how to calculate the number of FTEs. The number of an employer's FTEs is determined by dividing the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by 2,080. The result, if not a whole number, is rounded to the next lowest whole number. Lawmakers selected 2,080 hours because 2,080 hours comprise the number of hours in a 52-week assuming a 40-hour work week. Any hours beyond 2,080, such as overtime hours, are not taken into account when calculating FTEs.

Example. ABC Co has nine employees. ABC pays Aidan, Bonnie, Catherine, David, and Eddie wages for 2,080 hours each for 2010. ABC pays Francine, Gary and Harry wages for 1,040 hours each for 2010. ABC pays Kieran wages for 2,300 hours for 2010. The total hours not exceeding 2,080 per employee is the sum of: --10,400 hours for the five employees paid for 2,080 hours each (5 x 2,080) plus --3,120 hours for the three employees paid for 1,040 hours each (3 x 1,040) plus --2,080 hours for the one employee paid for 2,300 hours (lesser of 2,300 and 2,080), which add up to 15,600 hours.

To calculate the number of FTEs, 15,600 is divided by 2,080, which results in 7.5, rounded to the next lowest whole number.

Average annual wages

A formula is also used to calculate average annual wages. The amount of average annual wages is determined by first dividing the total wages paid by the employer to employees during the employer's tax year by the number of the employer's FTEs for the year. The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000).

Example. ABC Co. pays $224,000 in wages and has 10 FTEs. ABC's average annual wages are $224,000 divided by 10 which equals $22,400, and is rounded down to the nearest $1,000 for a final number of $22,000

Owners and family members

Some individuals are excluded from the calculation of FTEs and average annual wages. These include a sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses. Certain family members of these individuals are also excluded from the calculation of FTEs and average annual wages. These include a child, a parent, a sibling, and others. This list is not exhaustive. Please contact our office for more details about who is excluded from these calculations.

Premium deduction

Employers generally may deduct the cost of health insurance premiums paid on behalf of employees. The health care reform package does not change this general rule. However, the amount of premiums that an employer may deduct is reduced by the amount of the small employer health care tax credit.

Qualifying arrangement

Only premiums paid by the employer under a qualifying arrangement are counted in calculating the credit. Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage. The IRS is developing transition relief for 2010.

Additionally, the amount of an employer's premium payments is capped in relation to the average premium for the small group market. The U.S. Department of Health and Human Services will determine the average premium for the small group market in a state.

Congress is currently reviewing the costs of premiums. The health care reform package includes a requirement, effective in 2011, that insurance companies spend at least 80 percent of premium revenue on actual health care. Additionally, the health care reform package establishes a process for the annual review of premium increases prior to their use along with public disclosure of how premium rates are determined.

Claiming the credit

Qualified for-profit employers will claim the credit on their annual income tax return. The IRS is expected to advise how tax-exempt employers will claim the credit. Our office will keep you posted of developments.

According to the U.S. Department of Health and Human Services, a qualified small business can choose to start offering health insurance coverage to employees in 2010 and be eligible for the credit. If you are considering providing insurance coverage to your employees, please contact our office. If you have already been paying premiums, don't leave maximizing the new credit to chance; we can help you navigate the many federal rules that come into play.

As always, please contact our office if you have any questions about the new small employer health insurance tax credit.

Long-term care premiums are deductible up to certain amounts as itemized medical expense deductions. The amount is based upon your age. Unfortunately, most taxpayers do not have enough other medical expense deductions to exceed the non-deductible portion equal to the first 7 1/2 percent of adjusted gross income (10 percent if you are subject to alternative minimum tax (AMT)). Furthermore, more taxpayers now take the standard deduction rather than itemize, making even those medical expenses useless as a tax deduction.

A tax bill has been before Congress for several years now to allow long-term care premiums to be deductible "above the line," that is, by anyone irrespective of whether you itemize. The impetus behind this recommendation is that encouraging individuals to fund their own eventual eldercare is preferable to having federal Medicare payments to so. So far, however, Congress has not brought the matter to a vote. Some state income tax laws already allow such an above-the-line deduction.

Long-term care premiums. Long-term care insurance premiums are deductible in figuring itemized medical expense deductions up to the following amounts:

- Age 40 or younger: $290 in 2007; $310 in 2008;

- Over 40 but not older than 50: $550 in 2007; $580 in 2008;

- Over 50 but not older than 60: $1,110 in 2007; $1,150 in 2008;

- Over 60 but not older than 70: $2,950 in 2007; $3,080 in 2008; and

- Over 70: $3,680 in 2007; $3,850 in 2008.