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Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271

Tax-Related Portion of the Substance Use–Disorder Prevention that Promotes Opioid Recovery and Treatment (SUPPORT) for Patients and Communities Act, Enrolled, as Signed by the President on October 24, 2018, P.L. 115-271

President Donald Trump has signed bipartisan legislation, which expands a religious exemption for the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate. The exemption is effective for taxable years beginning after December 31, 2018.

Religious Exemption

SUPPORT for Patients and Communities Act ( HR 6) amends Code Sec. 5000A(d)(2)(a) to expand the religious conscience exemption for the ACA individual mandate. Individual taxpayers who rely solely on a religious method of healing for whom the acceptance of medical health services would be inconsistent with their religious beliefs are exempt from the ACA mandate to maintain health insurance or pay a penalty.

Tax Reform

Additionally, last year’s tax reform legislation essentially repeals the ACA’s individual mandate. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) repeals the ACA’s shared responsibility payment for individuals failing to maintain minimum essential coverage effective January 1, 2019.

Congressional Republicans are looking to move forward with certain legislative tax efforts during Congress’s lame-duck session. The House’s top tax writer, who will hand the reins to Democrats next year, has reportedly outlined several tax measures that will be a priority when lawmakers return to Washington, D.C., during the week of November 12. However, President Donald Trump’s recently touted 10-percent middle-income tax cut does not appear to be one of them.

Congressional Republicans are looking to move forward with certain legislative tax efforts during Congress’s lame-duck session. The House’s top tax writer, who will hand the reins to Democrats next year, has reportedly outlined several tax measures that will be a priority when lawmakers return to Washington, D.C., during the week of November 12. However, President Donald Trump’s recently touted 10-percent middle-income tax cut does not appear to be one of them.

Democrats Take the House

Republicans will lose their one-party rule in Washington, D.C. in the 116th Congress beginning in January 2019. As a result of the November 6 midterm elections, Democrats will control the House during the next Congress, and Republicans will retain control of the Senate.

Currently, Rep. Kevin Brady, R-Tex., serves as chairman of the House’s tax-writing Ways and Means Committee. Republicans’ majority in both chambers of Congress enabled the GOP, in coordination with the Trump administration, to enact tax reform legislation last year. However, the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) reportedly did not turn out to be as popular as they had hoped. The TCJA’s unpopularity is at least in part why Republicans lost vital seats in the House, according to several reports.

Lame-Duck

Before the turnover of power, however, Brady is reportedly gearing up to introduce a tax extenders measure during the lame-duck session, which would extend certain temporary or expired tax breaks. Generally, Democrats have been supportive of year-end tax extender legislation. At this time, the details of the tax-extender proposal remain unclear.

Additionally, Brady reportedly said on November 7 that a TCJA technical corrections bill with "minor changes" will move in the lame-duck session. Further, the Senate is expected to take up a House-approved retirement savings measure that is part of House Republicans’ "Tax Reform 2.0" efforts.

Looking Forward

House Ways and Means Committee ranking member Richard Neal, D-Mass., is expected to chair the committee in the 116th Congress. Neal has a fairly moderate tax-legislative record, and is considered on Capitol Hill to be "business-friendly." To that end, Neal has recently sponsored several retirement savings measures, which would enhance employer workplace savings accounts. Additionally, infrastructure and tax-related health care initiatives are expected to be a priority among House Democrats.

GOP Retains Senate

Republicans will continue to lead the Senate in the 116th Congress. While the GOP Senate majority may not be enough to approve additional GOP tax legislation, it is likely to prevent Democrats from repealing parts of the TCJA. However, it is expected on Capitol Hill that hearings will be held in both chambers’ tax writing committees to examine various provisions of the new tax law. Although a divided Congress can result in fewer tax bills being approved, successful legislation will likely be bipartisan.

The Senate Finance Committee’s (SFC) top ranking Democrat has introduced a bill to restore a retirement savings program known as myRA that was terminated by Treasury last year. The myRA program was created by former President Obama through an Executive Order.

The Senate Finance Committee’s (SFC) top ranking Democrat has introduced a bill to restore a retirement savings program known as myRA that was terminated by Treasury last year. The myRA program was created by former President Obama through an Executive Order.

Retirement Savings

"Cost-of-living is soaring with working families having less and less to save for their futures," SFC ranking member Ron Wyden, D-Ore., said in a November 15 tweet. "Today, I’m introducing a bill to address this retirement crisis."

The Encouraging Americans to Save Bill is co-sponsored by Sens. Ben Cardin, D-Md., Bob Casey, D-Pa., Amy Klobuchar, D-Minn., and Michael Bennet, D-Colo. An earlier version of the bill, Sen. 2492, was introduced by Wyden in the 114th Congress that also aimed to expand the myRA program.

"The Encouraging Americans to Save [Bill] enhances retirement savings incentives by restructuring the existing, nonrefundable saver’s credit into a refundable, government matching contribution of up to $500 a year for middle-class workers who save through 401(k) type plans or IRAs, "Wyden’s November 15 press release noted. Additionally, the bill would restore the myRA program, which Treasury determined last year was too costly to continue.

myRA Program

The Obama-era myRA program was designed as a government-sponsored retirement savings program available to individuals without access to employer-sponsored retirement plans. Although the program was determined to have very little demand to warrant its high operating costs, Democrats attributed the low sign-up to the program still being in its infancy. However, Republicans criticized the program as an "executive overreach" that could not become successful based on its investments in little interest yielding Treasury bonds and posed certain risks to taxpayers and employees.

House

House Ways and Means Committee ranking member Richard Neal, D-Mass., along with Wyden, sent a letter last year to Treasury Secretary Steven Mnuchin urging Treasury to continue the myRA program. Neal is expected to become chairman of the House’s tax writing committee this coming January in the 116th Congress.

However, considering the Trump administration ended the program, it is seen as unlikely on Capitol Hill that Trump would support legislation to restore it. Moreover, Republicans will retain their majority-hold of the Senate in the next Congress, thus further limiting its chances of success.

A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November.

A new, 10 percent middle-income tax cut is conditionally expected to be advanced in 2019, according to the House’s top tax writer. This timeline, although largely already expected on Capitol Hill, departs sharply from President Donald Trump’s original prediction that the measure would surface by November.

Middle-Income Tax Cut

President Donald Trump announced on October 22 that a new 10 percent tax cut would soon be unveiled that will focus specifically on middle-income taxpayers. "President Trump is determined to provide further tax relief for middle-class families," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an October 23 statement. "We will continue to work with the White House and Treasury over the coming weeks to develop an additional 10 percent tax cut focused specifically on middle-class families and workers, to be advanced as Republicans retain the House and Senate," Brady added.

Comment. Notably, Brady is essentially highlighting in his statement that any such additional tax cut measure would require a Republican majority for congressional approval. As November midterm elections near, there is "talk" on Capitol Hill that Republicans may lose control of the House.

The additional 10 percent tax cut for middle-income taxpayers would aim to build upon the individual tax cuts enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). To that end, the House passed a "Tax Reform 2.0"package last month, which would make permanent the TCJA’s individual and small business tax credits. The TCJA’s individual tax cut provisions were enacted temporarily through 2025 in accordance with certain Senate budget rules. Although the TCJA did not receive one Democratic vote, the Tax Reform 2.0 package did clear the House with some bipartisan support.

New Congress, New Tax Cut

"We expect to advance this in the new session of Congress if Republicans maintain control of the House and Senate," Brady, said of the tax cut in an October 26 televised interview. However, President Trump said a couple of days before that a " resolution" would be introduced for the tax cut by the week of October 29.

Democratic lawmakers have been criticizing Trump’s announcement as nothing more than politically-driven rhetoric ahead of the November 6 midterm elections. Several top congressional Democrats have voiced intent to repeal, at least in part, the TCJA enacted last December. While Republicans, on the other hand, want to continue building upon the TCJA’s tax cuts.

"What President Trump is looking at is a 10 percent cut focused on middle-class workers and families…he still believes middle-class families are the ones always in the squeeze," Brady said on October 26. "We’ve been working with the White House and the Treasury on some ideas about how best to do it," he added.

Net Neutral

Trump has predicted that the tax cut will be net neutral. A chief complaint of last year’s tax reform among Democrats is the TCJA estimated $1.4 trillion price tag over a 10-year budget window.

"If you speak to Brady and a group of people, we're putting in a tax reduction of 10 percent, which I think will be a net neutral because we're doing other things, which I don't have to explain now," Trump said. A spokesperson for Brady has reportedly said that cost measures for the tax cut will be addressed once the proposal has been scored.

Looking Ahead

At this time, it is considered likely on Capitol Hill that Republicans will retain control of the Senate, but several predictions continue to float that the GOP will lose its House majority. Republicans would likely need to retain control of both chambers for any chance of approving further individual tax cuts or making permanent those enacted under the TCJA.

Although, the House approved its "Tax Reform 2.0" package last month, which includes measures to make permanent the TCJA’s individual tax cuts and enhance various savings accounts and business innovation, the Senate has showed little interest in taking up the package as a whole before the end of the year. However, consideration of the retirement and savings measure in the lame-duck session remains a possibility.

IRS Commissioner Charles Rettig gave his first speech since being confirmed as the 49th chief of the Service at the American Institute of CPAs (AICPA) November 13 National Tax Conference in Washington, D.C. "You’re going to see things [I do] and go, ‘I can’t believe he did that,’" Rettig said.

IRS Commissioner Charles Rettig gave his first speech since being confirmed as the 49th chief of the Service at the American Institute of CPAs (AICPA) November 13 National Tax Conference in Washington, D.C. "You’re going to see things [I do] and go, ‘I can’t believe he did that,’" Rettig said.

Rettig, nominated by President Donald Trump last February and sworn in as IRS Commissioner on October 1, was a practicing tax attorney for over 30 years. "I’m not going to lose my tax edge," he told CPAs and other tax professionals.

Modernizing the IRS

Rettig, since being confirmed, has maintained that a top priority of the IRS is updating the Service’s technology. "We must work on our IT modernization efforts," Rettig said in a previous statement.

Additionally, Rettig discussed the IRS’s antiquated information technology (IT) systems and software at the AICPA event. "I can call Google…or All State and a recording…says, 'you are 14th in line, we can call you back, you won't lose your place in line," Rettig said. "We don't have those tools, we need those tools."

However, Rettig emphasized that the IRS’s employees should have pride in their roles, and that many IRS challenges are a result of constrained financial resources. IRS employees are "people who care,"Rettig said. Further, Rettig said he wants the IRS to gain taxpayers’ respect.

Additionally, in line with the IRS’s increased efforts toward transparency, Rettig said that employee training materials for last year’s tax reform will soon be posted to the IRS’s website. The Tax Cuts and Jobs Act (TCJA) (P.L. 115-97) was enacted last December. Rettig is tasked with overseeing the new tax law’s implementation.

Tax Reform

A copy of Rettig’s prepared remarks for the AICPA event was provided to Wolters Kluwer by the IRS on November 14. Notably, an IRS spokesperson told Wolters Kluwer that Rettig "did not stick to the script." In an informal outline of areas on which Rettig intends to focus, "the top of the list is continuing to implement the Tax Cuts and Jobs Act, which contains the most sweeping tax changes in 30 years,"Rettig stated in the prepared remarks. "The IRS has already made great progress in this area, but more remains to be done."

IRS Guidance

The IRS is committed to helping taxpayers and tax professionals understand the new tax law changes, as well as file returns next year timely and accurately, Rettig noted. To that end, the IRS will continue to issue guidance this year related to tax reform, according to Rettig. "You can expect additional guidance in the next several weeks in a number of areas," he added, which include TCJA provisions related to the following:

• Opportunity Zones;
• the limitation on the business interest expense deduction; and
• the Base Erosion and Anti-Abuse Tax (BEAT).

Additionally, the IRS will continue to update taxpayer forms and instructions related to new tax law provisions, Rettig noted. "We’re well on our way to having those completed in time for [the 2019] filing season."

The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules.

The American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA) Section of Taxation are urging the IRS to make extensive changes to proposed "transition tax" rules.

Transition Tax

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, revived and amended Code Sec. 965. The new Code Sec. 965 generally requires U.S. shareholders pay a mandatory one-time repatriation "transition" tax on untaxed foreign earnings of certain foreign corporations.

"The Tax Cuts and Jobs Act treats these foreign earnings as repatriated and places a 15.5 percent tax on cash or cash equivalents, and an 8 percent tax on the remaining earnings. Generally, the transition tax can be paid in installments over an eight-year period when a taxpayer files a timely election under section 965(h),"Treasury Secretary Steven Mnuchin said in a statement.

The IRS held an October 22 public hearing on NPRM REG-104226-18, which provides rules for implementing the transition tax created under last year’s tax reform. IRS officials did not provide any feedback at the hearing.

AICPA Recommendations

In an October 31 comment letter to the IRS, the AICPA offered 15 recommendations to provide taxpayers further clarity and guidance on tax reform’s transition tax requirements. The AICPA’s recommendations include the following:

• Clarify that previously taxed earnings (PTI) under Code Sec. 965(b)(4)(A) are deemed included in Code Sec. 951 for purposes of applying Code Sec. 1248(d).
• Clarify that the portion of a Code Sec. 965 inclusion liability attributable to Code Sec. 956 is eligible for the appropriate reduced rate of tax as a consequence of the deduction provided for in Code Sec. 965(c).
• Provide taxpayers with additional flexibility when making the basis adjustment election under Proposed Reg. §1.965-2(f) by including the ability to make partial basis adjustments, elect adjustments on an entity-by-entity basis, and modify the proposed consistency provision on related persons.
• Provide guidance as to the ordering of distributions of PTI between Code Sec. 965(a) PTI and Code Sec. 965(b) PTI for purposes of applying Code Sec. 959(c) and Code Sec. 986(c).
• Provide relief to taxpayers that make or have made late elections under the proposed regulations and clarify the procedure for obtaining such relief.
• Provide that U.S. shareholders that are members of the same consolidated group are treated as a single U.S. shareholder for all purposes with respect to Code Sec. 965.
• Clarify that the PTI amount created under Code Sec. 965(b)(4)(A) is not taken into account under Code Sec. 864(e)(4)(D) for purposes of allocating and apportioning interest expense.
• Exercise the authority under Code Sec. 965(o) to provide relief from the income inclusion to certain affected taxpayers. Specifically, provide guidance excluding a foreign corporation that is considered a controlled foreign corporation (CFC) solely as a result of the "downward attribution" rules of Code Sec. 318(a)(3) from the definition of an specified foreign corporation (SFC) for any U.S. shareholder not considered a related party (within the meaning of Code Sec. 954(d)(3)) with respect to the domestic corporation to which ownership was attributed.
• Provide a carve-out for certain "triggering events" of an S corporation Code Sec. 965(i), such as where the S corporation and relevant shareholders maintain direct or indirect ownership of the transferred assets (e.g., tax-free transfers).
• Provide guidance on the interaction between a Code Sec. 962 election and a Code Sec. 965(i) election, including clarifying that an eligible taxpayer may make a Code Sec. 962 election for a Code Sec. 965 tax liability for which they intend to defer inclusion under Code Sec. 965(i).

ABA Recommendations

Likewise, the ABA made similar recommendations on the proposed regulations and related guidance in an October 29 letter sent to IRS Commissioner Charles Rettig. The ABA’s 80-page letter grouped its principal recommendations into the three categories:

• the application of Code Sec. 965 to passthrough entities (other than S corporations) and individuals;
• the application of the netting of accumulated post-1986 deferred foreign income with deficits in other related entities; and
• issues in applying the foreign tax credit.

Last year’s tax reform created a new Opportunity Zone program, which offers qualifying investors certain tax incentives aimed to spur investment in economically distressed areas. Treasury Secretary Steven Mnuchin has predicted that the Opportunity Zone program will create $100 billion in private capital that will be invested in designated opportunity zones.

Last year’s tax reform created a new Opportunity Zone program, which offers qualifying investors certain tax incentives aimed to spur investment in economically distressed areas. Treasury Secretary Steven Mnuchin has predicted that the Opportunity Zone program will create $100 billion in private capital that will be invested in designated opportunity zones.

The IRS released the much anticipated proposed regulations for the Opportunity Zone program in October ( REG-115420-18). The proposed rules provide "clarity and some good news for taxpayers," Micheal Bernier, partner at Ernst & Young’s National Tax practice, told Wolters Kluwer in an emailed statement.

Opportunity Zones

The Opportunity Zone program was created under the Tax Cuts and Jobs Act ( P.L. 115-97) enacted in December 2017. The TCJA added Code Secs. 1400Z-1 and 1400Z-2, which include procedural rules for designating opportunity zones and provisions allowing qualifying taxpayers to elect certain income tax benefits. Although not a single Democrat voted for the TCJA, the Opportunity Zone program was based on a bipartisan bill sponsored by Sens. Tim Scott, R-S.C., and Cory Booker, D-N.J. The program "creates tax incentives to help stimulate the flow of capital into communities that need opportunity the most," Cory Booker said in an October 29 tweet.

Generally, the proposed rules have been considered on Capitol Hill as leaning favorably toward taxpayers. However, stakeholders and practitioners are reporting that many questions remain. To that end, the Office of Information and Regulatory Affairs (OIRA), housed under the Office of Management and Budget (OMB), has announced that a second package of regulations is expected to be completed by the end of this year.

Qualified Opportunity Funds

The TCJA’s Opportunity Zone program generally established the following investor tax benefits:

• a temporary tax deferral for capital gains realized on the sale of appreciated assets and reinvested within 180 days in a qualified opportunity fund (QOF);
• the elimination of up to 10 or 15 percent of the tax on the capital gain that is invested in the QOF and held between five and seven years; and
• the permanent exclusion of tax when exiting a qualified opportunity fund investment held for at least 10 years.

"Most importantly, taxpayers can use the fund as collateral. This was a surprise and is important," Bernier told Wolters Kluwer. "The type of investments made by Opportunity Funds do have some strings attached, which are designed to make sure the investments are creating economic activity in the Opportunity Zones, not just buying and holding existing assets," he added. "Under an Opportunity Zone structure, if you refinance the property and take cash out of the Opportunity Zone fund, that would be a disposition and would trigger the gain, thus reducing the amount of investment that is eligible for the 10-year deferral."

Real Estate Investors

Additionally, real estate investors stand to receive significant tax advantages through the Opportunity Zone program, according to Bernier. "As collateral, it is possible to borrow against the Opportunity Zone fund, a very important option for real estate investors," he said. "There are a few extra hurdles to using that strategy, but it’s valuable in the real estate world and would be the rough equivalent of a cash-out refinancing."

Additionally, Bernier noted the generous latitude that Treasury and the IRS used in defining certain statutory terms. For example, "‘substantially all’ of owned or leased assets was defined as 70 percent [in the proposed regulations]; this could have been as high as 90 percent or more," Bernier said. Further, "the time allowance for working capital is set at 30 months to deal with cash. This helps in getting the development done," he added.

Too Flexible?

The proposed regulations for the Opportunity Zone program may be too flexible, according to an October article released by the liberal-leaning Urban-Brookings Tax Policy Center (TPC). "Neither the statute nor the guidance ensure that the investments will benefit low- and moderate-income residents of these communities,"the TPC article noted. "The investment flexibility makes it very difficult to evaluate the success of Opportunity Zones."

Additionally, TPC researchers noted the need for proper reporting under the Opportunity Zone program. "The next round of IRS regulations and tax forms is expected to detail those reporting requirements,"the TPC article said. "It will be vital that this disclosure provide the public with the answers to a series of basic questions: Who is investing in Opportunity Zones? How much is being invested? How is the money being used?"

Likewise, the conservative-leaning Tax Foundation noted in an October 23 article that the proposed regulations do nothing to ensure the program’s success. "The benefits given to investors through opportunity funds are remarkably generous, and many of these regulations only increase and widen those benefits without regard to the results," the article said.

Further, stakeholders testifying before the Senate Small Business Committee in early October also emphasized the importance of establishing proper reporting metrics for the program.

Questions Remain

Although stakeholder feedback has been largely positive, stakeholders and practitioners have noted several areas where additional IRS guidance is needed. Particularly, uncertainties surrounding the application of the QOF penalty, tax treatment of the sale of a QOF asset, and clarity on the definition of qualified opportunity zone business property are reportedly among items circulating the tax community as needing further guidance.

After the IRS released the proposed regulations, Sen. Scott praised the guidance while also noting that it is incomplete. "The first set of rules released by the Treasury Department today reinforce that this will not be another bureaucratic process burdened by red tape, but rather a streamlined, efficient process that allows for investments to truly help communities in need," Scott said.

Additionally, Bernier told Wolters Kluwer that future regulations are needed to "fill in gaps." The next package of proposed regulations are "anticipated in November and December, "he added.

To that end, the House’s top tax writer has urged stakeholders in a recent statement to provide feedback on the proposed regulations. Moreover, those comments should include "identifying any areas where additional technical guidance would be valuable in providing certainty to potential investors and project managers," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said.

The IRS is expected to soon release proposed regulations for tax reform’s new business interest limitation. "They are so broad that nearly every domestic taxpayer will be impacted," Daniel G. Strickland, an associate at Eversheds Sutherland, told Wolters Kluwer.

The IRS is expected to soon release proposed regulations for tax reform’s new business interest limitation. "They are so broad that nearly every domestic taxpayer will be impacted," Daniel G. Strickland, an associate at Eversheds Sutherland, told Wolters Kluwer.

The first set of proposed regulations for the Code Sec. 163(j) business interest limitation is expected to focus primarily on corporations. A second package of proposed regulations, expected sometime in December, will reportedly address the business interest limitation’s treatment of partnerships and S corporations.

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), enacted last December, amended Code Sec. 163(j) to include a broader limitation on the business interest expense deduction. Before last year’s tax reform, the former Code Sec. 163(j) "earnings stripping" rules were applied much more narrowly to a specific type of debt-to-equity ratio held by corporations. Now, the amended Code Sec. 163(j)limitation encompasses all debt, regardless of entity or individual. The new business interest limitation was intended by Republicans, at least in part, to serve as a revenue raiser to help offset tax reform’s significant corporate tax rate reduction from 35 to 21 percent.

OMB Review

Currently, the proposed regulations for the Code Sec. 163(j) business interest limitation are under review at the Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA). OIRA received the proposed regulations from Treasury and the IRS on October 25, according to OIRA’s website.

It is expected on Capitol Hill that a 10-day expedited review process that is available for tax reform-related regulations was requested.

Business Interest Limitation

Under the amended Code Sec. 163(j), a taxpayer’s annual business interest expense for the tax year, effective for tax years after December 31, 2017, is limited to the following three factors:

• business interest income;
• 30 percent of adjustable taxable income (ATI); and
• floor plan financing interest.

Under the TCJA, business interest excludes "investment interest" as defined in Code Sec. 163(d). Additionally, the calculation requirements for "adjusted taxable income" are set to change in 2022.

Practitioner Insight

"In terms of statutory language, phrases like ‘properly allocable’ jump off the page,"Strickland told Wolters Kluwer. Under the TCJA, "business interest" is defined as any interest paid or accrued on indebtedness that is properly allocable to a trade or business. It remains to be seen how the IRS will identify what is "properly allocable,"according to Strickland.

"Since propriety differs between taxpayers and the government, it will be interesting to see how the regulations handle it," Strickland said. "Will we get a two-pronged objective and subjective test or will there be a bright line rule?" he posited.

Additionally, Strickland said that tax practitioners expect allocation rules will be included, but noted that it remains unclear what form the rules will take. Whether there will be separate rules for different types of entities and how the IRS will treat allocation between exempt and non-exempt entities and within consolidated groups are all interesting yet unsettled components, according to Strickland.

Further, Strickland predicted that the forthcoming regulations will clarify how Code Sec. 951A’s global intangible low-taxed income (GILTI) provision will interact with Code Sec. 163(j). "In the same vein, I expect that we will see how 163(j) plays with 168(k) and 267A, among other sections," he added. "As we get each new piece of the puzzle, the whole picture comes into focus."

Individuals, trusts, estates, personal service corporations and closely held C corporations may only deduct passive activities losses from passive activity income. The rules do not apply to S corporations and partnerships but do apply to their respective shareholders and partners. In general, limited partners are not deemed to materially participate in partnership activities. Thus, a limited partner's share of partnership income is passive income. However, general partners or acting general partners may hold limited partnership interests and materially participate in the partnership.

Individuals, trusts, estates, personal service corporations and closely held C corporations may only deduct passive activities losses from passive activity income. The rules do not apply to S corporations and partnerships but do apply to their respective shareholders and partners. In general, limited partners are not deemed to materially participate in partnership activities. Thus, a limited partner's share of partnership income is passive income. However, general partners or acting general partners may hold limited partnership interests and materially participate in the partnership.

Closely held C corporations and personal service corporations are treated as materially participating in an activity if shareholders owning 50 percent or more by value of the outstanding stock materially participate in the activity. Closely held C corporations can also satisfy the material participation standard under an alternative rule based on the participation of full-time employees in the activity.

A passive activity is trade or business activity in which the taxpayer does not materially participate. A passive activity is any activity that involves the conduct of a trade or business in which the taxpayer does not materially participate. Passive activities generally include rental activities, regardless of whether the taxpayer materially participates in the activity. A taxpayer's rental real estate activity is not a passive activity, however, if the taxpayer (1) materially participates in the activity, and (2) performs qualifying services in real property trades or businesses. A facts and circumstances test applies in determining whether other activities are combined or treated as separate for purposes of the passive loss rules.

Individuals who own and actively participate in the management of rental real estate may offset up to $25,000 of passive activity loss from rental real estate against active income in any tax year. The offset amount is reduced by 50 percent of the amount by which the taxpayer's adjusted gross income exceeds $100,000, phasing out completely at $150,000 of adjusted gross income. More liberal rules apply to the offset of rehabilitation and low income housing credits.

Deductions and credits that are disallowed under passive activity rules may be carried forward and used as passive activity deductions and credits in succeeding years. Remaining passive activity deductions are deductible against nonpassive income when taxpayer disposes of the passive activity. Passive activity credits may only be applied to taxes on passive income.

A major exception to the definition of a passive activity is a working interest in any oil and gas property that the taxpayer holds directly or through an entity that does not limit the taxpayer's liability for the interest, regardless of whether the taxpayer materially participates in the activity.

A taxpayer's passive activity loss for the tax year is disallowed and is carried forward until the taxpayer has available passive activity income. Passive activity loss is the amount by which passive activity deductions from all passive activities exceed passive activity gross income from all passive activities for the tax year.

For more on passive activity losses, please contact our office.

President Trump on April 26^th, just before his “100 days” in office, unveiled his highly-anticipated tax reform outline –the “2017 Tax Reform for Economic Growth and American Jobs.” The outline calls for dramatic tax cuts and simplification: lower individual tax rates under a three-bracket structure, doubling the standard deduction, and more than halving the corporate tax rate; along with changing the tax treatment of pass-through businesses, expanding child and dependent incentives, and more. Both the alternative minimum tax and the federal estate tax would be eliminated. The White House proposal does not include spending and tax incentives for infrastructure; nor a controversial “border tax.”

President Trump on April 26^th, just before his “100 days” in office, unveiled his highly-anticipated tax reform outline –the “2017 Tax Reform for Economic Growth and American Jobs.” The outline calls for dramatic tax cuts and simplification: lower individual tax rates under a three-bracket structure, doubling the standard deduction, and more than halving the corporate tax rate; along with changing the tax treatment of pass-through businesses, expanding child and dependent incentives, and more. Both the alternative minimum tax and the federal estate tax would be eliminated. The White House proposal does not include spending and tax incentives for infrastructure; nor a controversial “border tax.”

According to White House officials, the President’s proposals set out broad principles with specifics to be hammered-out in coming weeks. Actual “bill language” with details is now expected sometime in June now that the President has thrown his support officially to tax reform.

Individuals

For individuals, the White House proposed consolidating and reducing the tax rates to 10, 25 and 35 percent. Cohn said that no income brackets have yet been developed for the proposed lower rates. The proposal also calls for doubling the standard deduction. "Married couples would have a $24,000 standard deduction," National Economic Council Director Gary Cohn said at a White House briefing. He predicted that doubling the standard deduction would simplify tax filing for millions of Americans.

Along with repealing the federal estate tax, the AMT and the NII tax, the proposal calls for abolishing nearly all individual credits and deductions." The plan eliminates all individual deductions except mortgage interest and charitable deductions," Treasury Secretary Steven Mnuchin has stated. The plan also calls for unspecific tax relief for families with child and dependent care expenses.

The White House plan apparently keeps the current framework for capital gains and dividend taxes. However, it would repeal the 3.8-percent NII tax. "The president looks at [the NII tax] as being a tax on capital," Cohn said.

Businesses

During the campaign, President Trump proposed to reduce the corporate tax rate and cut taxes on small businesses. The plan does both, Cohn and Mnuchin said. The corporate tax rate would fall to 15 percent. "Small and mid-size businesses will be eligible for the 15-percent rate,"  Mnuchin said, referring to partnerships, S corporations and sole proprietorships in which income is currently passed through to their owners at individual income tax rates. "We will make sure that there are mechanisms in place to prevent wealthy people from taking advantage of the rules for small businesses," he added.

The proposal would also move the U.S. to a territorial tax regime. "A territorial system means U.S. companies will pay tax on income related to the U.S.," Mnuchin said. "U.S. companies will not be subject to worldwide income tax," he added.

Not included in the proposal is so-called border adjustability. House Republicans have promoted a border adjustment tax as a way to pay for tax reform. Mnuchin predicted that the president’s plan would "pay for itself" but did not elaborate how. "Lots and lots of details will go into how it will pay for itself. This will pay for itself with growth and closing loopholes," he said.

Another business proposal would provide for a one-time, reduced tax rate on earnings repatriated to the U.S. The White House has not said yet what the rate would be but predicted it would be a "very competitive rate."

All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year.  President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year.  At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.

All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year.  President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year.  At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.

Taxes and spending

Almost immediately after President Obama won re-election, Democrats and Republicans scrambled to stake out their positions over the fiscal cliff.  Unless the White House and the GOP reach an agreement, the Bush-era tax cuts will expire for all taxpayers after 2012 and across-the-board spending cuts will take effect.  Many popular but temporary tax incentives, known as tax extenders, expired after 2011, with many more scheduled to expire after 2012.  The alternative minimum tax (AMT), intended many years ago to apply to wealthy taxpayers, is on track to encroach on more middle income taxpayers because it is not indexed for inflation.  Also, the employee-side payroll tax cut is scheduled to expire after 2012.

Since winning a second term, President Obama has repeated that the Bush-era tax cuts should expire for higher income individuals after 2012.  The top two tax rates would rise to 36 percent and 39.6 percent after 2012. All of the remaining rates would be extended.  Tax rates on capital gains and dividends would also increase for higher income individuals. On the campaign trail, President Obama described higher income taxpayers as individuals with incomes above $200,000 and families with incomes above $250,000. 

President Obama has talked about trimming $4 trillion from the federal budget deficit.  Approximately $1.6 trillion would come from increased taxes on higher income individuals.  To achieve a target of $1.6 trillion in tax revenue, the Bush-era tax cuts could not be extended for higher income individuals.  Other incentives for higher income individuals would likely be curtailed or possibly eliminated under the President’s plan. These include the personal exemption phaseout (PEP) and the Pease limitation on itemized deductions. President Obama may also re-propose his “Buffett Rule,” which, the President has explained, would ensure that individuals making over $1 million a year pay a minimum effective tax rate of at least 30 percent.

The GOP, its majority reduced in the House after the November elections, has offered few details about its plans to avoid the fiscal cliff.  House Speaker John Boehner, R-Ohio, has indicated that the GOP may be open to raising revenue by closing tax loopholes and capping certain unspecified deductions for higher income individuals.  Revenue could also be raised by limiting or abolishing business tax deductions and credits.  Among the business tax incentives most often hinted at for elimination are ones for oil and gas producers. President Obama, however, has said that he will not support a deficit reduction plan that relies on closing undefined tax loopholes.

Possible scenarios

Looking ahead, several scenarios may play out before year-end.  President Obama and the GOP could agree on a tax and deficit reduction package that meets or comes close to the President’s targets.  President Obama and the GOP may agree to extend the Bush-era tax cuts and delay the spending cuts for three or six months to give everyone more time to negotiate a long-term deal.  On the other hand, both sides could fail to reach any agreement before year-end and the Bush-era tax cuts would expire as scheduled.  The spending cuts also would kick-in as scheduled.

Filing season

Whenever Congress changes the tax laws, the IRS has to reprogram its return processing systems.  Tax laws passed late in 2012 have the potential to delay the start of the 2013 filing season depending on how long it takes the IRS to reprogram its systems.

IRS officials have told Congress that they are preparing for late tax legislation, especially legislation on the AMT.  In past years, Congress has routinely “patched” the AMT to shield middle income taxpayers from its reach.  The IRS appears to be anticipating that Congress will patch the AMT for 2012.  If Congress does not, the IRS has warned that the start of the 2013 filing season could be delayed for as many as 60 million taxpayers.

The IRS also must reprogram its processing systems for the tax extenders.  These tax law changes generally do not require the level of reprogramming the AMT patch requires.  The IRS has predicted that any year-end extension of the extenders will be manageable.

Please contact our office if you have any questions about the tax and spending negotiations underway in Washington.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.

Additional tax on higher-income earners

There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.

The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).

Passthrough treatment

For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.

Withholding rules

Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.

Planning techniques

One planning device to minimize the tax  would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.

Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.

If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.