Congressional tax writers set to take up reform proposals
Tax writers in Congress are set to begin debating and writing tax reform legislation. On September 27, the White House and GOP leaders in Congress released a framework for tax reform. The framework sets out broad principles for tax reform, leaving the details to the two tax-writing committees: the House Ways and Means Committee and the Senate Finance Committee. How quickly lawmakers will write and pass tax legislation is unclear. What is clear is that tax reform is definitely one of the top issues on Congress’ Fall agenda.
The GOP framework proposes consolidating the current seven individual tax rates into three: 12, 25 and 35 percent. However, the framework leaves open the possibility of an additional top rate “to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”
For individuals, the GOP framework also proposes to:
• Eliminate the alternative minimum tax
• Roughly double the standard deduction
• Repeal the federal estate tax
• Preserve the home mortgage interest deduction and the deduction for charitable contributions
• Eliminate most other itemized deductions
• Repeal the personal exemption for dependents • Retain tax benefits that encourage work, higher education and retirement security
Family incentives have traditionally garnered bipartisan support in Congress and the GOP framework includes several. The child tax credit, for example, currently phases out when incomes reach certain levels. The GOP framework calls for increasing the income levels for the credit to unspecified amounts. Another proposal would create a new non-refundable $500 credit for non-child dependents. The details would be left to the tax-writing committees.
One pillar of the GOP framework is a corporate tax rate cut. The framework calls for a 20 percent corporate tax rate, down from the current 35 percent rate. Businesses that operate as passthroughs, such as S corporations, would have a maximum tax rate of 25 percent, subject to unspecified limitations to prevent abuses.
Other business proposals include:
• Enhanced expensing
• Limiting the deduction for net interest expenses by C corporations
• Eliminating the Code Sec. 199 deduction
• Preserving the research and development credit and tax preferences for low-income housing
• Reforming certain international taxation rules
After the GOP framework was released, the chairs of the tax writing committees said their committees would begin drafting legislation. The Ways and Means Committee is made up of 24 Republicans and 16 Democrats. Republicans also have a majority on the Senate Finance Committee but only by two votes (14 to 12). This narrow vote margin is likely to influence any tax bill out of the Senate Finance Committee. Our office will keep you posted of developments.
A number of popular but temporary tax incentives have expired. Unless extended, these “extenders” will not be available to taxpayers when they file their 2017 returns in 2018. They include:
• Tax exclusion for canceled mortgage debt
• Mortgage insurance premium deductibility
• Higher education tuition deduction
• Special expensing rules for film, television, and theatrical productions
• Seven-year recovery period for motorsports entertainment complexes
Other tax bills
Several tax-related bills may be taken up by either the House or Senate, including:
• RESPECT Act, passed by the House and waiting for a vote in the Senate, would limit the IRS’s ability to seize assets related to structured transactions
• FY 2018 IRS budget bill, passed by the House and waiting for a vote in Senate, which would fund the IRS for FY 2018 Please contact our office if you have any questions about tax reform, the extenders or other tax bills.
Disaster tax relief unveiled in Congress
As millions of Americans recover from Hurricanes Harvey, Irma and Maria, Congress is debating disaster tax relief. The relief would enhance the casualty loss rules, relax some retirement savings rules, and make other temporary changes to the tax laws, all intended to help victims of these recent disasters. At press time, a package of temporary disaster tax relief measures is pending in the House. The timeline for Senate action, however, is unclear.
In past years, after disasters similar to Hurricanes Harvey, Irma and Maria, Congress passed disaster tax relief measures. After Hurricane Katrina, far-reaching disaster tax relief was passed by Congress, which benefited businesses and individuals. In 2008, lawmakers passed a national disaster tax relief law. However, that law was temporary. After Hurricane Sandy several years ago, disaster tax relief was introduced in Congress but ultimately was not passed. Now, Congress is revisiting disaster tax relief.
Targeted tax relief
The House bill is the Disaster Tax Relief Act of 2017. The bill provides targeted tax relief to victims of Hurricanes Harvey, Irma and Maria. Unlike national disaster tax relief, discussed below, the measures in the House bill are temporary.
Included in the House bill is language to:
• Enhance the deduction for personal casualty losses
• Allow penalty-free access to retirement funds
• Encourage charitable giving
• Provide a tax credit to qualified employers
• Allow taxpayers to use prior year income for EITC and child tax credit
At press time, a similar disaster tax relief bill has not been introduced in the Senate. Reports have surfaced that the Senate Finance Committee may unveil some proposals in the near future. These proposals could mirror some or all of the ones in the House bill.
National disaster tax relief bill
In September, Rep. Bill Pascrell, D-New Jersey, and Rep. Tom Reed, R-New York, introduced the National Disaster Tax Relief Act of 2017. Their bill aims to create disaster tax relief not just for victims of Hurricanes Harvey, Irma and Maria, but victims of all disasters. The lawmakers modeled their 2017 bill on previous national disaster tax relief acts, including the legislation passed in 2008.
Like the House-passed temporary disaster tax relief bill, the National Disaster Tax Relief Act would relax the casualty loss rules. The National Disaster Tax Relief Act would also provide a temporary five-year net operating loss (NOL) carryback for qualified natural disaster losses; allow an affected business taxpayer to deduct certain qualified disaster cleanup expenses; and increase temporarily the limits that an affected business taxpayer could expense for qualifying Code Sec. 179 property.
Please contact our office if you have any questions about disaster tax relief.
IRS exam staffing falls; audit coverage declines
IRS Exam staffing in fiscal year (FY) 2016, the latest tax year with statistics available, reached a 20-year low. As a result, the Treasury Inspector General for Tax Administration (TIGTA) has reported that the IRS undertook fewer audits.
"Examination is a vitally important aspect of maintaining a voluntary tax compliance system because 85 percent of the Gross Tax Gap is comprised of underreported tax on timely filed returns," TIGTA reported. Although hiring increased in FY 2016, it did not make up for recent attrition and retirements, TIGTA found. Examination staffing in FY 2016 reached a 20-year low with 8,847 employees, a decrease of four percent from FY 2015 (9,189 employees) and 23 percent lower than FY 2012 (11,432 employees).
Overall, the number of IRS full-time employees has declined by some 14 percent since FY 2012. The decline in the number of employees is likely to continue, TIGTA predicted. Approximately 22 percent of full-time permanent employees in the IRS are eligible to retire, and the IRS expects this number to increase to 34 percent by 2019, TIGTA found. "Should this loss of staffing be realized, the gap created by the loss of knowledge and experience has the potential to materially affect the administration and enforcement of tax laws," TIGTA reported.
Individuals. TIGTA reported that the IRS examined one of every 143 individual income tax returns in FY 2016. This reflected a 16 percent decline compared to FY 2015 and 30 percent fewer examinations than the five-year high reported in FY 2012. The IRS examined one in 17 returns in FY 2016 with more than $1 million in income, which, according to TIGTA, is a decline of 29 percent compared to FY 2015.
Corporations and S corps. TIGTA found that fewer corporate tax returns were examined during FY 2016 than any year since FY 2004. The number of S corp examinations fell 15 percent from FY 2015 to FY 2016 (one in every 295 S corp returns in FY 2016 compared to one in every 248 S corp returns in FY 2015).
Partnerships. Partnership examinations also declined, TIGTA found. The number of partnership returns examined decreased 24 percent from FY 2015 to 14,645 in FY 2016. "Due to a focus on partnership examinations in FY 2015, one of every 196 returns filed were examined; however, this number decreased to one of every 263 returns being examined in FY 2016," TIGTA reported.
TIGTA Ref. No. 2017-30-072
How Do I? Get a payroll credit for increasing research expenses
IRS Chief Counsel, in generic legal advice (AM-2017-003), recently described when a qualified employer may take into account the payroll tax credit for increasing research activities. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) created the payroll credit aimed at start-ups with little or no income tax liabilities. This tax break allows taxpayers to get the cash benefit of the payroll tax credit sooner as they reduce their payroll tax liability as payroll payments are made, instead of having to wait until the end of the quarter to receive the credit.
A qualified business during a tax year may elect to apply a portion of its research credit against the 6.2 percent payroll tax imposed on the employer’s wage payments to employees. This payroll credit for research expenditures is limited to the lesser of: (a) the research credit for the tax year; (b) $250,000; or (c) the amount of the business credit for the tax year, including the research credit that may be carried forward to the tax year immediately after the election year.
Schedule B. Chief Counsel explained that if an employer is a semiweekly schedule depositor, it must complete Schedule B (Form 941), Report of Tax Liability for Semiweekly Schedule Depositors, and attach it to Form 941. Schedule B is also referred to as Record of Federal Tax Liability (ROFTL) for semiweekly schedule depositors. The IRS uses this information to determine if the employer made its federal employment tax deposits on time. Current Instructions for Schedule B describe the payroll tax credit.
Employers, Chief Counsel explained, know the maximum amount of payroll tax credit potentially available for a quarter at the beginning of the quarter. This is because the return reflecting the payroll tax credit election on Form 6765, Credit for Increasing Research Activities, must have been filed before the quarter begins in which the employer can claim credit. However, the amount of the credit that is allowed for the quarter is limited to the employer Social Security tax on wages paid to the employer's employees during the quarter.
Therefore, as the employer makes payments of wages from the beginning of the quarter for which the payroll tax credit is taken, the employer can take the payroll tax credit into account for purposes of the Schedule B and for purposes of deposit liability on the Form 941 or other employment tax return, provided the employer later files Form 8974, "Qualified Small Business Payroll Tax Credit for Increasing Research Activities," Chief Counsel explained.
Further, the payroll tax credit should be taken against deposit liabilities and reflected on Schedule B as the employer incurs liability for employer Social Security tax on wages paid in the quarter to which it applies, beginning with the first payment of wages in the quarter. "It would be counter to the purpose of the payroll tax credit to allow it as a credit only when the employer files its Form 941 for the quarter claiming the credit and not as the employer is paying wages during the quarter subject to employer Social Security tax," Chief Counsel stated.
Deadline opportunity: The IRS also recently announced that it would allow start-up companies to make the payroll tax credit election on an amended return for the 2016 tax year, but as long as the amended return is filed by December 31, 2017.
FAQ: Can I claim the adoption credit for a foreign adoption?
Yes, however, there are special timing rules for foreign adoptions. These rules differ from the timing rules for domestic adoptions and impact when you may claim qualified adoption expenses.
The Tax Code provides a nonrefundable credit for qualified adoption expenses. The credit is subject to income limitations, which means that some taxpayers may not qualify for it. Generally, the credit covers adoption expenses such as fees, court costs, traveling expenses, and other expenses directly related to the adoption. The
Tax Code also distinguishes between domestic and foreign adoptions. This distinction is important due to timing rules. The IRS has explained that a domestic adoption is the adoption of a U.S. child, an eligible child who is a citizen or resident of the U.S. or its possessions before the adoption effort begins. Qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment, even if the adoption is never finalized and even if an eligible child was never identified.
A foreign adoption is the adoption of an eligible child who is not yet a citizen or resident of the U.S. or its possessions before the adoption effort begins. Qualified adoption expenses paid before and during the year are allowable as a credit for the year when the adoption becomes final.
Let’s look at an example. Julia pays qualified adoption expenses of $2,000 in 2015, $3,000 in 2016 and $4,000 in 2017 related to the adoption of Marisa, who is not a U.S. citizen or resident. The adoption becomes final on September 5, 2017. Because the adoption is foreign and not domestics, Julia may claim all $9,000 in expenses on her 2017 federal income tax return.
After an adoption becomes final, qualified adoption expenses paid during or after the year of finality are allowable as a credit for the year of payment, whether the adoption is foreign or domestic. In our example, Julia pays an additional $1,000 in qualified adoption expenses in 2018. Julia may claim the $1,000 in expenses on her 2018 return.
The adoption credit is just one personal tax preference that could be modified if Congress passes a tax reform bill. Under current law, as described above, there is a distinction between domestic and foreign adoptions. Please contact our office if you have any questions about the adoption credit and how it may help offset the expenses of an adoption, whether domestic or foreign.
October 2017 tax compliance calendar
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of October 2017.
Employers. Semi-weekly depositors must deposit employment taxes for Sept 27–Sept 29.
Employers. Semi-weekly depositors must deposit employment taxes for Sept 30, Oct 1–Oct 3.
Employees who work for tips. Employees who received $20 or more in tips during September must report them to their employer using Form 4070.
Employers. Semi-weekly depositors must deposit employment taxes for Oct 4–Oct 6.
Employers. Semi-weekly depositors must deposit employment taxes for Oct 7–Oct 10.
Individuals. Individuals with automatic 6-month extensions file Form 1040, 1040A, or 1040EZ, and pay any tax, interest, and penalties due.
Corporations. Corporations who had timely requested an automatic six-month extension file calendar year income tax return (Form 1120) and pay any tax, interest and penalties due.
Employers. For those to whom the monthly deposit rule applies, deposit employment taxes and nonpayroll withholding for payments in September.
Employers. Semi-weekly depositors must deposit employment taxes for Oct 11–Oct 13.
Employers. Semi-weekly depositors must deposit employment taxes for Oct 14–Oct 17.
Employers. Semi-weekly depositors must deposit employment taxes for Oct 18–Oct 20.
Employers. Semi-weekly depositors must deposit employment taxes for Oct 21–Oct 24.
Employers. File Form 941 for third quarter of 2017 and deposit or pay any undeposited tax. Pay tax liability in full with timely filed return if less than $2,500. If the tax for the quarter was deposited timely, properly, and in full, deadline to file Form 941 is November 13.
Employers. Deposit federal unemployment tax owed through September if more than $500.
Certain Small Employers. Deposit any undeposited tax if tax liability is $2,500 or more for 2017 but less than $2,500 for the third quarter.
Employers. Semi-weekly depositors must deposit employment taxes for Oct 25–Oct 27.
Employers. Semi-weekly depositors must deposit employment taxes for Oct 28–Oct 31
IRS announces per diem rates for post-September 30 travel
The IRS has announced the special per diem rates that taxpayers may use to reimburse employees for expenses incurred during travel after September 30, 2017. The IRS announces new rates each year around the end of September. New rates. The IRS-approved per diem rate for high-cost areas is $284 (up from $282 for the previous per diem). The IRS-approved per diem rate for all other areas is $191 (up from $189). The rates apply to per diem allowances paid for travel as of October 1, 2017. Within these overall high-low per diem rates: the rate paid for purposes of the meals/incidental expense (M&EI) limitation is $68 for travel to any high-cost locality and $57 for travel to any other locality within CONUS; and the rate for the incidental expenses only deduction remains at $5 per day for post-September 30, 2017 travel (those individuals who do not pay or incur meal expenses for a calendar day of travel away from home may deduct $5 per day for each day away from home). Federal travel regs issued by the General Services Administration (GSA) in 2011 describe “incidental expenses” to generally include fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships. Comment. As in past years, the employee must still substantiate to the payer the elements of time, place, and business purpose. High-cost areas. The latest IRS announcement also contains a list of “high-cost” areas, revised from its list last year: The following localities have been added to the list of high-cost localities: Oakland, California; Lewes, Delaware; Fort Myers, Florida; Hyannis, Massachusetts; Petoskey, Michigan; Portland, Oregon; Vancouver, Washington. The following localities have changed the portion of the year in which they are high-cost localities: Aspen, Colorado; Denver/Aurora, Colorado; Telluride, Colorado; Vail, Colorado; Bar Harbor, Maine; Ocean City, Maryland; Nantucket, Massachusetts; Philadelphia, Pennsylvania; Jamestown/Middletown/Newport, Rhode Island; Jackson/Pinedale, Wyoming. The following localities have been removed from the list of high-cost localities: Sedona, Arizona; Los Angeles, California; Vero Beach, Florida; Kill Devil, North Carolina Effective dates. The new per diem allowances are effective for lodging, meal and incidental expenses, or for meal and incidental expenses only, paid to any employee on or after October 1, 2017, for travel away from home on or after October 1, 2016. For travel during the last three months of the calendar year, a payor must continue to use the same method (per diem method, or high-low method) for an employee as the payor used during the first nine months of the calendar year. The payor may use either the rates and high-cost localities in effect for the first nine months of the calendar year or the updated rates and high-cost localities in effect for the last three months of the calendar year as long as the payor uses the same rates and localities consistently for all employees reimbursed under the high-low method. Notice 2016-58
NTA Olson expresses concern about installment agreements and ability to pay
National Taxpayer Advocate Nina Olson recently expressed concern that many IRS installment agreements are disregarding a taxpayer’s ability to pay and meet his or her basic living expenses and, therefore, set up those installment agreements for failure. Olson highlighted her concerns about installment agreements, which she said are the most popular collection alternative, in a recent blog post. Installment agreements. Many taxpayers can apply for an installment agreement online through the IRS's Online Payment Agreement (OPA) application. Taxpayers who are ineligible for an OPA must either must file Form 9465, Installment Agreement Request, or telephone the IRS. Olson reported that installment agreements are the most widely used collection alternative. According to Olson, taxpayers enter into more than three million installment agreements every year. Comment. The IRS generally charges taxpayers a $225 user fee for entering into installment agreements. The fee is $107 for taxpayers who pay by direct debit from their bank account. Alternatively, the IRS charges a user fee of $149 for taxpayers who apply for an installment agreement through the OPA application process. The fee is $31 for taxpayers who apply the OPA process and pay by direct debit from their bank account. The user fee for low-income taxpayers is $43 but will be reduced to $31 if the taxpayers apply for the agreement through the OPA process and pay by direct debit from their bank account. "Offering installment agreements that are affordable is necessary for promoting future compliance. Offering installment agreements that disregard the taxpayer’s ability to pay and meet his or her basic living expenses would set up such installment agreement for failure, jeopardize the taxpayer's right to privacy and his or her right to a fair and just tax system, in addition to creating compliance rework for the IRS," Olson said. Streamlined agreements. Over 80 percent of installment agreements are “streamlined installment agreements,” Olson reported. The streamlined installment agreement procedure is available for individuals, businesses that owe income taxes, and any business that is out of business regardless of the type of tax owed. Taxpayers with an aggregate unpaid balance of assessment that does not exceed $50,000 are eligible to enter into an installment agreement using the streamlined procedure. That amount does not include penalties and interest. The agreement generally must call for the balance due to be paid within six years. To qualify for the streamlined agreement for amounts owed of $25,001 to $50,000, a taxpayer must agree to make payments via direct debit from a bank account. "With streamlined installment agreements, there is no financial analysis. The IRS simply divides the balance due by 72 or even 84 months. The resulting required monthly payment bears no relationship to what the taxpayer can actually afford to pay,"” Olson said. Comment. According to Olson, the IRS "likes" streamlined installment agreements because they are easy to implement. "Lower graded Customer Service Representatives (CSRs), who have limited training on financial statements, are able to place taxpayers into streamlined installment agreements, ‘saving’ resources," Olson said. However, they are not always in the best interests of the taxpayer involved. www.irs.gov
RS again revises passport certification start date
The IRS has announced on its website that passport certifications to the U.S. State Department are expected to begin in January 2018. Previously, the agency reported that passport certifications would begin this year. Background. The Fixing America’s Surface Transportation Act of 2015 (FAST Act) requires the Treasury Department, upon receiving certification by the IRS that an individual has a seriously delinquent tax debt, to transmit the certification to the State Department for action with respect to denial, revocation, or limitation of a passport for the individual. The FAST Act prohibits the State Department, upon receiving the certification, from issuing a passport except in emergency circumstances or for humanitarian reasons. The FAST Act also requires the State Department to revoke a passport previously issued; but allows a limited passport for return travel to the U.S. Update. The IRS has posted and updated frequently asked questions (FAQs) about passport certification on its website. Initially, the agency reported that certification would begin in 2017. The agency did not explain why the start date has been moved to 2018. www.irs.gov
Projections for 2018 inflation-adjusted tax amounts available
The Tax Code requires that federal income tax brackets and certain other figures be adjusted for inflation annually. Wolters Kluwer has projected the 2018 standard deduction, tax bracket amounts and other inflation-adjusted tax figures based on the relevant inflation data just released by the U.S. Department of Labor (DOL). Comment. These projections reflect current law. Tax reform legislation may change some of these amounts. Inflation-adjusted amounts, however, are expected to be built into any changes as well. Key figures. Key projected inflation-adjusted tax amounts that have increased for 2018 include: The personal exemption for 2018 will rise $100 from its 2017 level, to $4,150. The top 39.6 percent bracket will start at: $480,050 for married joint filers (up from $470,700); $453,350 for heads of household (up from $444,550); $424,950 for unmarried filers (up from $418,400); $240,025 for married separate filers (up from $235,350); and $12,700 for estates and trusts (up $12,500 from 2017). Filers subject to the alternative minimum tax (AMT) will see their exemption amounts increase: $86,200 for married joint filers (up from $84,500); $55,400 for unmarried filers (up from $54,300); $43,100 for married separate filers (up from $42,250); and $24,600 for estates and trusts (up from $24,100). The annual gift tax exclusion will increase from $14,000 to $15,000 per donee in 2018.
Over- and underpayment interest rates remain same for fourth quarter 2017
The IRS has announced that the interest rates on overpayments and underpayments of tax for the calendar quarter beginning October 1, 2017, will remain unchanged. The rates will be: 4 percent for overpayments, other than corporations; 3 percent for overpayments by corporations (except 1.5 percent of the portion of a corporate overpayment exceeding $10,000); 4 percent for underpayments (except large corporations); and 6 percent for large corporate underpayments. Comment. These IRS rates, which are subject to inflation adjustments, have remained at the same levels since April 2016. IR-2017-147
FL - Condominium owners exempt from property taxation
The Florida First District Court of Appeal held that because condominium unit owners were not equitable owners of the underlying land, they were exempt from ad valorem property taxation. Beach Club Towers is a condominium located on Santa Rosa Island in Escambia County. In light of the state supreme court Accardo decision, Escambia County began assessing ad valorem property taxes on the land underlying Beach Club Towers. In response, Beach Club Towers Homeowners Association, Inc. (the Association) filed a complaint seeking, among other things, a declaratory judgment that the land underlying Beach Club Towers is government-owned and not subject to ad valorem taxation, and injunctive relief enjoining the County from treating it differently. The Association alleged that, unlike the lessees in Accardo, its unit owners did not have perpetually-renewable leases. A person may be deemed the owner of property for taxation purposes even without legal title, based on the doctrine of equitable ownership. The trial court concluded that the Association’s members (the unit owners) were required to pay ad valorem property taxes on the land underlying Beach Club Towers because they were equitable owners of the land. The County interpreted Accardo broadly to expand the doctrine of equitable ownership with regard to the property on Santa Rosa Island, taking the position that lessees equitably own property even under those leases that are not perpetually renewable. The court of appeals concluded that this interpretation of Accardo"overreached" and reversed and remanded the case. The outcome of this case turns on who owns the land underlying Beach Club Towers. If Escambia County owns it, then it is exempt from ad valorem taxation and the unit owners would merely be lessees of the land, and the County could tax the unit owners’ leasehold interests only as intangible personal property. If the unit owners own the land, then it is subject to ad valorem property taxes, payable by the unit owners. The court of appeals determined that the subleases involved in this case were not perpetually renewable. Because renewal of each sublease was not automatic, but instead must be renegotiated, Accardo was inapplicable. The court agreed with the Association that the unit owners were not equitable owners of the underlying land. If the land underlying a condominium is not subjected to condominium ownership, it is, by definition, not part of the condominium parcel. Each unit owner’s condominium parcel includes an undivided interest in a leasehold estate in the underlying land, which is exempted from ad valorem property taxation. Beach Club Towers Homeowners Association, Inc., v. Jones, Circuit Court, 1st Judicial Circuit (Florida), No. 1D15-5886, October 11, 2017