The Treasury and IRS have issued guidance on the recent order by President Trump to defer certain employee payroll tax obligations on wages paid from September 1, 2020, through December 31, 2020. Under the guidance:

The Treasury and IRS have issued guidance on the recent order by President Trump to defer certain employee payroll tax obligations on wages paid from September 1, 2020, through December 31, 2020. Under the guidance:

• the due date for the withholding and payment of the employee’s portion of the 6.2-percent old-age, survivors and disability insurance (OASDI) tax (Social Security tax) under Code Sec. 3101(a), and the employee’s portion of the Railroad Retirement Tax Act (RRTA) Tier 1 tax that is attributable to the 6.2-percent Social Security tax under Code Sec. 3201, on applicable wages is postponed until the period beginning on January 1, 2021, and ending on April 30, 2021; and
• the deferred taxes must be withheld and paid from wages and compensation paid between January 1, 2021, and April 30, 2021.

The guidance states that it does not separately postpone the deposit obligation for employee Social Security tax. This is because the deposit obligation does not arise until the tax is withheld, so by postponing the time for withholding the employee Social Security tax, the deposit obligation is delayed by operation of the tax regulations.

7508A Relief
In light of the coronavirus (COVID-19) disaster, President Trump issued a memorandum on August 8, 2020, directing the Treasury Secretary to use his Code Sec. 7508A authority to defer the withholding, deposit, and payment of the employee’s portion of Social Security tax, and the employee’s portion of the RRTA equivalent tax, on wages and compensation paid from September 1, 2020, through December 31, 2020. The deferral is available only for employees whose biweekly, pre-tax pay is less than $4,000, or a similar amount where a different pay period applies.

The Treasury Secretary has determined that employers required to withhold and pay the employee share of the Social Security tax under Code Sec. 3102(a) or the RRTA tax equivalent under Code Sec. 3202(a) are affected by the COVID-19 emergency for purposes of the relief described in the presidential memorandum.

Applicable Wages
The deferral applies to wages under Code Sec. 3121(a) or compensation under Code Sec. 3231(e) paid to an employee on a pay date during the period beginning on September 1, 2020, and ending on December 31, 2020 (collectively "applicable wages"), but only if the amount of wages or compensation paid for a biweekly pay period is less than $4,000, or the equivalent threshold amount with respect to other pay periods.

Applicable wages are determined on a pay period-by-pay period basis. If the amount of wages or compensation payable to an employee for a pay period is less than the corresponding pay period threshold amount, then that amount is considered applicable wages for the pay period. In that case, the relief provided in the guidance applies to the wages or compensation paid to that employee for that pay period, irrespective of the amount of wages or compensation paid to the employee for other pay periods.

Paying Deferred Taxes
An affected employer must withhold and pay the total applicable taxes that it has deferred ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021, on any unpaid deferred taxes.

If necessary, the employer can make arrangements to otherwise collect the total deferred taxes from the employee.

The IRS has released the 2020-2021 special per diem rates. Taxpayers use the per diem rates to substantiate the amount of ordinary and necessary business expenses incurred while traveling away from home. These special per diem rates include the special transportation industry meal and incidental expenses (M&IEs) rates, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Taxpayers using the rates and list of high-cost localities provided in the guidance must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390.

The IRS has released the 2020-2021 special per diem rates. Taxpayers use the per diem rates to substantiate the amount of ordinary and necessary business expenses incurred while traveling away from home. These special per diem rates include the special transportation industry meal and incidental expenses (M&IEs) rates, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Taxpayers using the rates and list of high-cost localities provided in the guidance must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1390.

The guidance is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only, that are paid to any employee on or after October 1, 2020, for travel away from home on or after October 1, 2020. For computing the amount allowable as a deduction for travel away from home, the guidance is effective for M&IEs or for incidental expenses only paid or incurred on or after October 1, 2020.

Transportation Industry Rates
The special M&IE rates for taxpayers in the transportation industry are:

• $66 for any locality of travel in the continental United States (CONUS), and
• $71 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate
The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method
For purposes of the high-low substantiation method, the per diem rates in lieu of the rates described in Notice 2019-55 (the per diem substantiation method) are:

• $292 for travel to any high-cost locality, and
• $198 for travel to any other locality within CONUS.

The amount of these rates that is treated as paid for meals, and the per diem rates in lieu of the rates described in Notice 2019-55 (the M&IE only substantiation method), are:

• $71 for travel to any high-cost locality, and
• $60 for travel to any other locality within CONUS

The guidance provides a list of localities that have a federal per diem rate of $245 or more, and are high-cost localities for a specified portion of the calendar year. The list differs from the high-cost locality list in Notice 2019-55:

• Added to the list: Los Angeles, California; San Diego, California; Gulf Breeze, Florida; Kennebunk/Kittery/Sanford, Maine; Virginia Beach, Virginia.
• Localities that have changed the portion of the year in which they are high-cost localities: Sedona, Arizona; Monterey, California; Santa Barbara, California; District of Columbia; Naples, Florida; Jekyll Island/Brunswick, Georgia; Boston/Cambridge, Massachusetts; Philadelphia, Pennsylvania; Jamestown/Middletown/Newport, Rhode Island; Charleston, South Carolina.
• Removed from the list: Midland/Odessa, Texas; Pecos, Texas.

The Treasury and IRS have issued final regulations that limit the Code Sec. 245A dividends received deduction and the Code Sec. 954(c) exception on distributions supported by certain earnings and profits not subject to the integrated international tax regime created by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Proposed regulations and temporary regulations, issued on June 18, 2019, are adopted and removed, respectively.

The Treasury and IRS have issued final regulations that limit the Code Sec. 245A dividends received deduction and the Code Sec. 954(c) exception on distributions supported by certain earnings and profits not subject to the integrated international tax regime created by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Proposed regulations and temporary regulations, issued on June 18, 2019, are adopted and removed, respectively.

TCJA Provisions
The TCJA transitioned the United States from a primarily deferral-based international system of taxation (i.e., current taxation of subpart F income) to a participation exemption system with immediate taxation of certain offshore earnings. The TCJA introduced:

• the Code Sec. 245A dividends received deduction;
• the Code Sec. 965 transition tax; and
• the global intangible low-taxed income (GILTI) regime under Code Sec. 951A.

The Code Sec. 245A deduction provides a 100-percent deduction to domestic corporations for certain dividends received from a specified foreign corporations (SFC) after December 31, 2017. Earnings and profits generated before the deduction became available are subject to the Code Sec. 965 transition tax on post-1986 earnings and profits.

The GILTI regime subjects certain intangible income of a controlled foreign corporation (CFC) to current taxation, for tax years starting in 2018.

The subpart F regime was retained for tax years starting in 2018. The regime subjects certain earnings of a CFC to current taxation. The regime also provides that dividends received by a CFC, from a related CFC, are not included in the recipient CFC’s income and subject to current tax under subpart F, if certain requirements are met under the Code Sec. 954(c) exception.

Earnings and profits that are previously taxed under the transition tax, or subpart F or GILTI regimes, are treated as being distributed before non-previously taxed earnings and profits, and a distribution of previously taxed earnings and profits (PTEP) is not treated as a distribution of a dividend eligible for the Code Sec. 245A deduction.

Limits on Deduction
The final regulation limit the Code Sec. 245A deduction with respect to a dividend received by a U.S. corporation from certain SFCs so that the deduction is not available for the earnings and profits attributable to base erosion-type income. The final regulations limit the deduction to the portion of the dividend that exceeds the ineligible amount of the dividend. The ineligible amount is the sum of (1) 50 percent of the extraordinary disposition amount, and (2) the extraordinary reduction amount.

An extraordinary disposition is a disposition of an asset by a SFC that:

is outside of the ordinary course of activities to a related party during the disqualified period (between January 1, 2018, and the end of the foreign corporation's last taxable year beginning before January 1, 2018), and
exceeds the lesser of $50 million or 5 percent of the gross value of the SFC’s assets.
The Code Sec. 245A deduction is limited with respect to extraordinary dispositions, because earnings and profits generated in those transactions are not subject to tax under the transition tax, or the GILTI and subpart F regimes and, as a result, are not of the residual type for which the Code Sec. 245A deduction is intended to potentially be available.

Extraordinary reductions result from transfers of CFC stock where:

a controlling Code Sec. 245A shareholder transfers more than 10 percent of its stock of the CFC, or
there is a greater than 10 percent change in the controlling Code Sec. 245A shareholder’s overall ownership of the CFC.
The Code Sec. 245A deduction is limited in connection with extraordinary reductions because the deduction can result in complete avoidance of U.S. tax with respect to subpart F income or tested income that, absent the extraordinary reduction, would have been included in income by the selling U.S. shareholder under the subpart F or GILTI regimes, respectively

The final regulations require taxpayers to compute, track, and report information relevant for determination of extraordinary dispositions and extraordinary reductions. If an SFC is sold and there is no Code Sec. 245A shareholder of the target SFC after the transaction, the extraordinary disposition account of the target SFC is generally eliminated.

A taxpayer may elect to close the tax year of the CFC for all purposes of the Code on the date of an extraordinary reduction. This prevents disallowance of the Code Sec. 245A deduction. Under the election, the CFC’s earnings and profits for the tax year up to the date of the extraordinary reduction are subject to taxation under the subpart F or GILTI regimes in the seller’s hands, while the remaining earnings and profits of the CFC for the year would be subject to taxation under the subpart F or GILTI regimes in the buyer’s hands. The final regulations clarify that there must be agreement between the buyer and seller of the CFC that was subject to the extraordinary reduction for the election to be made.

Limits on Exception
Application of the Code Sec. 954(c)(6) is also limited when portion of a dividend is paid out of an extraordinary disposition account, or when an extraordinary reduction occurs.

The Code Sec. 954(c)(6) exception is limited where its application would otherwise allow earnings and profits that had accrued after December 31, 2017 (the last measurement date for determining the amount of earnings and profits subject to the transition tax), and that was generated by income that had never been tested under the subpart F and GILTI regimes, to inappropriately qualify for an exception to the subpart F regime.

Treasury has issued final and amended regulations on the rules for distributions made by terminated S corporations during the post-termination transition period (PTTP). These regulations apply after an S corporation has become a C corporation.

Treasury has issued final and amended regulations on the rules for distributions made by terminated S corporations during the post-termination transition period (PTTP). These regulations apply after an S corporation has become a C corporation.

Generally, the regulations are applicable as of the date they are published in the Federal Register.

Eligible Terminated S Corporation (ETSC) Under Section 481
In the case of an S election revocation with a retroactive effective date, the revocation may be treated as occurring on the retroactive effective date for ETSC qualification as well.

The treasury department amended Reg. §§1.481-5(b)(2) and (3) so that a corporation may test compliance with the revocation requirement and the shareholder identity requirement on either:

• the date the revocation was made; or
• in the case of a revocation with a retroactive effective date, the date the revocation was effective.

To qualify as an ETSC under Code Sec. 481, a corporation must satisfy the revocation requirement by making a revocation of its S election during the two-year period beginning on December 22. It also must satisfy the shareholder identify requirement that the owners of the stock of the corporation on the date the S election was revoked are the same owners as on December 22, 2017.

The two year period during which an S corporation can revoke its S election ends on December 23. Reg. §1.1362-2(a)(2) provides that Code Sec. 7503 applies where the last day for making a revocation occurs on a Saturday, Sunday, or legal holiday.

No Newcomer Rule
Reg. §1.1377-2(b) applies to a corporation’s taxable years beginning after the date of the publication of final regulations. It eliminates the no-newcomer rule for special treatment under Code Sec. 1371(e)(1) of distributions of money by a corporation with respect to its stock during the PTTP.

In the case of a corporation using the calendar year as its annual accounting period, newcomers are not entitled to receive distributions of the accumulated adjustments account (AAA) before January 1, 2021, unless the corporation chooses to apply Reg. §1.1377-2(b) before January 1, 2021.

The final regulations allow but do not require corporations to apply the final regulations addressing distributions made during the ETSC period to tax years beginning on or before the date that the final regulations are published.

Distributions of Money by ETSC
Reg. §1.1371-1 addresses distributions of money by an ETSC. It provides rules for qualified distributions and distributions where Code Sec. 301 applies during the tax years of the ETSC period, including the tax year in which the ETSC period ends.

Under Reg. §1.1371-2, if an intervening audit PTTP arises, the ETSC period immediately stops. Then, the ETSC period resumes provided that the ETSC’s AAA balance is greater than zero. Otherwise, later distributions by the ETSC are treated in the manner provided in Code Sec. 301(c).

Applicability Dates of the Regulations
A corporation may choose to apply the rules set forth in Reg. §§1.481-5, 1.1371-1, and 1.1371-2 to tax years beginning on or before the date the regulations are published in the Federal Register. In addition, a corporation generally may choose to not apply the no-newcomer rule in Reg. §1.1377-2(b) to tax years beginning on or before publication as long as the three year period described in Code Sec. 6501(a) has not expired.

Final regulations clarify that the amount of the rehabilitation credit for a qualified rehabilitated building (QRB) is determined as a single credit in the year the QRB is placed in service. This is the case even though the credit is allocated ratably over a five-year period. The final regulations adopt without modification proposed regulations released earlier this year ( NPRM REG-124327-19).

Final regulations clarify that the amount of the rehabilitation credit for a qualified rehabilitated building (QRB) is determined as a single credit in the year the QRB is placed in service. This is the case even though the credit is allocated ratably over a five-year period. The final regulations adopt without modification proposed regulations released earlier this year ( NPRM REG-124327-19).

TCJA Changes to Rehabilitation Credit
The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) amended the rehabilitation credit for amounts paid or incurred after 2017. The credit is now claimed ratably over a five-year period that begins in the year the QRB is placed in service. The ratable share for each year is 20 percent of the qualified rehabilitation expenditures (QREs) for the building. However, a transition rule allows certain taxpayers to claim the credit all in one year under pre-TCJA rules if the 24- or 60-month period selected for the substantial rehabilitation test began by June 20, 2018.

Final Rehabilitation Credit Regs Include Coordination Rules and Examples
The amended version of the rehabilitation credit is still determined in the year the QRB is placed in service. This single credit is then claimed ratably over five years. This single-credit approach also applies to the recapture, basis adjustment, and leased property rules. These results are consistent with pre-TCJA law.

To reflect these changes, the final regs provide:

• a general rule for calculating the rehabilitation credit;
• definitions of "ratable share" and "rehabilitation credit determined;"
• a rule coordinating the amended credit with the Code Sec. 50 rules for the investment credit; and
• examples illustrating the interaction of the credit with Code Sec. 50(a) (recapture in case of dispositions, etc.), Code Sec. 50(c) (basis adjustment to investment credit property); and Code Sec. 50(d)(5) (relating to certain leased property when the lessee is treated as owner and subject to an income inclusion requirement).

Effective Date for Rehab Credit Regs
The final regulations apply to tax years beginning on or after the date they are published in the Federal Register. However, taxpayers may apply them to QREs paid or incurred after December 31, 2017, as long as they apply them in their entirety and in a consistent manner.

The IRS has released final regulations that clarify the definition of a "qualifying relative" for purposes of various provisions for tax years 2018 through 2025. These regulations generally affect taxpayers who claim federal income tax benefits that require a taxpayer to have a qualifying relative.

The IRS has released final regulations that clarify the definition of a "qualifying relative" for purposes of various provisions for tax years 2018 through 2025. These regulations generally affect taxpayers who claim federal income tax benefits that require a taxpayer to have a qualifying relative.

Effective Date
These regulations are effective on the date of publication in the Federal Register.

Exemption Amount
On June 9, 2020, the Treasury and the IRS published a notice of proposed rulemaking REG-118997-19. Consistent with Notice 2018-70, the proposed regulations provide that, in determining whether an individual is a qualifying relative for purposes of various provisions that refer to Code Sec. 152 in tax years in which the exemption amount is zero, the Code Sec. 151(d) exemption amount will be the inflation-adjusted Code Sec. 152(d)(1)(B) exemption amount in the annual revenue procedure setting forth inflation-adjusted items that is published in the Internal Revenue Bulletin. Thus, the exemption amount to be used for this purpose is $4,150 for tax year 2018 (section 3.24 of Rev. Proc. 2017-58, 2017- 45 I.R.B. 489, modified and superseded by Rev. Proc. 2018-18, 2018-10 I.R.B. 392); $4,200 for tax year 2019 (section 3.25 of Rev. Proc. 2018-57, 2018-49 I.R.B. 827); and $4,300 for tax year 2020 (section 3.25 of Rev. Proc. 2019-44, 2019-47 I.R.B. 1093).

The IRS has announced that Medicaid coverage of Coronavirus Disease 2019 (COVID-19) testing and diagnostic services is not minimum essential coverage for purposes of the premium tax credit under Code Sec. 36B.

The IRS has announced that Medicaid coverage of Coronavirus Disease 2019 (COVID-19) testing and diagnostic services is not minimum essential coverage for purposes of the premium tax credit under Code Sec. 36B.

Under the Affordable Care Act (ACA), certain taxpayers who obtain their coverage through an Exchange may claim a premium tax credit under Code Sec. 36B. However, taxpayers are only allowed the credit for months they are not otherwise eligible for minimum essential coverage.

Minimum essential coverage includes coverage under government-sponsored programs, including Medicaid, but certain health care coverage providing limited benefits is exempted.

The Treasury Department and the IRS have determined that Medicaid coverage limited to COVID-19 testing and diagnostic services is not minimum essential coverage under a government-sponsored program. Thus, an individual’s eligibility for this coverage for one or more months does not prevent the individual from claiming the premium tax credit under Code Sec. 36B.

The IRS has released guidance in the form of questions and answers with respect to certain provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and the Bipartisan American Miners Act of 2019 (Miners Act).

The IRS has released guidance in the form of questions and answers with respect to certain provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and the Bipartisan American Miners Act of 2019 (Miners Act).

Business Credit
The SECURE ACT added a new Code Sec 45T, which provides a business credit to an eligible employer that establishes an eligible automatic contribution arrangement under a qualified employer plan. The credit is equal to $500 per year and applies to tax years beginning after December 31, 2019.

The notice clarifies than an eligible employer can only receive a credit during a single three year credit period. For example, if Employer X includes an automatic contribution arrangement for Plan A during 2021, 2022, and 2023 and then includes an automatic contribution arrangement for Plan B during 2022, 2023, and 2024, they can receive no more than $500 as a credit for 2021, 2022, and 2023, and are not permitted to receive a credit for 2024. The employer must include the same arrangement in the same plan for years two and three.

The credit applies separately to each eligible employer that participates in a multiple employer plan.

IRA Contribution Age Limit
Prior to the SECURE Act, an individual was not permitted to make contributions to their IRA if they were age 70 and 1/2 or older by the last day of the year. The SECURE Act eliminated that age limit for contributions after 2019.

The notice clarifies that a financial institution is not required to accept contributions after age 70 and 1/2, but if it does choose to accept them, it must amend its IRA contract and distribute a copy of the amendment and disclosure statement to each individual.

Individuals are not permitted to offset the amount of their required minimum distribution by the amount of their post-age 70 and 1/2 contributions for the same year.

Individuals are able to take their required minimum distributions as qualified charitable distributions. The example below illustrates how this would interact with the new lack of age limit on contributions.

Imagine Bob is over 70 and a 1/2 before 2020. He deducts $5,000 for contributions for 2020 and 2021, but makes no contribution for 2022. He makes no qualified charitable distributions for 2020 and makes qualified charitable distributions of $6,000 for 2021 and $6,500 for 2022. Bob’s excludable amount of qualified charitable distributions for 2021 is the $6,000 of qualified charitable distributions reduced by the $10,000 aggregate amount of post-age 70 1/2 contributions for 2021 and earlier taxable years. For this individual, these amounts are $5,000 for each of 2020 and 2021, resulting in no excludable amount of qualified charitable distributions for 2021 (that is, $6,000 - $10,000 = ($4,000)). The excludable amount of the qualified charitable distributions for 2022 is $2,500 ($6,500 - $4,000 = $2,500). Because the $4,000 amount reduced the excludable amount of qualified charitable distributions for 2022, that $4,000 amount does not apply again in later years, and no amount of post-age 70 1/2 contributions remains to reduce the excludable amount of qualified charitable distributions for subsequent taxable years.

Qualified Birth or Adoption Distributions
Code Sec. 72(t)(1) generally imposes a 10 percent additional tax on an early distribution from a qualified retirement plan (including an IRA or Roth IRA), unless the distribution qualifies for an exception. The SECURE Act provides a new exception to the 10 percent penalty for any qualified birth or adoption distribution up to $5,000 from an applicable retirement plan if made during the 1-year period beginning on the date on which the child is born or the adoption is finalized. The parent must include the name, age and the Taxpayer Identification Number of the child on their tax return the year the distribution is made.

The distribution can be made from any eligible retirement plan described in Code Sec. 402(c)(8)(B), other than a defined benefit plan. Therefore, a Code Sec. 401(a) qualified defined contribution plan, a Code Sec. 403(a) annuity plan, a Code Sec. 403(b) annuity contract, a governmental Code Sec. 457(b) plan, or an IRA is eligible to permit a qualified birth or adoption distribution. Eligible adoptees include any individual who has not attained age 18 or is physically or mentally incapable of self support as defined in Code Sec. 72(m)(7), but does not include an individual who is a child of the taxpayer’s spouse. Each parent can receive a qualified distribution up to $5,000 with respect to the same adoptee, and can receive multiple distributions if they have multiple births (ex. Twins or triplets).

Eligible retirement plans are not required to permit distributions for qualified birth or adoption distributions, but if they do not, individuals can still take the distribution and treat it as a qualified birth or adoption distribution on their federal tax return. Plans must accept recontribution of the distribution, if the following apply:

(a) the plan permits qualified birth or adoption distributions;

(b) the individual received a qualified birth or adoption distribution from that plan; and

(c) the individual is eligible to make a rollover contribution to that plan at the time the individual wishes to recontribute the qualified birth or adoption distribution to the plan.

Qualified birth or adoption distributions are not treated as eligible rollover distributions for purposes of the direct rollover rules, Code Sec. 402(f) notice requirements, and the mandatory withholding rules.

Difficulty of Care Payments
Code Sec. 408(o) provides that designated nondeductible contributions may be made on behalf of an individual to an IRA. A difficulty of care payment is a type of qualified foster care payment that is excludable from gross income.

The notice clarifies that difficulty of care payments received by an employee from a person other than his or her employer are not included as compensation. If an employer does not make difficulty of care payments, then the plan does not need to amend the plan to include the payments in the plan’s definition of compensation. However, if the employer begins to make difficulty of care payments, the plan must be amended.

Participation Rights Expanded for Part-Time Employees
Prior to the SECURE Act, employers that maintained a 401(k) plan were not required to offer it to part-time employees who work less than 1,000 hours per year. The rules require only that employers offer the plan to any employee who has both attained age 21 and has completed at least one year of service. A "year of service" is defined as a 12-month period during which the employee has worked at least 1,000 hours. Someone who works a bare 1,000 hours would be averaging 19.2 hours per week.

Under the SECURE Act, employers with 401(k) plans must offer employees who work between 500 and 1000 hours year an additional track to 401(k) participation. Employees must be able to satisfy participation requirements by completing either:

• the existing one year of service requirement, working at least 1,000-hours, or
• the new three consecutive 12-month periods of service requirement working at least 500 hours in each period.

The three-consecutive-years-of-service track is not available for an employee unless the employee reaches age 21 by the close of the last of the 12-month periods.

For purposes of determining vesting rights to employer contributions for 500-hour track employees, each 12-month period for which the employee has at least 500 hours of service is treated as a year of service. For purposes of the break-in-service rules, a 1-year break in service includes a year in which the employee has not completed at least 500 hours of service.

These amendments apply to plan years beginning after December 31, 2020, except that 12-month periods beginning before January 1, 2021, are not taken into account. The IRS guidance clarifies that this exception does not extend to the special vesting rules.

Plan Amendments
The deadlines to amend a retirement plan for provisions of the SECURE Act, the regulations thereunder, or Act Sec. 104 of the Miners Act are as follows. Note these amendment deadlines apply to both required and discretionary plan amendments.

• Qualified plans. For a qualified plan that is not a governmental plan or an applicable collectively bargained plan, the deadline is the last day of the first plan year beginning on or after January 1, 2022. The plan amendment deadline for a qualified governmental plan or for an applicable collectively bargained plan is the last day of the first plan year beginning on or after January 1, 2024. A plan sponsor may amend its plan after these dates, but they are not entitled to anti-cutback relief.
  
• Section 403(b) plans. The deadline for a Code Sec. 403(b) plan that is not maintained by a public school is the last day of the first plan year beginning on or after January 1, 2022. The deadline is for a plan maintained by a public school is the last day of the first plan year beginning on or after January 1, 2024. A plan sponsor may amend its plan after these dates, but they are not entitled to anti-cutback relief.
  
• Code Sec. 457(b) governmental plans. The deadline is the later of (i) the last day of the first plan year beginning on or after January 1, 2024, or (ii) if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the Secretary that the plan was administered in a manner that is inconsistent with the requirements of Code Sec. 457(b).
  
• IRAs. The deadline to amend the trust governing an IRA is December 31, 2022, or such later date as the Secretary prescribes in guidance. In the case of a deemed IRA, the deadline is the deadline applicable to the plan under which the deemed IRA is established.

Reduction in Minimum Age for In-Service Distributions
A qualified pension plan cannot make distributions to an employee who is still in-service (that is, working for the employer) prior to a certain age. The Miners Act lowered the minimum age from age 62 to age 59 1/2. Similarly, the Miners Act changed the rule for an eligible government deferred compensation plans under Code Sec. 457(b), reducing the minimum age to the calendar year the participant turns age 70 1/2 to age 59 1/2. These amendments apply to plan years beginning after December 31, 2019.

IRS guidance clarifies that neither a qualified plan nor a Code Sec. 457(b) governmental plan is required to provide for in-service distributions due to changes in the Miners Act. For example, a qualified plan that provides for in-service distributions commencing at age 62 is not required to be amended to provide for in-service distributions commencing at age 59 1/2. Also, the guidance clarifies that a change in the in-service distribution minimum age does not necessarily affect the plan’s existing normal retirement age.

Final regulations provide additional guidance on the base erosion and anti-abuse tax (BEAT) under Code Sec. 59A. The regulations also address certain aspects of the BEAT under Code Secs. 1502 and 6031.

Final regulations provide additional guidance on the base erosion and anti-abuse tax (BEAT) under Code Sec. 59A. The regulations also address certain aspects of the BEAT under Code Secs. 1502 and 6031.

The final regulations retain the basic approach and structure of the 2018 proposed regulations ( NPRM REG-112607-19), with certain revisions. The final regulations generally provide rules addressing the following:

• the determination of a taxpayer’s aggregate group for purposes of determining gross receipts and the base erosion percentage;
• an election to waive deductions for purposes of the BEAT;
• the application of the BEAT to partnerships; and
• the anti-abuse rule provided in Reg. §1.59A-9(b)(4) with respect to certain basis step-up transactions.

Determination of Taxpayer’s Aggregate Group
The final regulations provide guidance regarding how a taxpayer determines its aggregate group. Specifically, rules are provided for the calculation of gross receipts and the base erosion percentage when either the taxpayer or a member of the taxpayer’s aggregate group has a short tax year. The final regulations generally retain the rule in the 2018 proposed regulations that permits the use of a reasonable approach to determine whether a taxpayer’s aggregate group meets the gross receipts test and base erosion percentage test with respect to a short tax year of the taxpayer. The final rules provide examples of methods that may or may not constitute a reasonable approach.

In addition, the final regulations provide guidance on how the gross receipts and the base erosion percentage of an aggregate group are determined when members join or leave a taxpayer’s aggregate group, such as through a sale of the stock of a member to a third party. Clarification is provided regarding the close of the tax year rule for determining gross receipts and base erosion percentage. The final rules also address concerns regarding over-and under-counting of gross receipts of aggregate group members with different tax years.

Finally, guidance is provided on the application of the aggregate group rules to predecessors and successors.

Election to Waive Allowable Deductions
The final regulations address the election to waive allowable deduction and more specifically:

• when a taxpayer is eligible to make the BEAT waiver election;
• the effect of the BEAT waiver election on the base erosion percentage (whether deductions
• waived pursuant to the BEAT waiver election should be included in the denominator of the base erosion percentage);
• a reduction of waived deductions during audit or on an amended return;
• a waiver of life and non-life reinsurance premiums;
• procedures for making the BEAT waiver election;
• the application of the BEAT waiver election to partnerships;
• the application of the BEAT waiver election to consolidated groups; and
• the interaction of the BEAT waiver election with other regulations.

Application of the BEAT to Partnerships
The final regulations expand the ECI exception to apply to certain partnership transactions. The regulations also clarify the treatment of curative allocations and the partnership anti-abuse rule for derivatives.

Anti-abuse Rules of Reg. §1.59A-9 for Basis Step-up Transactions
The anti-abuse rule of Reg. §1.59A-9 is revised to address concerns about the breadth of this rule and its potential to create a "cliff effect," whereby a minimal amount of pre-transaction basis step-up could disqualify an entire transaction that would have otherwise qualified for the specified nonrecognition transaction exception.

Possible Future Guidance Concerning the QDP Reporting Requirements
The IRS is currently studying the interaction of the QDP exception, the BEAT netting rule in Reg. §1.59A-2(e)(3)(iv), and the QDP reporting requirements in Reg. §1.59A-6 and Reg. §1.6038A-2(b)(7)(ix) and considering whether future guidance may be appropriate.

Applicability Date
The final regulations generally apply to tax years beginning on or after the date they are published in Federal Register. Certain rules apply to tax years ending on or after December 2, 2019. However, taxpayers may apply these final regulations in their entirety for tax years beginning after December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply these regulations in their entirety for all subsequent tax years. Alternatively, taxpayers may apply only Reg. §§1.59A-3(c)(5) and (6) for tax years beginning after December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply them in their entirety for all subsequent tax years. Taxpayers may also rely on Proposed Reg. §§1.59A-2(c)(2)(ii) and (c)(4) through (c)(6), and 1.59A-3(c)(5) and (c)(6) in their entirety for tax years beginning after December 31, 2017, and before the date of publication of these final regulations in the Federal Register.

You have just been notified that your tax return is going to be audited ... what now? While the best defense is always a good offense (translation: take steps to avoid an audit in the first place), in the event the IRS does come knocking on your door, here are some basic guidelines you can follow to increase the chances that you will come out of your audit unscathed.

You have just been notified that your tax return is going to be audited ... what now? While the best defense is always a good offense (translation: take steps to avoid an audit in the first place), in the event the IRS does come knocking on your door, here are some basic guidelines you can follow to increase the chances that you will come out of your audit unscathed.

Relax. It is a normal reaction upon receiving notice of an audit to panic and feel particularly singled out, however, as in most situations, panic can be counterproductive. A better course of action is to contact an experienced professional to get additional guidance as to how best to proceed to prepare for the audit as well as to get reassurance that everything will be fine.

Be professional. In the event that you have any type of communication with the IRS prior to your audit -- written or verbal, it's important that you act in a professional, business-like manner. Verbally abusing the auditor or becoming defensive is not a good way to start off your relationship with him or her.

Organization is very important. Before the audit, take the time to gather all of your documents together and consider how they will be presented. While throwing them all into a box in a haphazard fashion is certainly one way to present your documents to your auditor, this method will also be sure to raise at least one eyebrow ... and encourage him or her to dig deeper.

As you gather your data, you may need to re-create records if no longer available. This may involve calls to charities, medical offices, the DMV, etc., to obtain the written documentation required for verification of deductions claimed. Once you are confident that you have all of the necessary documentation, organize it in a binder, separated by category as shown on your return. This will allow quick and easy access to these records during the actual audit, something that the auditor will appreciate and will give him/her the impression that you are organized and thorough.

Leave the face to face to a professional. Make sure that you retain the services of a tax professional, most likely the person who prepared your return. Having a tax professional appear on your behalf for your audit is beneficial in a number of ways.

• A tax professional is emotionally detached from the return and less likely to become angry or defensive if questioned.
• A tax professional can serve as a "buffer" between you and the IRS -- indicating that he/she will need to get back to the auditor on certain issues, can buy you extra time to prepare for an issue raised you didn't consider.
• A tax professional can keep an auditor on track, making sure all inquiries are relevant to the return areas being audited.

If you disagree, appeal. If you disagree with the outcome of the audit, you still have the right to send your case to the IRS Appeals division for review. Appeals officers are usually more experienced than auditors and are more likely to negotiate with you, if necessary.

As for the "best defense is a good offense" comment? In this case, this old adage applies to how you approach the tax return preparation process throughout the year, year-in and year-out.

• Good recordkeeping is key. Maintaining complete and accurate records throughout the year reduces the chance that you will forget to provide important information to your tax preparer, which can increase your chances of audit. Good recordkeeping will also result in a more relaxed reaction to notification of an audit as most of your upfront audit work will be complete -- this is especially true if you audit pertains to a tax year several years in the past! Tax records should be retained for at least 3 years after the filing date.
• Provide ALL relevant information to your tax preparer. When your tax preparer is fully informed of all tax-related events that occurring during the year, the chances for errors or omissions on your return dramatically decrease.
• Keep a low profile. Error-free, complete tax returns that are filed in a timely manner don't have the tendency to raise any of those infamous "red flags" with the IRS. During the year, if the IRS does send you correspondence, it should be responded to immediately and fully. Don't hesitate to retain professional assistance to help you "fly under the radar".

While the odds of your tax return being audited remain very low, it does happen to even the most diligent taxpayers. If you are contacted about an examination by the IRS, take a deep breath, relax and contact the office as soon as possible for additional assistance and guidance.

Employers are required by the Internal Revenue Code to calculate, withhold, and deposit with the IRS all federal employment taxes related to wages paid to employees. Failure to comply with these requirements can find certain "responsible persons" held personally liable. Who is a responsible person for purposes of employment tax obligations? The broad interpretation defined by the courts and the IRS may surprise you.

Employers are required by the Internal Revenue Code to calculate, withhold, and deposit with the IRS all federal employment taxes related to wages paid to employees. Failure to comply with these requirements can find certain "responsible persons" held personally liable. Who is a responsible person for purposes of employment tax obligations? The broad interpretation defined by the courts and the IRS may surprise you.

Employer's responsibility regarding employment taxes

Employment taxes such as federal income tax, social security (FICA) tax, unemployment (FUTA) tax and various state taxes (note that state issues are not addressed in this article) are all required to be withheld from an employee's wages. Wages are defined in the Code and the accompanying IRS regulations as all remuneration for services performed by an employee for an employer, including the value of remuneration, such as benefits, paid in any form other than cash. The employer is responsible for depositing withheld taxes (along with related employer taxes) with the IRS in a timely manner.

100% penalty for non-compliance

Although the employer entity is required by law to withhold and pay over employment taxes, the penalty provisions of the Code are enforceable against any responsible person who willfully fails to withhold, account for, or pay over withholding tax to the government. The trust fund recovery penalty -- equal to 100% of the tax not withheld and/or paid over -- is a collection device that is normally assessed only if the tax can't be collected from the employer entity itself. Once assessed, however, this steep penalty becomes a personal liability of the responsible person(s) that can wreak havoc on their personal financial situation -- even personal bankruptcy is not an "out" as this penalty is not dischargeable in bankruptcy.

A corporation, partnership, limited liability or other form of doing business won't insulate a "responsible person" from this obligation. But who is a responsible person for purposes of withholding and paying over employment taxes, and ultimately the possible resulting penalty for noncompliance? Also, what constitutes "willful failure to pay and/or withhold"? To give you a better understanding of your potential liability as an employer or employee, these questions are addressed below.

Who are "responsible persons"?

Typically, the types of individuals who are deemed "responsible persons" for purposes of the employment tax withholding and payment are corporate officers or employees whose job description includes managing and paying employment taxes on behalf of the employer entity.

However, the type of responsibility targeted by the Code and regulations includes familiarity with and/or control over functions that are involved in the collection and deposit of employment taxes. Unfortunately for potential targets, Internal Revenue Code Section 6672 doesn't define the term, and the courts and the IRS have not formulated a specific rule that can be applied to determine who is or is not a "responsible person." Recent cases have found the courts ruling both ways, with the IRS generally applying a broad, comprehensive standard.

A Texas district court, for example, looked at the duties performed by an executive -- and rejected her argument that responsibility should only be assigned to the person with the greatest control over the taxes. Responsibility was not limited to the person with the most authority -- it could be assigned to any number of people so long as they all had sufficient knowledge and capability.

The Fifth Circuit Court of Appeals has delineated six nonexclusive factors to determine responsibility for purposes of the penalty: whether the person: (1) is an officer or member of the board of directors; (2) owns a substantial amount of stock in the company; (3) manages the day-to-day operations of the business; (4) has the authority to hire or fire employees; (5) makes decisions as to the disbursement of funds and payment of creditors; and (6) possesses the authority to sign company checks. No one factor is dispositive, according to the court, but it is clear that the court looks to the individual's authority; what he or she could do, not what he or she actually did -- or knew.

The Ninth Circuit recently cited similar factors, holding that whether an individual had knowledge that the taxes were unpaid was irrelevant; instead, said the court, responsibility is a matter of status, duty, and authority, not knowledge. Agreeing with the Texas district court, above, the court held that the penalty provision of Code section 6672 doesn't confine liability for unpaid taxes to the single officer with the greatest control or authority over corporate affairs.

Suffice it to say that, under the various courts' interpretations -- or that of the IRS -- many corporate managers and officers who are neither assigned nor assume any actual responsibility for the regular withholding, collection or deposit of federal employment taxes would be surprised to find that they could be responsible for taxes that should have been paid over by the employer entity but weren't.

What constitutes "willful failure" to comply?

Once it has been established that an individual qualifies as a responsible person, he must also be found to have acted willfully in failing to withhold and pay the taxes. Although it may be easier to establish the ingredients for "responsibility," some courts have focused on the requirement that the individual's failure be willful, relying on various means to divine his or her intent.

An Arizona district court, for example, found that a retired company owner who had turned over the operation of his business to his children while maintaining only consultant status was indeed a responsible person -- but concluded that his past actions indicated that he did not willfully cause the nonpayment of the company's employment taxes. Since he had loaned money to the company in the past when necessary, his inaction with respect to the taxes suggested that he believed the company was meeting its obligations and the taxes were being paid.

A Texas district court found willfulness where an officer of a bankrupt company knew that the taxes were due but paid other creditors instead.

The Fifth Circuit has determined that the willfulness inquiry is the critical factor in most penalty cases, and that it requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent. "A responsible person acts willfully if [s]he knows the taxes are due but uses corporate funds to pay other creditors, or if [s]he recklessly disregards the risk that the taxes may not be remitted to the government, or if, learning of the underpayment of taxes fails to use later-acquired available funds to pay the obligation.

Planning ahead

Is there any way for those with access to the inner workings of an employer's finances or tax responsibilities -- but without actual responsibility or knowledge of employment tax matters -- to protect themselves from the "responsible person" penalty? It may depend on which jurisdiction you're in -- although a survey of the courts suggests most are more willing than not to find liability. Otherwise, the wisest course may be to enter into an employment contract that carefully delineates and separates the duties and responsibilities -- and the expected scope of knowledge -- of an individual who might find himself with the dubious distinction of being responsible for a distinctly unexpected and undesirable drain on his finances.

The laws and requirements related to employment taxes can be complex and confusing with steep penalties for non-compliance. For additional assistance with your employment related tax issues, please contact the office for additional guidance.

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

A. Small business owners have long adhered to the practice of hiring family members to help them run their businesses -- results have ranged from very rewarding to absolutely disastrous. From a purely financial aspect, however, it is very important for you as a business owner to consider the tax advantages and potential pitfalls of hiring -- or continuing to employ -- family members in your small business.

Keeping it all in the family

Pay your family -- not Uncle Sam. Hiring family members can be a way of keeping more of your business income available for you and your family. The business gets a deduction for the wages paid -- as long as the family members are performing actual services in exchange for the compensation that they are receiving. This is true even though the family member will have to include the compensation received in income.

Some of the major tax advantages that often can be achieved through hiring a family member -- in this case, your spouse -- include:

Health insurance deduction. If you are self-employed and hire your spouse as a bona fide employee, your spouse -- as one of your employees -- can be given full health insurance coverage for all family members, including you as the business owner. This will convert the family health insurance premiums into a 100% deductible expense.

Company retirement plan participation. You may be able to deduct contributions made on behalf of your spouse to a company sponsored retirement plan if they are employees. The tax rules involved to put family members into your businesses retirement plan are quite complex, however, and generally require you to give equal treatment to all employees, whether or not related.

Travel expenses. If your spouse is an employee, you may be able to deduct the costs attributable to her or him accompanying you on business travel if both of you perform a legitimate business function while travelling.

IRA contributions. Paying your spouse a salary may enable them to make deductible IRA contributions based on the earned income that they receive, or Roth contributions that will accumulate tax-free for eventual tax-free distribution.

"Reasonable compensation"

In order for a business owner to realize any of the advantages connected with the hiring family members as discussed above, it is imperative for the family member to have engaged in bona fide work that merits the compensation being paid. Because this area has such a high potential for abuse, it's definitely a hot issue with the IRS. If compensation paid to a family member is deemed excessive, payments may be reclassified as gifts or as a means of equalizing payments to shareholders.

As you decide on how much to pay your spouse working in your business, keep in mind the reasonable compensation issue. Consider the going market rate for the work that is being done and pay accordingly. This conservative approach could save you money and headaches in the event of an audit by the IRS.

Hiring your spouse can be a rewarding and cost effective solution for your small business. However, in order to get the maximum benefit from such an arrangement, proper planning should be done. For additional guidance, please feel free to contact the office.

Q. Each year when it comes time to prepare my return, I realize how little I think about my tax situation during the rest of the year. I seem to lack any sort of common sense when it comes to dealing with my taxes. Do you have any general advice for people like me trying to "do the right thing" in any tax situation that may arise during the year?

Q. Each year when it comes time to prepare my return, I realize how little I think about my tax situation during the rest of the year. I seem to lack any sort of common sense when it comes to dealing with my taxes. Do you have any general advice for people like me trying to "do the right thing" in any tax situation that may arise during the year?

A. Unfortunately, you're not alone in your "seasonal" approach to considering your tax situation. Many people have a once-a-year relationship with their tax professional, which can result in the improper handling of important tax documents and sometimes-costly financial decisions. When it comes to handling your tax situation during the year, you will find that a little common sense will go a long way.

Here are some general common sense tips to handling all things tax-related pre- tax season and during the "off-season":

Don't assume all your tax paperwork is correct. Check Forms W-2s and 1099s for accuracy. Many W-2s and 1099s are prepared by data processing companies that merely process your tax information as raw data. Mistakes have been known to occur. Although your employer or financial institution should be checking these forms for accuracy, it's a good idea to double-check these forms against payroll stubs and monthly statements from the payer. If you find a discrepancy, notify your employer as soon as possible to the error corrected and reported to the appropriate taxing authorities.

Gather possible ALL relevant tax documents for your tax preparation. Don't avoid taking legitimate deductions out of fear of "raising red flags" that may cause your return to be audited. Filing a complete and accurate return is required and is your best defense against an audit.

Don't make decisions solely on potential "tax breaks". All good investment or business decisions should be able to stand on their own before tax breaks are considered. A change in the tax law can be disastrous (and costly) when you are stuck in an affected investment (can you say "abusive tax shelter"?).

Seek planning advice from a tax professional. Probably the best investment decision you can make is to seek out the services of your tax professional. In most cases, the amount you are charged for good tax advice is a fraction of the resulting tax savings.

Consult with a tax professional before responding to IRS notices. If you receive a notice from the IRS (or any taxing authority) do not automatically assume that it is accurate and mail them a check. Many notices are inaccurate or merely require additional explanation. Tax professionals have the knowledge and experience to recognize areas where additional explanation or documentation may reduce or eliminate the assessment stated on the notice.

If audited, consider your appeal rights. Although the IRS auditor may not bring it to your attention, the end of an audit is be no means the end of the road for your tax case. Appealing an audit decision can many times put your case in front of a more experienced agent who may better understand the issues and your position on them.

Taking a little time during the year to consider your tax situation and invoke a little common sense can pay off with substantial tax savings and the avoidance of unnecessary expenditures. If you need any additional assistance throughout the year, please do not hesitate to contact the office for guidance.

All of us will, at one time or another, incur financial losses - whether insubstantial or quite significant -- in our business and personal lives. When business fortunes head South -- either temporarily or in a more prolonged slide, it is important to be aware of how the tax law can limit the actual amount of your losses and your ability to deduct them. Here are some of the types of losses your business may experience and the related tax considerations to keep in mind in the event of a business downturn.

All of us will, at one time or another, incur financial losses - whether insubstantial or quite significant -- in our business and personal lives. When business fortunes head South -- either temporarily or in a more prolonged slide, it is important to be aware of how the tax law can limit the actual amount of your losses and your ability to deduct them. Here are some of the types of losses your business may experience and the related tax considerations to keep in mind in the event of a business downturn.

Bad debts

One loss that occurs frequently when business slows down is bad debt. A bad debt is simply a technical term used to describe a debt that has become totally or partially worthless. Different strategies apply depending upon whether you are the borrower or the lender.

As borrower. If you are the borrower, the "forgiveness" of all or part of the debt by the lender will generally trigger taxable income on that amount, unless the business is insolvent (debts exceed liabilities).

Note. The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) allows some business to elect to recognize cancellation of indebtedness income over five years, beginning in 2014. The temporary benefit applies to specific types of business debt repurchased by the business after December 31, 2008 and before January 1, 2011. Under this provision, an applicable debt instrument includes a bond, note, certificate, debenture, or other instrument that constitutes indebtedness issued by a C corporation or any other "person" in connection with the conduct of trade or business by that person. This election is irrevocable. Moreover, the liquidation or sale of substantially all the taxpayer's assets can result in acceleration of deferred items.

Although recognizing income may not be an immediate problem for a business that has plenty of losses to net against current income, additional income may wash out a net operating loss carryover that can either provide an immediate refund for a past tax year or shelter from income in the future. As a result, some businesses re-define debt "forgiveness" into a non-taxable event, such as a refinancing or a business-generated settlement.

As lender. If you are the lender, your major tax concern will be proving that a real debt exists, and then determining how fast you can deduct the bad debt and whether the deduction can offset ordinary income, as opposed to just capital gains.

Loans between corporations and their shareholders are scrutinized to make sure that they are really debts rather than disguised dividends or contributions to the corporation's capital. You can protect yourself by taking the steps that an arm's-length lender would take, such as putting it in writing and charging a reasonable rate of interest.

The IRS sometimes requires taxpayers to play a guessing game about which tax year a debt becomes sufficiently worthless to support the deduction. Because of potential statute of limitations problems, tax experts generally recommend that you claim the loss in the earliest possible year that it can reasonably be argued to be worthless.

Finally, you must determine whether a business or nonbusiness bad debt exists. A business bad debt must be created or acquired, or become worthless, in the course of your trade or business. If you conduct a business in the form of a corporation, generally any debt held by the corporation is a business debt. Any debt not falling into the business category is a nonbusiness debt.

As guarantor. If you take out a loan on behalf of your corporation or you personally guarantee the loan and then must make good on it, you are usually considered to have either made a contribution to capital or created a nonbusiness bad debt to protect your position as an investor. A nonbusiness debt must be completely worthless before a loss can be taken. Furthermore, nonbusiness bad debts are subject to limits on capital losses. Business bad debts, on the other hand, are deductible as ordinary losses in full against your other income.

Net operating losses

If you show a net operating loss for the year, it normally may be carried back two years or carried forward up to 20 years until it can be netted against current taxable income. A net operating loss (NOL) for this purpose has some complexity built in to strip it of most personal tax characteristics. An individual's NOL, for example, does not include any offset for personal or dependency exemptions, for net nonbusiness capital losses, or for nonbusiness itemized deductions that exceed nonbusiness income. Another choice in dealing with an NOL is to elect to immediately carryforward the loss. This can be advantageous when high rate-bracket income is anticipated in the following year.

Note. The 2009 Recovery Act provides a five-year carryback of 2008 NOLs for qualified small businesses only. These are small businesses with average gross receipts of $15 million or less. Businesses can choose to carryback NOLs three, four or five years. This treatment applies only to NOLs for any tax year beginning or ending in 2008. The normal NOL carryback period returns in for NOLs incurred in 2009.

Pass-through losses

One of the advantages of investing in a business as a partner or a subchapter S shareholder is that losses on the business level get passed-through to your individual tax return. Regular corporations, on the other hand, file separate returns and the shareholder cannot "realize" a tax loss until he or she actually sells stock.

For both partners and S shareholders, however, the ability to deduct pass-through losses is determined by the amount of tax basis the partner has in his partnership interest or the S shareholder has in his shares. This, in turn, depends upon a variety of factors, including the original price paid, the amount of losses already passed through, cash or property distributed, and any later contributions.

If you have such a stake in a business, a tax strategy for both adding to basis and preventing its diminution is critical to your ability to be able to deduct business losses as a partner or S shareholder.

Section 1244 Stock

If you sell stock at a loss and that stock had been designated on its issuance to be "Section 1244 stock," you are more fortunate than most investors who bail out during a business downturn. Reason: you are entitled to an ordinary loss deduction rather than a capital loss. This special loss treatment is limited to $50,000 for any one year ($100,000 for joint returns). Other requirements are that the stock was issued for no more than $1 million, less than 50% of corporate receipts were from passive sources for the first five years of operation, and the shareholder claiming the treatment must be an individual.

Dealing with and making the most of losses related to a business downturn can get complicated. Because the preceding discussion is meant to be general, is limited in nature and does not cover all the tax rules involved, you are encourage to contact the office for additional guidance with this issue.

Fringe benefits to employees often provide the "sizzle" to keep them aboard during times of high employment. One increasingly popular benefit -- from the perspective of both employees and employers alike -- comes in the form of "qualified transportation fringe benefits." Set up properly, this fringe benefit arrangement can fund a substantial portion of an employee's commuting expenses with either pre-tax dollars or tax-free employer-provided benefits.

The recently enacted American Recovery and Reinvestment Tax Act of 2009 (2009 Recovery Act) increases certain qualified transportation fringe benefits. Fringe benefits to employees often provide the "sizzle" to keep them aboard during times of high employment. One increasingly popular benefit -- from the perspective of both employees and employers alike -- comes in the form of "qualified transportation fringe benefits." Set up properly, this fringe benefit arrangement can fund a substantial portion of an employee's commuting expenses with either pre-tax dollars or tax-free employer-provided benefits.

How can personal commuting expenses result in a tax benefit?

Commuting expenses to and from a place of business and home are generally considered nondeductible, personal expenses. The magic of "transportation fringe benefits," however, is that they can turn some commuting expenses into tax-favored benefits. They do so by defraying some of an employee's commuting expenses with either pre-tax dollars that reduce otherwise taxable compensation, or with direct, employer-subsidized amounts that are considered tax free.

What are "qualified transportation fringe benefits"?

Qualified transportation fringe benefits include transit passes, van pooling and qualified parking. These benefits are not included in an employee's gross income up to an inflation-adjusted monthly cap. The 2009 Recovery Act increases for March 2009 through 2010 the current $120 per month income exclusion amount for transit passes and van pooling to $230 per month. For qualified parking expenses, the limit is $230 per month. Additionally, employees can exclude $20 per month for qualified bicycle commuting. Benefits that exceed the limitation are included in an employee's income.

Transit passes. A transit pass --which is now tax-free up to $230 per month-- includes a pass, token, fare card, voucher or similar item entitling a person to ride at a reduced price on mass transit facilities or in a highway vehicle with a seating capacity of at least six adult passengers. Transit passes also include cash reimbursements only if a voucher is not readily available for direct distribution by the employer to employees.

Van pooling. Transportation in a vanpool may be valued at its fair market value, or under the automobile lease valuation rule, the vehicle cents-per-mile rule, or the commuting valuation rule. Cash reimbursement for this transportation is allowed. Car pooling arrangements can obtain pre-tax benefits only if organized and administered by the employer. Private arrangements among employees won't work.

The van that is used must carry a seating capacity of at least six adults, not including the driver. At least 80 percent of its mileage use must be reasonably expected to be for purposes of transporting employees.

Parking. Some employers assume -- incorrectly -- that transportation fringe benefits are available only in circumstances that are "environmentally correct." Parking subsidies, which may persuade some employees not to use mass transportation, nevertheless can amount to a tax-free fringe benefit.

The exclusion is available only for the value of parking provided to an employee at the business premises of the employer or at a staging area from which the employee commutes to work by car pool, commuter highway vehicle, or mass transit facilities. Parking provided by an employer includes parking for which the employer pays, either directly to a parking lot operator or by reimbursement to the employee, or provides on premises it owns or leases.

How is this fringe benefit administered?

In compensation-reduction arrangements (where the employee foots the bill "pre-tax"), the employee's election must be in writing or in another form, such as electronic, that includes, in a permanent and verifiable form, the required information. The election must contain the date of the election, the amount of the compensation to be reduced, and the period for which the benefit will be provided. The employer may provide as a default that employees will be provided with the fringe unless they elect to receive cash, provided that employees receive adequate notice that a reduction will be made and are given adequate opportunity to make a contrary election.

The portion of a qualified transportation fringe benefit that is included in income is subject to withholding and reporting rules. Such amount is treated as wages for federal income and employment tax withholding purposes, and must be reported on an employee's Form W-2, Wage and Tax Statement. Qualified transportation fringes not exceeding the applicable monthly limit are not wages for purposes of withholding and employment taxes.

Is this fringe benefit available to self-employed individuals?

If you are self-employed, qualified transportation fringe benefits are not available to you. For this purpose, self-employed persons include independent contractors, partners and 2-percent shareholders of S corporations. However, a de minimis fringe rule for transit passes continues to apply: tokens or farecards worth $21 a month or less, provided by a partnership to a partner that enable the partner to commute on a public transit system, are excludable from the partner's gross income. In addition, if a partner performing services for a partnership or a director of a corporation would be able to deduct the cost of parking as a trade or business expense, the value of free or reduced-cost parking is entirely excludable as a working condition fringe.

Providing some assistance to your employees to offset their commuting costs in the form of transportation fringe benefits can prove to be an effective employee recruitment and retention tool. If you are interested in finding out more about this type of fringe and how it could benefit your business, please contact the office for a consultation.