The Senate has approved a bipartisan IRS reform bill, which now heads to President Trump’s desk. Trump is expected to sign the bill into law.

The Senate has approved a bipartisan IRS reform bill, which now heads to President Trump’s desk. Trump is expected to sign the bill into law.

The reworked Taxpayer First Act ( HR 3151) cleared the Senate on the evening of June 13. The revamped measure had been approved unanimously in the House on June 10.

"After years of good-faith, bipartisan work, our IRS reforms are finally going to become law," House Ways and Means Committee Chairman Richard Neal, D-Mass., and ranking member Kevin Brady, R-Tex., said in a joint statement. "In this historic legislation, we focused on putting taxpayers first."

Likewise, Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, praised the passage of the bipartisan, bicameral IRS reform bill. "It’s a big first step toward strengthening taxpayer protections and turning the IRS into the customer service organization it ought to be," Grassley said in a statement. "I look forward to President Trump signing it into law so the IRS can begin implementing long overdue reforms that will put taxpayers first," he added.

Reworked Bill

The reworked IRS reform bill, originally introduced in the last Congress, was revised earlier in June after the House passed a prior version in April. However, the original House-approved Taxpayer First bill (HR 1957) was deemed doomed in the Senate by May because of recent controversy surrounding the IRS’s Free File program. Thus, the provision codifying the Free File program was stripped from the original bill; the measure was reintroduced as HR 3151. It then quickly cleared each chamber.

Service Improvements

Generally, the Taxpayer First Act aims to reform the IRS for the first time in 20 years to better meet the needs of taxpayers. It requires the IRS to develop a comprehensive customer service strategy, as well as a plan to redesign its structure, modernize its technology, and enhance its cyber security. In addition, the new law will:

• waive the application fee for an offer in compromise (OIC) by a low-income taxpayer;

• clarify information available about low-income taxpayer clinics (LITCs);

• codify the Volunteer Income Tax Assistance (VITA) Program;

• require notice regarding the closure of taxpayer assistance centers (TACs);

• improve the IRS whistleblower program; and

• modify the private debt collection program.

Identity Protection

The legislation includes a number of provisions to help protect taxpayers from tax ID theft and improve taxpayer interaction with the IRS should they become a victim. For example, the IRS must provide a single point of contact for victims of identity theft, notification of suspected identity theft, and guidelines for stolen identity refund fraud cases.

The IRS is required to expand its current program that allows victims of tax ID theft to obtain a personalized PIN. Any individual must be allowed to request an identity protection personal identification number (IP PIN) to confirm a taxpayer’s identity on tax returns.

Electronic Filing

The IRS reform bill directly impacts taxpayers and other persons by reducing the threshold for filing electronically from 250 or more returns during the year. The threshold is 100 or more returns for 2021, and 10 or more return after 2021. The IRS can waive the e-file requirement for tax return preparers in areas with limited internet access.

E-filing requirements are also extended to all tax-exempt organizations that file returns or statements, regardless of amount of assets, gross receipts, or number of returns to be filed. In addition, the IRS is directed to develop an internet portal to allow taxpayers to file series Form 1099, similar to the portal used to file series Form W-2 with the Social Security Administration.

Other Electronic Services

To help increase the use of electronic services, the IRS must publish within six months uniform standards for accepting electronic signatures on requests for disclosure of taxpayer information (Forms 2848, 4506-T, and 8821). It must also limit the redisclosure of return information by a designee to only those expressly consented to by the taxpayer.

The new law increases the penalty for improper disclosure or use of information by return preparers. It also puts new limits on access to returns and return information by non-IRS employees.

Overall, the IRS must develop procedures to authenticate users of its suite of electronic services, to prevent tax refund fraud. Included in these services, the IRS must develop an automated version of its Income Verification Express Service (IVES) for third-parties.

Planning Note: The legislation also allows the IRS to accept credit and debit card payments for the payment of taxes directly, as opposed to through a third party. In addition, the IRS must establish procedures for taxpayers to report misdirected deposits of refunds.

Other Changes

Additional changes made by the Taxpayer First Act include:

• clarifying procedures for equitable relief from joint liability;

• establish new safeguards on the seizure of funds believed to be structured to avoid the $10,000 financial reporting requirement; and

• modify procedures for the issuance of summons and notice of third party contacts by the IRS.

To help pay for these changes, the minimum penalty for failure to file returns is increased after 2019 to the lesser of $330 (indexed for inflation) or 100 percent of the amount required to be shown on the return.

Taxpayers may rely on two new pieces of IRS guidance for applying the Code Sec. 199A deduction to cooperatives and their patrons:

Taxpayers may rely on two new pieces of IRS guidance for applying the Code Sec. 199A deduction to cooperatives and their patrons:

• Proposed regulations provide detailed rules for coop patrons and specified cooperatives to calculate the deduction.

• A proposed revenue procedure provides three methods for specified cooperatives to calculate W-2 wages.

199A Deduction for Cooperatives and Patrons

The 199A deduction, also known as the pass-through deduction or the QBI deduction, generally allows individuals, estates and trusts to deduct up to 20 percent of their qualified business income (QBI) from sole proprietorships and pass-through entities. Since most coops are C corporations, they cannot claim the deduction. However, their members may receive patronage dividends that are included in QBI.

Despite these general rules, certain agricultural or horticultural coops, known as "specified cooperatives," can claim their own version of the a deduction under Code Sec. 199A(g). A specified coop can also pass through any portion of this deduction by making qualified payments to its patrons. The patrons must reduce their own QBI accordingly.

For specified coops, the 199A(g) deduction retains many of the rules that governed the Code Sec. 199 domestic production activities deduction before it was repealed at the end of 2017. For example, the 199A(g) deduction is based on the specified coop’s domestic production gross receipts (DPGR) and qualified production activities income (QPAI), rather than its QBI.

Sec. 199A Deduction for Coop Patrons in General

Under the proposed regulations, any coop patron’s QBI may include patronage dividends and an exempt coop’s non-patronage dividends that:

• are related to the patron’s trade or business,

• are qualified items of income, gain, deduction or loss at the coop level,

• are not from a specified service trade or business (SSTB), and

• are properly reported to the patron.

The proposed regulations provide detailed rules for how coops must report the required information to their patrons. However, the coop does not report any W-2 wages or unadjusted basis in qualified property immediately after acquisition (UBIA). The W-2/UBIA limit that can reduce QBI for higher-income taxpayers is calculated only at the patron level.

Sec. 199A(g) Deduction for Specified Cooperatives

Code Sec. 199A(g) allows specified coops to claim a 199A deduction and pass through any portion of it by making qualified payments to its members. However, as mentioned above, a specified coop’s deduction is largely based on the pre-2018 domestic production activities deduction (DPAD). This means that the 199A(g) deduction for specified coops is effectively separate from the general Code Sec. 199A(a) deduction for other taxpayers.

Since specified coop patrons might be able to claim both the general 199A(a) deduction and the passed-through portion of the coop’s 199A(a) deduction, they must reduce their 199A(a)deduction by nine percent of QBI (or if less, 50 percent of W-2 wages) that is allocable to the qualified payments from the specified coop.

The proposed regulations offer a safe harbor that patrons can use to calculate this reduction. The patron allocates aggregate business expenses and W-2 wages between qualified payments and other gross receipts by ratably apportioning them based on the ratio of qualified payments to total gross receipts in QBI.

The proposed regulations also define several terms that are relevant to the 199A(g) deduction for specified coops, including:

• Patron,

• Specified cooperative,

• Agricultural or horticultural products (though the IRS is also considering broader definitions), and

• In whole or significant part.

Sec. 199A(g) Deduction and DPAD

The proposed regulations also provide four steps to determine the amount of a specified coop’s 199A(g) deduction. A specified coop that is not tax-exempt must:

• separate patronage and non-patronage gross receipts and related deductions;

• identify patronage gross receipts that qualify as DPGR,

• use the patronage DPGR from step (3) to calculate QPAI, and

• calculate the 199A(g) deduction, which is generally nine percent of the lesser of QPAI from step (4), or taxable income

These last three steps are virtually identical to the pre-2018 DPAD rules.

A tax-exempt specified coop calculates two separate 199A(g) deductions: one based on gross receipts and related deductions from patronage sources, and one based on those items from non-patronage sources.

The proposed regulations also apply DPAD-types rules to:

• determine the coop’s DPGR,

• reduce a specified coop’s 199A(g) deduction to reflect oil-related QPAI, and

• pass through the deduction to patrons.

In addition, the proposed regulations provide special rules for partnerships and expanded affiliated groups (EAGs).

Specified Coops and W-2 Wages

Although the proposed regulations treat the 199A(g) deduction as largely independent from the general 199A(a) deduction, both deductions generally use the same rules for W-2 wages. However, under the proposed regulations, W-2 wages for the 199A(g) deduction cannot include wages paid with respect to employment in Puerto Rico.

As mentioned above, a wages/UBIA limit may reduce the 199A deduction for higher-income taxpayers. A proposed revenue procedure provides three methods for calculating W-2 wages for purposes of the 199A(g) deduction:

• unmodified Box method

• modified Box 1 method

• tracking wages method.

These methods are largely identical to the methods provided in Rev. Proc. 2019-11, but are intended to better reflect changes that may be made in the underlying Form W-2, Wage and Tax Statement.

Effective Dates for 199A Proposed Regulations and Revenue Procedure

The regulations are proposed to apply to tax years beginning after the date they are published as final. However, taxpayers may apply them in their entirely before that date.

The notice of the proposed revenue procedure is effective on June 18, 2019. Specified cooperatives may rely on the proposed procedure before it is published in its final form.

IRS Invites Comments on Proposed Rules for Sec. 199A

The IRS requests comments on the proposed regulations and the proposed revenue procedure. In particular, the IRS invites comments on the following elements:

• A coop’s reporting of W-2 wages and UBIA,

• The safe harbor for coop patrons,

• Definitions,

• A specified coop’s separation of patronage and non-patronage income,

• DPGR treatment of minor assembly and contract work, and

• W-2 wages and Puerto Rico.

Comments are due by August 19, 2019. They may be mailed or hand-delivered to the IRS, or submitted electronically via the Federal eRulemaking Portal at www.regulations.gov. Comments on the proposed regs should reference "IRS REG-118425-18" and comments on the proposed revenue procedure should reference "Notice 2019-27".

The IRS has issued final regulations that require taxpayers to reduce the amount any charitable contribution deduction by the amount of any state and local tax (SALT) credit they receive or expect to receive in return. The rules are aimed at preventing taxpayers from getting around the SALT deduction limits. A safe harbor has also been provided to certain individuals to treat any disallowed charitable contribution deduction under this rule as a deductible payment of taxes under Code Sec. 164. The final regulations and the safe harbor apply to charitable contribution payments made after August 27, 2018.

The IRS has issued final regulations that require taxpayers to reduce the amount any charitable contribution deduction by the amount of any state and local tax (SALT) credit they receive or expect to receive in return. The rules are aimed at preventing taxpayers from getting around the SALT deduction limits. A safe harbor has also been provided to certain individuals to treat any disallowed charitable contribution deduction under this rule as a deductible payment of taxes under Code Sec. 164. The final regulations and the safe harbor apply to charitable contribution payments made after August 27, 2018.

SALT Limit

An individual’s itemized deduction of SALT taxes is limited to $10,000 ($5,000 if married filing separately) for tax years beginning after 2017. Some states and local governments have adopted laws that allowed individuals to receive a state tax credit for contributions to certain charitable funds. These laws are aimed at getting around the SALT deduction limit by creating a charitable deduction for federal income tax purposes. Regardless of state and local law, however, federal law controls when determining charitable deductions for federal income tax purposes.

Return Benefit

The final regulations generally adopt the rule in proposal regulations ( NPRM REG-112176-18) that the receipt of a SALT credit for a charitable contribution is the receipt of a return benefit (quid pro quo benefit). If a taxpayer makes a payment or transfers property to Code Sec. 170(c) entity, he or she must reduce any charitable contribution deduction for federal income tax purposes if he or she receives or expects to receive a SALT credit in return. A taxpayer is generally is not required to reduce the charitable deduction on account of its receipt of state or local tax deductions. However, the taxpayer must reduce its charitable deduction if it receives or expects to receive state or local tax deductions in excess of the taxpayer’s payment or the fair market value of property transferred.

De Minimis Exception

The final regulations retain the de minimis exception that a taxpayer’s charitable deduction is not reduced if the SALT credits received as a return benefit do not exceed 15 percent of the taxpayer’s charitable payment. The 15-percent exception applies only if the sum of the taxpayer SALT credit received or excepted to receive does not exceed 15 percent of the taxpayer’s payment or of the fair market value of the property transferred.

Safe Harbor

The IRS has also issued Notice 2019-12 providing a safe harbor for certain individuals if any portion of a charitable contribution deduction disallowed due to the receipt of a SALT credit. Under the safe harbor, any disallowed portion of the charitable deduction may be treated as the payment of SALT taxes for the purposes of deducting taxes under Code Sec. 164.

Eligible taxpayers can use the safe harbor to determine their SALT deduction on their tax-year 2018 return. Those who have already filed may be able to claim a greater SALT deduction by filing an amended return if they have not already claimed the $10,000 maximum amount ($5,000 if married filing separately).

Final regulations address the global intangible low-taxed income (GILTI) provisions of Code Sec. 951A. The final regulations retain the basic approach and structure of the proposed regulations published on October 10, 2018. The final regulations address open questions and comments received on the proposed regulations.

Final regulations address the global intangible low-taxed income (GILTI) provisions of Code Sec. 951A. The final regulations retain the basic approach and structure of the proposed regulations published on October 10, 2018. The final regulations address open questions and comments received on the proposed regulations.

Final regulations on the foreign tax credit also adopt proposed regulations published December 7, 2018. These rules were issued to ensure that the applicability dates coincide with the applicability dates of the Code sections to which they relate. The final foreign tax credit regulations also retain the basic structure and approach of the proposed regulations.

Also, a number of provisions were substantially revised.

Domestic Partnerships

The final regulations treat a domestic partnership as an entity for purposes of determining whether a U.S. person is a U.S. shareholder and whether a foreign corporation is a controlled foreign corporation (CFC). But the final rules treat a domestic partnership as an aggregate for purposes of determining whether and to what extent a partner of a domestic partnership has a GILTI inclusion.

Transfers During Qualified Period

The final regulations allow taxpayers to make an election that eliminates disqualified basis in property, by reducing a commensurate amount of adjusted basis in the property for all purposes of the Code.

Specified Tangible Property

A CFC may elect to use its non-ADS depreciation method for property acquired before enactment of the GILTI rules. A special rule requires depreciation of the salvage value: the portion of the basis in the property that would not be fully depreciated under the non-ADS depreciation method.

Anti-Abuse Rule

Under a "per se" rule in the proposed regulations, property was deemed to be held for the principal purpose of reducing a GILTI inclusion if held by the CFC for less than a 12-month period. The final regulations convert the per se rule to a rebuttable presumption. Under a second presumption, property held for more than 36 months is not subject to the rule. A safe harbor applies for certain transfers.

Foreign Tax Credit

The foreign tax credit proposed regulations contained a rule for determining the adjusted basis of the stock of the foreign corporation for purposes of allocating expenses to stock of certain foreign corporations. The final regulations provide that a taxpayer should not have an adjusted basis below zero in stock of a foreign corporation. A taxpayer’s adjusted basis may be reduced below zero as a result of an adjustment for earnings and profits deficits, as long as the adjustment for earnings and profits increased the adjusted basis of the foreign corporation above zero.

Applicability of Final Regs

The final GILTI regulations generally apply to tax years of foreign corporations beginning after December 31, 2017, and to tax years of U.S. shareholders in which or with which such tax years of foreign corporations end.

Proposed Regulations

The Treasury Department and the IRS also issued proposed regulations on the treatment of domestic partnerships for determining amounts included in their partners' gross incomes under Code Sec. 951 with respect to CFCs owned by the partnership, and the GILTI treatment of gross income that is subject to a high rate of foreign tax under Code Sec. 951A.

The proposed regulations would affect U.S. persons that own stock of foreign corporations through domestic partnerships and U.S. shareholders of foreign corporations. The Treasury Department and the IRS request timely comments on all aspects of the proposed rules. A public hearing will be scheduled if requested in writing by any person that timely submits written comments.

Aggregate Treatment Adopted

To be consistent with the treatment of domestic partnerships under Code Sec. 951A, Treasury and the IRS determined that a domestic partnership should also generally be treated as an aggregate of its partners in determining stock owned under Code Sec. 958(a) for Code Sec. 951 purposes.

Expansion to Exclude Other High-Taxed Income

Treasury and the IRS also determined that the GILTI high tax exclusion should be expanded (on an elective basis) to include certain high-taxed income even if that income would not otherwise be foreign base company income (FBCI) or insurance income. Further, taxpayers should be allowed to elect to apply the Code Sec. 954(b)(4) exception (the "GILTI high tax exclusion") for certain classes of income that are subject to high foreign taxes.

Newly issued temporary regulations limit the application of the Code Sec. 245A participation dividends received deduction (the participation DRD) and the Code Sec. 954(c)(6) exception in certain situations that present an opportunity for tax avoidance. The temporary regulations also provide related information reporting rules under Code Sec. 6038.

Newly issued temporary regulations limit the application of the Code Sec. 245A participation dividends received deduction (the participation DRD) and the Code Sec. 954(c)(6) exception in certain situations that present an opportunity for tax avoidance. The temporary regulations also provide related information reporting rules under Code Sec. 6038.

Participation Exemption Regime

The transition to the participation exemption system introduced by the Tax Cuts and Jobs Act, P.L. 115-97 (the Act) is effected through several interlocking provisions – Code Secs. 245A, 951A, and 965. All three provisions have different effective dates so there are periods in which some but not all of them apply. The participation exemption system operates alongside the subpart F regime.

Code Sec. 245A generally allows a domestic corporation a 100-percent dividends received deduction (a participation DRD) for the foreign-source portion of a dividend received after December 31, 2017, from a specified 10 percent-owned foreign corporation (an SFC). Generally, only earnings that are not taxed under the subpart F or the global intangible low-taxed income (GILTI) regime can, upon distribution, give rise to a dividend eligible for the participation DRD. Distribution of earnings and profits that is taxed under the subpart F or GILTI regime is a distribution of previously taxed earnings and profits (PTEP) that is not treated as a dividend and cannot qualify for the participation DRD. The participation DRD applies to distributions made after December 31, 2017.

The participation DRD does not apply to untaxed earnings of U.S. shareholders as of December 31, 2017. Instead, such earnings are subject to a transition tax under Code Sec. 965. For fiscal year CFCs, there is a gap period during which certain of their earnings may escape taxation.

Code Sec. 951A (the GILTI regime) taxes a U.S. shareholder on its global intangible low-taxed income, or GILTI, with respect to its CFCs at a reduced rate. The GILTI regime applies in the first tax year of a CFC beginning after December 31, 2017.

Code Sec. 954 generally provides that a dividend received by a CFC is included in the CFC’s foreign personal holding company income (FPHCI). Under Code Sec. 954(c)(6), however, a dividend received by a CFC from a related CFC is not included in the CFC’s FPHCI if certain requirements are satisfied (the section 954(c)(6) exception).

Scope of the Temporary Regulations

The temporary regulations limit the availability of the participation DRD and the section 954(c)(6) exception in specific and narrow cases where the deduction or exception, respectively, effectively eliminates subpart F income or GILTI from the U.S. tax system. Specifically, the temporary regulations address transactions that have the effect of avoiding tax under Code Sec. 965, 951A, or 951by inappropriately converting income that should have been subject to U.S. tax into nontaxed income. The temporary regulations also include information reporting rules under Code Sec. 6038 to facilitate administration of certain rules in the temporary regulations. The temporary regulations do not include general rules relating to dividends eligible for the participation DRD since those rules will be included in separate guidance.

Overview of the Temporary Regulations

Code Secs. 245A, 951A, and 965 generally act to tax foreign source income equivalently across taxpayers and sources so long as a U.S. shareholder owns the same amount of stock of a calendar year CFC throughout the CFC’s entire tax year. However, deviations from this condition potentially allow taxpayers to avoid tax by claiming a participation DRD in situations where otherwise identical income would be subject to U.S. tax. The following two situations may present such an opportunity for tax avoidance: (1) a U.S. corporation is the shareholder of a fiscal year CFC during 2018, or (2) a CFC pays a dividend and experiences a direct or indirect change in ownership during a tax year. The temporary regulations limit the application of the participation DRD in these situations.

With respect to the first situation, described above, as a result of a gap in the effective dates of these related international tax provisions, the difference between calendar year and fiscal year CFCs is significant and presents the potential for substantial tax avoidance when utilized to artificially generate earnings and profits in non-ordinary course transactions between related parties.

The temporary regulations refer to the portion of a dividend attributable to earnings and profits arising from such a transaction during this period as an "extraordinary disposition amount." An extraordinary disposition amount consists of certain earnings and profits resulting from transactions between related parties during the disqualified period. Although the period during which extraordinary dispositions may have occurred has passed, the regulations will potentially apply to any distributions of the associated earnings and profits after 2017.

In the second situation, described above, the participation DRD could facilitate the avoidance of the subpart F and GILTI regimes by allowing a U.S. shareholder to transfer, before the end of a CFC’s tax year, stock of the CFC to a new shareholder who will not be taxed on the CFC’s subpart F income or tested income.

The earnings and profits representing the portion of a dividend of a CFC attributable to subpart F income or tested income that, absent a transfer of the CFC stock pursuant to an extraordinary reduction, would have been subject to the subpart F or GILTI regimes are referred to as an "extraordinary reduction amount" in the temporary regulations. An extraordinary reduction amount consists of certain earnings and profits generated during a CFC’s tax year beginning after 2017 in which a domestic corporate U.S. shareholder reduces its ownership of the CFC by certain threshold amounts (e.g., a decrease in ownership of more than 10 percent). For this purpose, "certain earnings and profits" refers to income generally subject to inclusion under the subpart F or GILTI regimes.

Results similar to the ones described in the context of extraordinary disposition amounts and extraordinary reduction amounts can be achieved using the exemption from subpart F income under Code Sec. 954(c)(6) and lower-tier CFC dividends to upper-tier CFCs. Thus, the temporary regulations limit the application of the section 954(c)(6) exception in order to prevent similar results in circumstances in which a lower-tier CFC pays a dividend to another CFC, instead of directly to a U.S. shareholder.

Operation of the Temporary Rules

The temporary regulations do not permit the participation DRD for the portions of dividends made by CFCs that are attributable to ineligible amounts, which comprise extraordinary reduction amounts and 50 percent of any extraordinary disposition amounts.

To accomplish this, the temporary regulations disallow a deduction for transactions that have the effect of avoiding tax under Code Sec. 965, 951A, or 951. The extraordinary disposition rules accomplish this by denying the participation DRD for a narrowly and objectively defined class of earnings and profits generated by transactions undertaken in the disqualified period in circumstances that raise abuse concerns.

The extraordinary reduction rules accomplish this by denying the participation DRD for certain earnings distributed in the same year as reductions in ownership of CFC stock by a controlling Code Sec. 245A shareholder. The temporary regulations contain similar rules with respect to the section 954(c)(6) exception.

Information Reporting under Code Sec. 6038

Ineligible amounts, tiered extraordinary disposition amounts, and tiered extraordinary reduction amounts must be reported on the appropriate information reporting form in accordance with Code Sec. 6038. A transition rule mandates that taxpayers report the required information on the first return filed following the issuance of revised forms, instructions, or other guidance with respect to reporting such information. The transition rule also requires a corporation to report the information with respect to a predecessor corporation.

Applicability Dates

The rules in the temporary regulations relating to eligibility of distributions for the participation DRD apply to distributions occurring after December 31, 2017. The rules in the temporary regulations relating to the eligibility of dividends for the section 954(c)(6) exception also apply to distributions occurring after December 31, 2017, subject to a transition rule.

Final regulations reduce the Code Sec. 956 amount for certain domestic corporations that own stock in controlled foreign corporations (CFCs). The regulations are intended to ensure that Code Sec. 956 is applied consistently with the participation exemption system under Code Sec. 245A.

Final regulations reduce the Code Sec. 956 amount for certain domestic corporations that own stock in controlled foreign corporations (CFCs). The regulations are intended to ensure that Code Sec. 956 is applied consistently with the participation exemption system under Code Sec. 245A.

Subpart F Rules

Under the subpart F rules, U.S. shareholders of a CFC are currently taxed on their pro rata shares of the CFC’s subpart F income without regard to whether the income is distributed to the shareholders ( Code Sec. 951(a)). Subpart F income generally includes passive income and other income that is readily movable from one taxing jurisdiction to another ( Code Sec. 952). A U.S. shareholder is a U.S. person (e.g., individual citizen, domestic corporation, etc.) that owns or is treated as owning 10 percent or more of the voting power or value of a foreign corporation ( Code Sec. 951(b)).

The U.S. shareholders of a CFC are taxed on their pro rata share of the CFC’s earnings that are invested in U.S. property during the tax year and not distributed or otherwise taxed (the "section 956 amount"). U.S. shareholders are effectively taxed on foreign source earnings brought back into the United States, on the theory that the returned earnings are substantially the same as a dividend. This rule is intended to create symmetry by taxing effective repatriations of earnings in the same manner as actual repatriations of earnings are taxed.

Participation DRD

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) added Code Sec. 245A, which allows a 100-percent participation exemption deduction—a participation dividends-received deduction (DRD)—for the foreign-source portion of dividends received from a specified 10-percent owned foreign corporation by a domestic corporation that is a U.S. shareholder of the foreign corporation. A specified 10-percent owned foreign corporation is any foreign corporation (other than certain passive foreign investment companies) in which a domestic corporation is a U.S. shareholder.

However, a domestic corporation cannot claim a participation DRD for a dividend on any share of the foreign corporation’s stock:

• that the domestic corporation holds for 365 days or less during the 731-day period that begins on the date that is 365 days before the date when the share becomes ex-dividend with respect to the dividend; or

• to the extent the domestic corporation is obligated to make related payments on positions in substantially similar or related property ( Code Sec. 246(c)).

Under the TCJA, a Code Sec. 956 inclusion is not eligible for the DRD because it is not a dividend.

Tax Treatment Symmetry

The participation exemption system has made the current broad application of Code Sec. 956 to corporate U.S. shareholders inconsistent with the Code section’s purposes and the scope of the transactions it is meant to address. In response, the regulations:

• exclude corporate U.S. shareholders from the application of Code Sec. 956 to the extent necessary to maintain symmetry between the taxation of actual repatriations and the taxation of effective repatriations, so that neither an actual dividend to a corporate U.S. shareholder nor the shareholder’s Code Sec. 956 amount will result in additional U.S. tax; and

• reduce the Code Sec. 956 amount otherwise determined regarding a U.S. shareholder for a CFC’s tax year ( "tentative Section 956 amount") to the extent that the shareholder would be allowed a participation DRD had the shareholder received a distribution from the CFC equal to the tentative Code Sec. 956 amount (the "hypothetical distribution").

The regulations include an ordering rule to address the previously taxed earnings and profits (PTEP) rules in Code Sec. 959. Under the ordering rule, the hypothetical distribution is treated as:

• first attributable to earnings and profits (E&P) described in Code Sec. 959(c)(2) (amounts attributable to subpart F inclusions); and

• then attributable to E&P described in Code Sec. 959(c)(3) (all other E&P).

The regulations also address the tentative section 956 amount with respect to domestic partnerships. The regulations provide that the tentative section 956 amount with respect to a domestic partnership is reduced to the extent that one or more of the domestic corporate partners would be entitled to a participation DRD if:

• the partnership received the amount as a distribution; and

• the remaining amount of the inclusion under Code Sec. 956 is allocated to the partners in the same proportion as net income would result to partners upon a hypothetical distribution.

Applicability Date

The regulations will apply to tax years of CFCs beginning on or after July 22, 2019, and to tax years of U.S. shareholders in which or with which such tax years of CFCs end.

The regulations may be applied to tax years of CFCs beginning after December 31, 2017, and to tax years of U.S. shareholders in which or with which such tax years of CFCs end, provided the rules are applied consistently by the taxpayer and U.S. related persons.

Final rules allow employers to use health reimbursement arrangements (HRAs) to reimburse employees for the purchase individual insurance coverage, including coverage on an Affordable Care Act Exchange. The rules also allow "excepted benefit HRAs," which would not have to be integrated with any coverage. The rules generally apply for plan years starting on or after January 1, 2020.

Final rules allow employers to use health reimbursement arrangements (HRAs) to reimburse employees for the purchase individual insurance coverage, including coverage on an Affordable Care Act Exchange. The rules also allow "excepted benefit HRAs," which would not have to be integrated with any coverage. The rules generally apply for plan years starting on or after January 1, 2020.

HRA Use Expanded

The final rules expand the use of HRAs by:

• allowing integration of an HRA with individual health insurance coverage and thereby satisfy the Affordable Care Act’s annual dollar limit and preventive care cost sharing requirements;

• creating "excepted benefit HRAs" limited in amount and to the types of coverage for which premiums may be reimbursed;

• providing new premium tax credit eligibility rules for individuals who are offered an HRA integrated with individual health insurance coverage;

• clarifying that individual health insurance coverage, the premiums of which are reimbursed by an HRA or qualified small employer HRA (QSEHRA), does not become part of an ERISA plan when certain conditions are met; and

• adding new special enrollment for the individual market for individuals who gain access to HRAs integrated with individual health insurance coverage or who are provided a QSEHRA.

The final regulations add conditions on individual coverage HRAs intended to prevent a negative impact on the individual market.

Integration With Individual Coverage

Almost any employer can satisfy Affordable Care Act reimbursement requirements by having employees buy their own individual coverage. An employers may integrate an HRA with individual health coverage only if:

• participants and dependents are actually enrolled in individual health insurance coverage (though not coverage that consists solely of excepted benefits) for each month they are covered by the HRA;

• coverage is offered to a class of employees to whom a traditional group health plan is not offered;

• coverage is offered on the same terms in amount and conditions to all employees within each class (though certain variations based on age are allowed);

• an opt out option is provided for individuals who prefer Affordable Care Act Exchange coverage, but would not be eligible for the premium tax credit if enrolled in an employer health plan such as an HRA; and

• substantiation and notice requirements are met.

To guard against adverse selection, the final rules add a minimum class size requirement that will apply to certain classes of employees in certain instances. Classes of employees may include full-time employees; part-time employees; seasonal employees; employees who are included in a unit of employees covered by a collective bargaining agreement in which the plan sponsor participates; employees who have not satisfied a waiting period for coverage; employees who have not attained age 25 prior to the beginning of the plan year; nonresident aliens with no U.S.-based income; employees whose primary site of employment is in the same rating area; and groups combining any of these classes of employee.

Excepted Benefit HRAs

An employer that wants to offer an HRA that is not integrated with non-HRA group coverage, Medicare, TRICARE, or individual health insurance coverage may do so as an excepted benefit. As excepted benefits, these HRAs would not be subject to the employer group plan rules, including the market reforms under the Affordable Care Act. An excepted benefit HRA:

• must not be an integral part of the plan;

• must provide benefits that are limited in amount ($1,800 per year, adjusted for inflation after 2020);

• cannot provide reimbursement for premiums for certain health insurance coverage; and

• must be made available under the same terms to all similarly situated individuals.

Final regulations provide requirements that a person must satisfy to become and remain a certified professional employer organization (CPEO), as well as the CPEO’s federal employment tax liabilities and other obligations.

Final regulations provide requirements that a person must satisfy to become and remain a certified professional employer organization (CPEO), as well as the CPEO’s federal employment tax liabilities and other obligations.

CPEOs

Some employers contract with PEOs to complete and file tax returns, pay and withhold employment taxes on wages paid to employees, or provide other employee benefits. Code Sec. 3511 and Code Sec. 7705 provide certification requirements for PEOs, and codify the employment tax consequences of being CPEO.

For federal employment tax purposes, a CPEO is generally treated as the employer of any individual who is:

• performing services for a customer of the CPEO; and

• covered by a contract between the CPEO and the customer.

Employer treatment applies only to remuneration paid to the covered employee by the CPEO. If an individual covered by a CPEO contract performs services for a customer at a work site that meets certain coverage requirements, only the CPEO is treated as the employer for federal employment tax purposes for remuneration its pays to that work site employee.

A person must apply to the IRS to become a CPEO, and the IRS must certify that the person meets certain requirements. A CPEO must:

• meet tax status and background requirements;

• meet bond, financial review, and quarterly reporting requirements; and

• notify the IRS of any change that materially affects the continuing accuracy of information it has provided to the IRS.

The Treasury Secretary can suspend or revoke CPEO certification if the person does not satisfy certain agreements or applicable requirements.

Final Regs

The final regulations adopt and amend proposed regulations published in 2016 ( NPRM REG-127561-15), and reflect and address certain interim guidance ( Rev. Proc. 2016-33, 2016-25 I.R.B. 1034; Notice 2016-49, 2016-34 I.R.B. 265; Rev. Proc. 2017-14, 2017-3 I.R.B. 426). In finalizing the regulations, the IRS reviewed and analyzed a variety of issues affecting CPEOs, including:

• maintaining a separate annual FICA tax and FUTA tax wage base and withholding threshold for each customer for which a covered employee performs services during a calendar year;

• the treatment of tax credits, including the addition of the employer credit for paid family and medical leave and certain employee retention credits to the list of specified credits that apply to the CPEO customer and not the CPEO;

• the treatment of self-employed individuals under the CPEO rules;

• CPEO reporting to the IRS, such as reporting the commencement or termination of CPEO contracts and service agreements;

• the meaning of key terms such as "responsible individuals" (certain owners, officers, and other persons of the CPEO), "work site," and "work site employee";

• the CPEO application process, including when an applicant may reapply for certification;

• CPEO "suitability" requirements, including domestic disregarded entity and sole proprietorship certification, fingerprint cards and background checks, and the waiver of confidentiality and privilege;

• working capital requirements, including a limited exception to the positive working capital requirement;

• bond requirements, including a provision that the IRS Commissioner may provide exceptions to the rule that a CPEO must meet the bond requirements without posting collateral; and

• maintaining employee records.

Applicability

The final regulations are effective on May 28, 2019.

Tax reform discussions continue on Capitol Hill with legislation expected to be released very soon. GOP lawmakers in the House and Senate appear to be aiming for a comprehensive overhaul of the Tax Code. President Trump and Republicans in Congress have set out an ambitious schedule of passing a tax reform bill before year-end. 

Tax reform discussions continue on Capitol Hill with legislation expected to be released very soon. GOP lawmakers in the House and Senate appear to be aiming for a comprehensive overhaul of the Tax Code. President Trump and Republicans in Congress have set out an ambitious schedule of passing a tax reform bill before year-end. 

Tax reform

Although the specifics are not yet known, a GOP tax bill is expected to lower the individual and corporate tax rates and eliminate many tax credits and deductions. The corporate tax rate could be lowered to 20 percent (or in the 20s), the individual tax rates are expected to cap at 35 percent (although a higher rate may be retained), and the list of eliminated credits and deductions is likely to be lengthy. There is also talk of a lower rate for pass-through businesses.

The current Tax Code contains hundreds of credits and deductions, targeted to individuals, businesses and taxpayers of all types. These tax preferences touch on almost every activity. In past years, proposals to repeal tax preferences have met stiff resistance from the taxpayers they benefit.

The Trump Administration and Republicans in Congress appear to support keeping the home mortgage deduction and the charitable contribution deduction for individuals. The research credit is one business incentive that also appears to have support from the White House. Almost every other tax preference could be a candidate for repeal.

The GOP tax bill could also repeal the alternative minimum tax (AMT) and the federal estate tax. The federal gift tax, however, does not appear to be on the chopping block.

Without bill language, it is nearly impossible to envision the components of a GOP tax bill. Left unanswered, at least for now, are some important questions. Will the GOP tax bill be retroactive to January 1, 2017? Will the GOP tax bill expire after 10 years, as some tax bills have in the past? Our office will monitor developments and keep you posted.

Filing season

At this time, it is unclear if any tax law changes would be retroactive to January 1, 2017. If they are, the IRS may have to delay the start of the 2018 filing season. The filing season typically starts in mid-January. The IRS programs its return processing systems for existing tax laws. If the tax laws change, the IRS needs to revise its processing systems and that takes time. Our office will keep you posted.

More tax legislation

While the details of a GOP tax bill take shape, some stand-alone tax bills have been introduced in Congress. They include bills that:

• Exempt more taxpayers from the Affordable Care Act’s individual shared responsibility requirement
• Permit non-itemizers to take above-the-line deductions for charitable contributions.
• Delay the Affordable Care Act’s health insurance provider fee.
• Make taxpayers in Puerto Rico eligible for the earned income tax credit (EITC).
• Create a tax credit for renewable chemicals.
• Treat Native American nations the same as states for certain federal tax purposes.
• Create “Move America” bonds for infrastructure improvements.
• Expand tax-free distributions from IRAs for charitable purposes.

Lawmakers have a short window between now and year-end to pass any tax bills. Please contact our office if you have any questions about tax legislation.

Holiday gifts made to customers are generally deductible as ordinary and necessary business expenses as long as the taxpayer can demonstrate that such gifts maintain or improve customer goodwill. Such gifts must bear a direct relationship to the taxpayer's business and must be made with a reasonable expectation of a financial return commensurate with the amount of the gift. However, the $25 annual limitation per recipient on deductibility is applicable to holiday gifts, unless a statutory exceptions applies.

Holiday gifts made to customers are generally deductible as ordinary and necessary business expenses as long as the taxpayer can demonstrate that such gifts maintain or improve customer goodwill. Such gifts must bear a direct relationship to the taxpayer's business and must be made with a reasonable expectation of a financial return commensurate with the amount of the gift. However, the $25 annual limitation per recipient on deductibility is applicable to holiday gifts, unless a statutory exceptions applies.

Holiday turkeys and other holiday distributions of nominal value made by an employer to employees to promote goodwill are treated as tax-free gifts to those employees instead of taxable compensation. If the employer gives cash, gift certificates or similar items of readily convertible cash value, however, the value of those gifts is considered additional compensation regardless of the amount.  But if holiday gift certificates given by an employer to its employees are redeemable only for merchandise and were not convertible to cash, they may be considered tax-free gifts.

Employers can give items worth a "nominal amount" without fear that the IRS will tax the employee. Gifts of items worth more, or a gift of any amount of cash, risks the IRS taking the view that the gift belongs in the employee's gross income. What constitutes a nominal amount is not crystal clear, but keeping a gift under $25 is erring on the safe side. It also assures a situation in which the employer can deduct the expense of the gift while not having it taxable to the employee.

For purposes of federal tax, employers must withhold and pay FICA taxes (7.65%) if they paid a household employee cash wages of at least $2,000 in 2016 or in 2017 ($2,100 in 2018). Employers must pay FUTA tax (6%) if they paid total cash wages of at least $1,000 in a calendar quarter to household employees. A homeowner may be an “employer” to a housekeeper; or, if enough evidence is shown, merely a recipient of services by an independent contractor or self-employed individual.

Nanny tax. For purposes of federal tax, employers must withhold and pay FICA taxes (7.65%) if they paid a household employee cash wages of at least $2,000 in 2016 or in 2017 ($2,100 in 2018). Employers must pay FUTA tax (6%) if they paid total cash wages of at least $1,000 in a calendar quarter to household employees. A homeowner may be an “employer” to a housekeeper; or, if enough evidence is shown, merely a recipient of services by an independent contractor or self-employed individual.

“Employer” status. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you will need an employer identification number (EIN) and you may have to pay employment taxes. If the individual who works in your home is self-employed and you do not direct him or her on specific tasks, you aren't liable as an employer – a difficult hurdle to overcome in the case of childcare. Usually, you aren't a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business.

If you use a placement agency that exercises control over what work is done and how it will be done by a baby-sitter or companion who works in your home, the worker isn't your employee. This control could include providing rules of conduct and appearance and requiring regular reports. In this case, you don't have to pay employment taxes. But, if an agency merely gives you a list of sitters and you hire one from that list, and pay the sitter directly, the sitter may be your employee.

Employer responsibilities. If you have a household employee, you may be subject to:

• Social security and Medicare taxes,
• Federal unemployment tax, and
• Federal income tax withholding.

Social security and Medicare taxes are generally withheld from the employee's pay and matched by the employer. Federal unemployment (FUTA) tax is paid by the employer only and provides for payments of unemployment compensation to workers who have lost their jobs. Federal income tax is withheld from the employee's total pay if the employee asks you to do so and you agree.

An employer must report and pay required employment taxes for household employees on Schedule H of the employer’s Form 1040 or Form 1040A. While withheld amounts do not have to be deposited on a monthly basis, the employer does need an employer identification number (EIN) to include on the employee’s Form W-2 and the employer’s Schedule H. To obtain an EIN, an employer should complete Form SS-4.

An employer must increase either his or her quarterly estimated tax payments or the income tax withholding on his or her own wages in order to satisfy employment tax obligations with respect to household employees. Failure to withhold results in liability for the penalty for underpayment of estimated tax.

Child and dependent care credit. A credit is allowed for a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer, and the taxpayer's spouse if filing a joint return, to be gainfully employed. The Social Security “Nanny” Taxes you pay on wages for qualifying child and dependent care services are themselves considered work-related expenses for purposes of this credit.

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.

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.

Individuals

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

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.

Businesses

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

Drafting legislation

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.

Extenders

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.