Newsletters

Happy New Year 2021! 

Following is an update of a few of the new 2020 tax law changes.  If you are a returning client and would like a personalized client organizer for tax planning, request one via email at wendy@carefreetax1040.com.  An organizer is also on our website, www.carefreetax1040.com  under the info center tab.  There are about 90 financial calculators on the website, along with a number of financial and tax links including IRS and WI/IL Dept of Revenue websites.  This site is packed with lots of information that will be helpful for both tax information and planning. 

Our hope is to manage this season as normal as possible, while providing a safe environment.  We have taken extra precautions including an air purifier device that cleans the air every 30 minutes and can handle the covid micron size.  Cleaning will be done throughout the day.  We are trying to limit the number of clients in the office at this time.  Considering this, we would appreciate it if you would not bring children or additional people with you to your appointment.  If you are not comfortable with a face-to-face meeting, you are welcome to drop off or mail in your information.  We also have a secure link we can email to you if you’d like to submit the documents electronically.  Please do not email anything to us without asking for this secure link.

We hope 2020 was a year of being able to count blessings in the midst of such a challenging time in history.   Looking forward to seeing you soon!  Call 608-756-9930 to set up your appointment. 

Wendy and Robin

Please Bring Completed Client Data Sheet to your Appointment.

It is very important that you fill the attached data sheet out, front and back, and bring it to your appointment with required paperwork.  It will help with your organization.  Please also bring any updated bank information for direct deposit of refunds.  We very much appreciate your cooperation!

1040 Form. We again have a new 1040 form with line and form changes. 

Economic Impact Payment. Beginning in April, the IRS began sending economic impact payments to eligible taxpayers.  The amount of the payment you received was based on your 2019 tax return. If you did not file a 2019 return by the time the IRS sent your payment, they used the information on your 2018 return. Because of this, you may have received more or less than you were entitled to receive. The nature of the payment works as an advance credit on your 2020 tax return and is not taxable. If you did not receive all that you were due, for example because your marital status changed or you gained a dependent, the additional amount will be included on your 2020 return. If you received more than you were entitled to receive, this will not need to be repaid, nor will it change your tax liability. Within 15 days of the payment, the IRS should have mailed you a letter (Notice 1444). This notice explained the payment and how much you received. You will need to include that with your tax papers and bring it to your tax appointment.

Self-employed and small business owners, PPP Loans/Grants. If you have a small business and had either a PPP Loan or Grants, please bring applicable documentation. WI Dept of Revenue will issue a 1099-G for any grants they gave.  If your PPP Loan has not been forgiven yet but you expect it will be, bring in the documents you turned into the bank to show proof.  If you were a self-employed individual who got covid outside of the weeks you were earning unemployment, please bring in documentation showing the test results and the date.

Charitable Contributions. For 2020, you can claim an above-the-line deduction of up to $300 for cash/check contributions to a qualified charity if you do not itemize your deductions. The deduction is limited to $300 per tax return. The CARES Act also changed the adjusted gross income limit for cash contributions. Such contributions are allowed up to 100% in 2020. Bring charitable documentation to your appointment.

Changes to Retirement Accounts. The SECURE and the CARES Act made several changes to IRAs and other qualified retirement accounts starting in 2020. 1) Taxpayers of any age can now make contributions to their IRA if you have earned income, regardless of age.  2) You are not required to begin distributions from your qualified retirement plan or IRA until April 1 of the year following the year in which you reach age 72. Previously you were required to begin distributions by April 1 of the year following age 70½. 3) In 2020, you are not required to take your minimum required distribution (RMD) from your IRA or qualified retirement plan. If you did take your RMD in early 2020, the IRS allowed you to roll it back into your plan provided you did so by August 31.

Covid Retirement Account Distributions. 1) You are permitted to withdraw up to $100,000 from your IRA or retirement account and avoid the 10% early distribution penalty if the reason was due to COVID-19. To be eligible, you, your spouse or a family member must have tested positive for the virus or you experienced adverse financial hardships as a result of being furloughed or laid off from work or were unable to work due to lack of childcare.  If you elect to do so, COVID related distributions can be included in your income in the current tax year, otherwise the income is reported over a three-year period beginning with the year of the distribution. You also have three years to recontribute a COVID distribution back into a qualified plan or IRA and avoid paying tax on the amount. 2) The CARES Act provides for some flexibility for loans from certain qualified plans. If you are qualified, you can take a loan from your retirement plan of up to $100,000. In addition, if you have an outstanding loan with a payment due between March 27 and December 31, 2020 you are granted an automatic one-year delay for making a repayment.

Section 529 Plans. Any person can contribute to a 529 plan for the benefit of designated beneficiary. Generally, distributions are used to help pay for higher education expenses. New rules also allow for distributions to pay for the cost of a registered apprenticeship program or up to $10,000 lifetime limit for student loan repayments including principal and interest. The money can be used to repay the designated beneficiary’s student loan or the loan of the beneficiary’s sibling. Siblings include brothers, sisters, stepbrothers, or stepsisters. A student loan distribution to a sibling of a designated beneficiary is applied to the sibling's $10,000 lifetime limit, not to the lifetime limit of the designated beneficiary.  **If you paid any student loans with 529 distributions, we will need documentation showing the breakdown of the interest vs the principal paid.  Also, you can now use your WI 529 plan to pay for tuition and enrollment fees for children in elementary or secondary public or private schools. This is limited to $10,000 per year per designated beneficiary.  

HSAs and FSAs. Amounts paid from Health Savings Accounts (HSAs), Archer Medical Savings Accounts and Flexible Spending Arrangements (FSAs) are to be treated as paid for medical care even if they are not paid under a doctor’s prescription. This includes amounts paid for over-the-counter products including menstrual care. This new rule applies to amount paid after December 31, 2019.

Unemployment Benefits. Many of you had to apply for and collect unemployment benefits for the first time this year. Unemployment benefits, including any of the special unemployment compensation authorized under the Coronavirus Relief Act, are included in your income and subject to tax.  Keep in mind, the taxable benefits, and Economic Security Act. If you did not elect to voluntarily have income tax withheld from your benefits, you could face an unanticipated tax bill in 2021.

Standard Mileage Rate.  Taxpayers can use the standard mileage rate (in lieu of actual expenses) in computing the deductible costs of operating automobiles owned or leased for various purposes. Business 57.5 cents/mi, Medical 17 cents/mi, and Charitable is 14 cents/mi. The 2021 rate will decrease to 56 cents/mi.

Social Security Wage Base for 2021.  The Social Security Administration (SSA) recently announced that the maximum earnings subject to the Social Security component of the FICA tax will increase from $137,700 to $142,800 for 2021.

Nonbusiness Energy Property. If you purchased certain energy efficient property for your personal residence, you may be entitled to tax credit for qualified energy improvements to your home for certain windows, doors, skylights, and roofs, furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulating fans, subject to a lifetime cap of $500. These credits have been retroactively extended through 2020. Bring in the receipt showing the breakdown of labor vs materials and how much was paid.  Feel free to stop by the office to pick up a listing of the specifications for each item to make sure it qualifies.

Qualified Tuition and Related Expenses. You may be entitled to an above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 if your AGI does not exceed $65,000 ($130,000 for joint filers) or $2,000 if your AGI does not exceed $80,000 ($160,000 for joint filers). The deduction is retroactively extended through 2020.

Check your withholding now. COVID-19 created cash-flow problems for many of you. Make sure your withholding and estimated taxes support what you expect to pay while you still have time to fix any problem. If you find you may be in danger of being penalized for underpaying taxes, you can make an estimated tax payment due January 15, 2021. There is a withholding calculator at https://apps.irs.gov/app/tax-withholding-estimator-2020.

Gifting. The 2020 gift exclusion remains at $15,000. If you are married, you and your spouse can elect to “gift split” and use your exemptions together to give up to $30,000 per beneficiary.

Non-employee Compensation. Non-employee compensation of $600 or more will be reported on a new form – 1099-NEC. If you are a business owner and paid out over $600 to a person as a commission, rent, fees, etc, you are required to issue a 1099 to that person by January 31 for the prior year.  Please call to schedule a time to bring in your information

Identity Protection Pin Number. Beginning in January, 2021, anyone can apply for the 6 digit number as additional protection against tax-related identity theft.  Go to the site, “Get an IP PIN” on IRS.gov.  You must get a new number each year.  An electronic return without a correct IP PIN will be rejected.

Virtual Currency. Bitcoin, bitcoin cash, Zcash, Dash, Ripple, EOS, Cardano Ethereum, Litecoin, and Monero are all types of cryptocurrency.  This is a capital asset like a stock.  Any gain or loss from the sale or exchange is taxed as a capital gain or loss.  If you “mine” cryptocurrencies, you have earnings from that transaction and that income must also be reported on the tax return.

Tuition Credits. We need the following documentation to prepare your return.  1098-T, Billing Acct Activity Stmt from the school showing all fees paid, and if applicable, the amounts paid for any required course materials. 

IRS Interest Income – Many taxpayers who filed after April 15 through July 15 and received a refund, also received interest on that refund in August from the IRS.  It may have been direct deposited into your account if that is where your refund went.  It is considered taxable income, so you will receive a 1099-INT if your interest totaled more than $10.   

WI residents are required to report any online purchases where sales tax was not collected.

REMINDER: Even if you think you will not itemize your deductions for federal tax purposes, bring in your receipts, including charitable contributions, because it may be useful for WI tax purposes.

Property Tax Bill. Check your personal residence property tax bill to verify you have the lottery credit applied on it.

Homestead Credit. For those eligible whose household income is less than $24,680.  If a claimant or spouse is collecting disability, proof of disability is required each year.  If there is no form SSA, then a statement from the Veteran’s Administration or a physician is required. The maximum credit available to claim is $1168.

Health Insurance Subtraction.  This is a reminder for those who pay health insurance and long-term care premiums after-tax, to bring those amounts in for reporting on the WI return.

WI Tuition and Fees Subtraction.  The maximum tuition and fees subtraction remains at $6,972 per student. The income phase-outs are $67,940 for single/HOH, and $113,240 for MFJ. 

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

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

The final regulations largely adopt regulations that were proposed in June ( NPRM REG-117589-18). However, they also:

• add a " state or local law" test to define real property; and
• reject the “purpose and use” test in the proposed regulations.

In addition, the final regulations classify cooperative housing corporation stock and land development rights as real property. The final regulations also provide that a license, permit, or other similar right is generally real property if it is (i) solely for the use, enjoyment, or occupation of land or an inherently permanent structure; and (ii) in the nature of a leasehold, an easement, or a similar right.

General Definition
Under the final regulations, property is classified as "real property" for like-kind exchange purposes if, on the date it is transferred in the exchange, the property is real property under the law of the state or local jurisdiction in which it is located. The proposed regulations had limited this “state or local law” test to shares in a mutual ditch, reservoir, or irrigation company.

However, the final regulations also clarify that real property that was ineligible for a like-kind exchange before the TCJA remains ineligible. For example, intangible assets that could not be like-kind property before the TCJA (such as stocks, securities, and partnership interests) remain ineligible regardless of how they are characterized under state or local law.

Accordingly, under the final regulations, property is real property if it is:

• classified as real property under state or local law;
• specifically listed as real property in the final regulations; or
• considered real property based on all of the facts and circumstances, under factors provided in the regulations.

These tests mean that property that is not real property under state or local law might still be real property for like-kind exchange purposes if it satisfies the second or third test.

Types of Real Property
Under both the proposed and final regulations, real property for a like-kind exchange is:

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

Under both the proposed and final regulations, improvements to land include inherently permanent structures, and the structural components of inherently permanent structures. Each distinct asset must be analyzed separately to determine if it is land, an inherently permanent structure, or a structural component of an inherently permanent structure. The regulations identify several specific items, assets and systems as distinct assets, and provide factors for identifying other distinct assets.

The final regulations also:

• incorporate the language provided in Reg. §1.856-10(d)(2)(i) to provide additional clarity regarding the meaning of "permanently affixed;"
• modify the example in the proposed regulations concerning offshore drilling platforms; and
• clarify that the distinct asset rule applies only to determine whether property is real property, but does not affect the application of the three-property rule for identifying properties in a deferred exchange.

"Purpose or Use" Test
The proposed regulations would have imposed a "purpose or use" test on both tangible and intangible property. Under this test, neither tangible nor intangible property was real property if it contributed to the production of income unrelated to the use or occupancy of space.

The final regulations eliminate the purpose and use test for both tangible and intangible property. Consequently, tangible property is generally an inherently permanent structure—and, thus, real property—if it is permanently affixed to real property and will ordinarily remain affixed for an indefinite period of time. A structural component likewise is real property if it is integrated into an inherently permanent structure. Accordingly, items of machinery and equipment are real property if they comprise an inherently permanent structure or a structural component, or if they are real property under the state or local law test—irrespective of the purpose or use of the items or whether they contribute to the production of income.

Similarly, whether intangible property produces or contributes to the production of income is not considered in determining whether intangible property is real property for like-kind exchange purposes. However, the purpose of the intangible property remains relevant to the determination of whether the property is real property.

Incidental Personal Property
The incidental property rule in the proposed regulations provided that, for exchanges involving a qualified intermediary, personal property that is incidental to replacement real property (incidental personal property) is disregarded in determining whether a taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money or non-like-kind property held by the qualified intermediary are expressly limited as provided in Reg. §1.1031(k)-1(g)(6).

Personal property is incidental to real property acquired in an exchange if (i) in standard commercial transactions, the personal property is typically transferred together with the real property, and (ii) the aggregate fair market value of the incidental personal property transferred with the real property does not exceed 15 percent of the aggregate fair market value of the replacement real property (15-percent limitation).

This final regulations adopt these rules with some minor modifications to improve clarity and readability. For example, the final regulations clarify that the receipt of incidental personal property results in taxable gain; and the 15-percent limitation compares the value of all of the incidental properties to the value of all of the replacement real properties acquired in the same exchange.

Effective Dates
The final regulations apply to exchanges beginning after the date they are published as final in the Federal Register. However, a taxpayer may also rely on the proposed regulations published in the Federal Register on June 12, 2020, if followed consistently and in their entirety, for exchanges of real property beginning after December 31, 2017, and before the publication date of the final regulations. In addition, conforming changes to the bonus depreciation rules apply to tax years beginning after the final regulations are published.

The IRS has released rulings concerning deductions for eligible Paycheck Protection Program (PPP) loan expenses.

The IRS has released rulings concerning deductions for eligible Paycheck Protection Program (PPP) loan expenses. The rulings:

• deny a deduction if the taxpayer has not yet applied for PPP loan forgiveness, but expects the loan to be forgiven; and
• provide a safe harbor for deducting expenses if PPP loan forgiveness is denied or the taxpayer does not apply for forgiveness.

Background
In response to the COVID-19 (coronavirus) crisis, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) expanded Section 7(a) of the Small Business Act for certain loans made from February 15, 2020, through August 8, 2020 (PPP loans). An eligible PPP loan recipient may have the debt on a covered loan forgiven, and the cancelled debt will be excluded from gross income. To prevent double tax benefits, under Reg. §1.265-1, taxpayers cannot deduct expenses allocable to income that is either wholly excluded from gross income or wholly exempt from tax.

The IRS previously determined that businesses whose PPP loans are forgiven cannot deduct business expenses paid for by the loan ( Notice 2020-32, I.R.B. 2020-21, 837). The new guidance expands on the previous guidance, but provides a safe harbor for taxpayers whose loans are not forgiven.

No Business Deduction
In Rev. Rul. 2020-27, the IRS amplifies guidance in Notice 2020-32. A taxpayer that received a covered PPP loan and paid or incurred certain otherwise deductible expenses may not deduct those expenses in the tax year in which the expenses were paid or incurred if, at the end of the tax year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period. This is the case even if the taxpayer has not applied for forgiveness by the end of the tax year.

Safe Harbor
In Rev. Proc. 2020-51, the IRS provides a safe harbor allowing taxpayers to claim a deduction in the tax year beginning or ending in 2020 for certain otherwise deductible eligible expenses if:

• the eligible expenses are paid or incurred during the taxpayer’s 2020 tax year;
• the taxpayer receives a PPP covered loan that, at the end of the taxpayer’s 2020 tax year, the taxpayer expects to be forgiven in a subsequent tax year; and
• in a subsequent tax year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan.

A taxpayer may be able to deduct some or all of the eligible expenses on, as applicable:

• a timely (including extensions) original income tax return or information return for the 2020 tax year;
• an amended return or an administrative adjustment request (AAR) under Code Sec. 6227 for the 2020 tax year; or
• a timely (including extensions) original income tax return or information return for the subsequent tax year.

Applying Safe Harbor
To apply the safe harbor, a taxpayer attaches a statement titled "Revenue Procedure 2020-51 Statement" to the return on which the taxpayer deducts the expenses. The statement must include:

• the taxpayer’s name, address, and social security number or employer identification number;
• a statement specifying whether the taxpayer is an eligible taxpayer under either section 3.01 or section 3.02 of Revenue Procedure 2020-51;
• a statement that the taxpayer is applying section 4.01 or section 4.02 of Revenue Procedure 2020-51;
• the amount and date of disbursement of the taxpayer’s covered PPP loan;
• the total amount of covered loan forgiveness that the taxpayer was denied or decided to no longer seek;
• the date the taxpayer was denied or decided to no longer seek covered loan forgiveness; and
• the total amount of eligible expenses and non-deducted eligible expenses that are reported on the return.

The IRS has issued final regulations under Code Sec. 274 relating to the elimination of the employer deduction of for transportation and commuting fringe benefits by the Tax Cuts and Jobs Act ( P.L. 115-97), effective for amounts paid or incurred after December 31, 2017. The final regulations address the disallowance of a deduction for the expense of any qualified transportation fringe (QTF) provided to an employee of the taxpayer. Guidance and methodologies are provided to determine the amount of QTF parking expenses that is nondeductible. The final regulations also address the disallowance of the deduction for expenses of transportation and commuting between an employee’s residence and place of employment.

The IRS has issued final regulations under Code Sec. 274 relating to the elimination of the employer deduction of for transportation and commuting fringe benefits by the Tax Cuts and Jobs Act ( P.L. 115-97), effective for amounts paid or incurred after December 31, 2017. The final regulations address the disallowance of a deduction for the expense of any qualified transportation fringe (QTF) provided to an employee of the taxpayer. Guidance and methodologies are provided to determine the amount of QTF parking expenses that is nondeductible. The final regulations also address the disallowance of the deduction for expenses of transportation and commuting between an employee’s residence and place of employment.

The final regulations adopt earlier proposed regulations with a few minor modifications in response to public comments ( REG-119307-19). Pending issuance of these final regulations, taxpayers had been allowed to apply to proposed regulations or guidance issued in Notice 2018-99, I.R.B. 2018-52, 1067. Notice 2018-99 is obsoleted on the publication date of the final regulations.

The final regulations clarify an exception for parking spaces made available to the general public to provide that parking spaces used to park vehicles owned by members of the general public while the vehicle awaits repair or service are treated as provided to the general public.

The category of parking spaces for inventory or which are otherwise unusable by employees is clarified to provide that such spaces may also not be usable by the general public. In addition, taxpayers will be allowed to use any reasonable method to determine the number of inventory/unusable spaces in a parking facility.

The definition of "peak demand period" for purposes of determining the primary use of a parking facility is modified to cover situations where a taxpayer is affected by a federally declared disaster.

The final regulations also provide that taxpayers using the cost per parking space methodology for determining the disallowance for parking facilities may calculate the cost per space on a monthly basis.

Effective Date
The final regulations apply to tax years beginning on or after the date of publication in the Federal Register. However, taxpayers can choose to apply the regulations to tax years ending after December 31, 2019.

As part of a series of reminders, the IRS has urged taxpayers get ready for the upcoming tax filing season. A special page ( https://www.irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes), updated and available on the IRS website, outlines steps taxpayers can take now to make tax filing easier in 2021.

As part of a series of reminders, the IRS has urged taxpayers get ready for the upcoming tax filing season. A special page ( https://www.irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes), updated and available on the IRS website, outlines steps taxpayers can take now to make tax filing easier in 2021.

Taxpayers receiving substantial amounts of non-wage income like self-employment income, investment income, taxable Social Security benefits and, in some instances, pension and annuity income, should make quarterly estimated tax payments. The last payment for 2020 is due on January 15, 2021. Payment options can be found at IRS.gov/payments. For more information, the IRS encourages taxpayers to review Pub. 5348, Get Ready to File, and Pub. 5349, Year-Round Tax Planning is for Everyone.

Income
Most income is taxable, so taxpayers should gather income documents such as Forms W-2 from employers, Forms 1099 from banks and other payers, and records of virtual currencies or other income. Other income includes unemployment income, refund interest and income from the gig economy.

Forms and Notices
Beginning in 2020, individuals may receive Form 1099-NEC, Nonemployee Compensation, rather than Form 1099-MISC, Miscellaneous Income, if they performed certain services for and received payments from a business. The IRS recommends reviewing the Instructions for Form 1099-MISC and Form 1099-NEC to ensure clients are filing the appropriate form and are aware of this change.

Taxpayers may also need Notice 1444, Economic Impact Payment, which shows how much of a payment they received in 2020. This amount is needed to calculate any Recovery Rebate Credit they may be eligible for when they file their federal income tax return in 2021. People who did not receive an Economic Impact Payment in 2020 may qualify for the Recovery Rebate Credit when they file their 2020 taxes in 2021.

Additional Information
To see information from the most recently filed tax return and recent payments, taxpayers can sign up to view account information online. Taxpayers should notify the IRS of address changes and notify the Social Security Administration of a legal name change to avoid delays in tax return processing.

This year marks the 5th Annual National Tax Security Awareness Week-a collaboration by the IRS, state tax agencies and the tax industry. The IRS and the Security Summit partners have issued warnings to all taxpayers and tax professionals to beware of scams and identity theft schemes by criminals taking advantage of the combination of holiday shopping, the approaching tax season and coronavirus concerns. The 5th Annual National Tax Security Awareness Week coincided with Cyber Monday, the traditional start of the online holiday shopping season.

This year marks the 5th Annual National Tax Security Awareness Week-a collaboration by the IRS, state tax agencies and the tax industry. The IRS and the Security Summit partners have issued warnings to all taxpayers and tax professionals to beware of scams and identity theft schemes by criminals taking advantage of the combination of holiday shopping, the approaching tax season and coronavirus concerns. The 5th Annual National Tax Security Awareness Week coincided with Cyber Monday, the traditional start of the online holiday shopping season.

The following are a few basic steps which taxpayers and tax professionals should remember during the holidays and as the 2021 tax season approaches:

• use an updated security software for computers and mobile phones;
• the purchased anti-virus software must have a feature to stop malware and a firewall that can prevent intrusions;
• don't open links or attachments on suspicious emails because this year, fraud scams related to COVID-19 and the Economic Impact Payment are common;
• use strong and unique passwords for online accounts;
• use multi-factor authentication whenever possible which prevents thieves from easily hacking accounts;
• shop at sites where the web address begins with "https" and look for the "padlock" icon in the browser window;
• don't shop on unsecured public Wi-Fi in places like a mall;
• secure home Wi-Fis with a password;
• back up files on computers and mobile phones; and
• consider creating a virtual private network to securely connect to your workplace if working from home.

In addition, taxpayers can check out security recommendations for their specific mobile phone by reviewing the Federal Communications Commission's Smartphone Security Checker. The Federal Bureau of Investigation has issued warnings about fraud and scams related to COVID-19 schemes, anti-body testing, healthcare fraud, cryptocurrency fraud and others. COVID-related fraud complaints can be filed at the National Center for Disaster Fraud. Moreover, the Federal Trade Commission also has issued alerts about fraudulent emails claiming to be from the Centers for Disease Control or the World Health Organization. Taxpayers can keep atop the latest scam information and report COVID-related scams at www.FTC.gov/coronavirus.

The IRS has issued proposed regulations for the centralized partnership audit regime...

NPRM REG-123652-18

The IRS has issued proposed regulations for the centralized partnership audit regime that:

• clarify that a partnership with a QSub partner is not eligible to elect out of the centralized audit regime;
• add three new types of “special enforcement matters” and modify existing rules;
• modify existing guidance and regulations on push out elections and imputed adjustments; and
• clarify rules on partnerships that cease to exist.

The regulations are generally proposed to apply to partnership tax years ending after November 20, 2020, and to examinations and investigations beginning after the date the regs are finalized. However, the new special enforcement matters category for partnership-related items underlying non-partnership-related items is proposed to apply to partnership tax years beginning after December 20, 2018. In addition, the IRS and a partner could agree to apply any part of the proposed regulations governing special enforcement matters to any tax year of the partner that corresponds to a partnership tax year that is subject to the centralized partnership audit regime.

Centralized Audit Regime
The Bipartisan Budget Act of 2015 ( P.L. 114-74) replaced the Tax Equity and Fiscal Responsibility Act (TEFRA) ( P.L. 97-248) partnership procedures with a centralized partnership audit regime for making partnership adjustments and tax determinations, assessments and collections at the partnership level. These changes were further amended by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) ( P.L. 114-113), and the Tax Technical Corrections Act of 2018 (TTCA) ( P.L. 115-141). The centralized audit regime, as amended, generally applies to returns filed for partnership tax years beginning after December 31, 2017.

Election Out
A partnership with no more than 100 partners may generally elect out of the centralized audit regime if all of the partners are eligible partners. As predicted in Notice 2019-06, I.R.B. 2019-03, 353, the proposed regulations would provide that a qualified subchapter S subsidiary (QSub) is not an eligible partner; thus, a partnership with a QSub partner could not elect out of the centralized audit regime.

Special Enforcement Matters
The IRS may exempt “special enforcement matters” from the centralized audit regime. There are currently six categories of special enforcement matters:

• failures to comply with the requirements for a partnership-partner or S corporation partner to furnish statements or compute and pay an imputed underpayment;
• assessments relating to termination assessments of income tax or jeopardy assessments of income, estate, gift, and certain excise taxes;
• criminal investigations;
• indirect methods of proof of income;
• foreign partners or partnerships;
• other matters identified in IRS regulations.

The proposed regs would add three new types of special enforcement matters:

• partnership-related items underlying non-partnership-related items;
• controlled partnerships and extensions of the partner’s period of limitations; and
• penalties and taxes imposed on the partnership under chapter 1.

The proposed regs would also require the IRS to provide written notice of most special enforcement matters to taxpayers to whom the adjustments are being made.

The proposed regs would clarify that the IRS could adjust partnership-level items for a partner or indirect partner without regard to the centralized audit regime if the adjustment relates to termination and jeopardy assessments, if the partner is under criminal investigation, or if the adjustment is based on an indirect method of proof of income.

However, the proposed regs would also provide that the special enforcement matter rules would not apply to the extent the partner could demonstrate that adjustments to partnership-related items in the deficiency or an adjustment by the IRS were:

• previously taken into account under the centralized audit regime by the person being examined; or
• included in an imputed underpayment paid by a partnership (or pass-through partner) for any tax year in which the partner was a reviewed year partner or indirect partner, but only if the amount included in the deficiency or adjustment exceeds the amount reported by the partnership to the partner that was either reported by the partner or indirect partner or is otherwise included in the deficiency or adjustment determined by the IRS.

Push Out Election, Imputed Underpayments
The partnership adjustment rules generally do not apply to a partnership that makes a "push out" election to push the adjustment out to the partners. However, the partnership must pay any chapter 1 taxes, penalties, additions to tax, and additional amounts or the amount of any adjustment to an imputed underpayment. Thus, there must be a mechanism for including these amounts in the imputed underpayment and accounting for these amounts.

In calculating an imputed underpayment, the proposed regs would generally include any adjustments to the partnership’s chapter 1 liabilities in the credit grouping and treat them similarly to credit adjustments. Adjustments that do not result in an imputed underpayment generally could increase or decrease non-separately stated income or loss, as appropriate, depending on whether the adjustment is to an item of income or loss. The proposed regs would also treat a decrease in a chapter 1 liability as a negative adjustment that normally does not result in an imputed underpayment if: (1) the net negative adjustment is to a credit, unless the IRS determines to have it offset the imputed underpayment; or (2) the imputed underpayment is zero or less than zero.

Under existing regs for calculating an imputed underpayment, an adjustment to a non-income item that is related to, or results from, an adjustment to an item of income, gain, loss, deduction, or credit is generally treated as zero, unless the IRS determines that the adjustment should be included in the imputed underpayment. The proposed regs would clarify this rule and extend it to persons other than the IRS. Thus, a partnership that files an administrative adjustment request (AAR) could treat an adjustment to a non-income item as zero if the adjustment is related to, and the effect is reflected in, an adjustment to an item of income, gain, loss, deduction, or credit (unless the IRS subsequently determines in an AAR examination that both adjustments should be included in the calculation of the imputed underpayment).

A partnership would take into account adjustments to non-income items in the adjustment year by adjusting the item on its adjustment year return to be consistent with the adjustment. This would apply only to the extent the item would appear on the adjustment year return without regard to the adjustment. If the item already appeared on the partnership’s adjustment year return as a non-income item, or appeared as a non-income item on any return of the partnership for a tax year between the reviewed year and the adjustment year, the partnership does not create a new item on the partnership’s adjustment year return.

A passthrough partner that is paying an amount as part of an amended return submitted as part of a request to modify an imputed underpayment would take into account any adjustments that do not result in an imputed underpayment in the partners’ tax year that includes the date the payment is made. This provision, however, would not apply if no payment is made by the partnership because no payment is required.

Partnership Ceases to Exist
If a partnership ceases to exist before the partnership adjustments take effect, the adjustments are taken into account by the former partners of the partnership. The IRS may assess a former partner for that partner’s proportionate share of any amounts owed by the partnership under the centralized partnership audit regime. The proposed regs would clarify that a partnership adjustment takes effect when the adjustments become finally determined; that is, when the partnership and IRS enter into a settlement agreement regarding the adjustment; or, for adjustments reflected in an AAR, when the AAR is filed. The proposed regs would also make conforming changes to existing regs:

• A partnership ceases to exist if the IRS determines that the partnership does not have the ability to pay in full any amount that the partnership may become liable for under the centralized partnership audit regime.
• Existing regs that describe when the IRS will not determine that a partnership ceases to exist would be removed.
• Statements must be furnished to the former partners and filed with the IRS no later than 60 days after the later of the date the IRS notifies the partnership that it has ceased to exist or the date the adjustments take effect.

The proposed regs would also modify the definition of "former partners" to be partners of the partnership during the last tax year for which a partnership return or AAR was filed, or the most recent persons determined to be the partners in a final determination, such as a final court decision, defaulted notice of final partnership adjustment (FPA), or settlement agreement.

Comments Requested
Comments are requested on all aspects of the proposed regulations by January 22, 2021. The IRS strongly encourages commenters to submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-123652-18). Comments submitted on paper will be considered to the extent practicable.

The IRS has issued final regulations with guidance on how a tax-exempt organization can determine whether it has more than one unrelated trade or business, how it should identify its separate trades and businesses, and how to separately calculate unrelated business taxable income (UBTI) for each trade or business – often referred to as "silo" rules. Since 2018, under provisions of the Tax Cuts and Jobs Act (TCJA), the loss from one unrelated trade or business may not offset the income from another, separate trade or business. Congress did not provide detailed methods of determining when unrelated businesses are "separate" for purposes of calculating UBTI.

The IRS has issued final regulations with guidance on how a tax-exempt organization can determine whether it has more than one unrelated trade or business, how it should identify its separate trades and businesses, and how to separately calculate unrelated business taxable income (UBTI) for each trade or business – often referred to as "silo" rules. Since 2018, under provisions of the Tax Cuts and Jobs Act (TCJA), the loss from one unrelated trade or business may not offset the income from another, separate trade or business. Congress did not provide detailed methods of determining when unrelated businesses are "separate" for purposes of calculating UBTI.

On April 24, 2020, the IRS published a notice of proposed rulemaking ( REG-106864-18) that proposed guidance on how an exempt organization determines if it has more than one unrelated trade or business and, if so, how the exempt organization calculates UBTI under Code Sec. 512(a)(6). The final regulations substantially adopt the proposed regulations issued earlier this year, with modifications.

Separate Trades or Businesses
The proposed regulations suggested using the North American Industry Classification System (NAICS) six-digit codes for determining what constitutes separate trades or businesses. Notice 2018-67, I.R.B. 2018-36, 409, permitted tax-exempt organizations to rely on these codes. The first two digits of the code designate the economic sector of the business. The proposed guidance provided that organizations could make that determination using just the first two digits of the code, which divides businesses into 20 categories, for this purpose.

The proposed regulations provided that, once an organization has identified a separate unrelated trade or business using a particular NAICS two-digit code, the it could only change the two-digit code describing that separate unrelated trade or business if two specific requirements were met. The final regulations remove the restriction on changing NAICS two-digit codes, and instead require an exempt organization that changes the identification of a separate unrelated trade or business to report the change in the tax year of the change in accordance with forms and instructions.

QPIs
For exempt organizations, the activities of a partnership are generally considered the activities of the exempt organization partners. Code Sec. 512(c) provides that if a trade or business regularly carried on by a partnership of which an exempt organization is a member is an unrelated trade or business with respect to such organization, that organization must include its share of the gross income of the partnership in UBTI.

The proposed regulations provided that an exempt organization’s partnership interest is a "qualifying partnership interest" (QPI) if it meets the requirements of the de minimis test by directly or indirectly holding no more than two percent of the profits interest and no more than two percent of the capital interest. For administrative convenience, the de minimis test allows certain partnership investments to be treated as an investment activity and aggregated with other investment activities. Additionally, the proposed regulations permitted the aggregation of any QPI with all other QPIs, resulting in an aggregate group of QPIs.

Once an organization designates a partnership interest as a QPI (in accordance with forms and instructions), it cannot thereafter identify the trades or businesses conducted by the partnership that are unrelated trades or businesses with respect to the exempt organization using NAICS two-digit codes unless and until the partnership interest is no longer a QPI.

A change in an exempt organization’s percentage interest in a partnership that is due entirely to the actions of other partners may present significant difficulties for the exempt organization. Requiring the interest to be removed from the exempt organization’s investment activities in one year but potentially included as a QPI in the next would create further administrative difficulty. Therefore, the final regulations adopt a grace period that permits a partnership interest to be treated as meeting the requirements of the de minimis test or the participation test, respectively, in the exempt organization’s prior tax year if certain requirements are met. This grace period will allow an exempt organization to treat such interest as a QPI in the tax year that such change occurs, but the organization will need to reduce its percentage interest before the end of the following tax year to meet the requirements of either the de minimis test or the participation test in that succeeding tax year for the partnership interest to remain a QPI.

The IRS has modified Rev. Proc. 2007-32, I.R.B. 2007-22, 1322, to provide that the term of a Gaming Industry Tip Compliance Agreement (GITCA) is generally five years, and the renewal term of a GITCA is extended from three years to a term of up to five years. A GITCA executed under Rev. Proc. 2003-35, 2003-1 CB 919 and Rev. Proc. 2007-32 will remain in effect until the expiration date set forth in that agreement, unless modified by the renewal of a GITCA under section 4.04 of Rev. Proc. 2007-32 (as modified by section 3 of this revenue procedure).

The IRS has modified Rev. Proc. 2007-32, I.R.B. 2007-22, 1322, to provide that the term of a Gaming Industry Tip Compliance Agreement (GITCA) is generally five years, and the renewal term of a GITCA is extended from three years to a term of up to five years. A GITCA executed under Rev. Proc. 2003-35, 2003-1 CB 919 and Rev. Proc. 2007-32 will remain in effect until the expiration date set forth in that agreement, unless modified by the renewal of a GITCA under section 4.04 of Rev. Proc. 2007-32 (as modified by section 3 of this revenue procedure).

The modified provisions generally provide as follows:

• In general, a GITCA shall be for a term of five years. For new properties and properties that do not have a prior agreement with the IRS, however, the initial term of the agreement may be for a shorter period.
• A GITCA may be renewed for additional terms of up to five years, in accordance with Section IX of the model GITCA. Beginning not later than six months before the termination date of a GITCA, the IRS and the employer must begin discussions as to any appropriate revisions to the agreement, including any appropriate revisions to the tip rates described in Section VIII of the model GITCA. If the IRS and the employer have not reached final agreement on the terms and conditions of a renewal agreement, the parties may mutually agree to extend the existing agreement for an appropriate time to finalize and execute a renewal agreement.

Effective Date
This revenue procedure is effective November 23, 2020.

Final regulations issued by the Treasury and IRS coordinate the extraordinary disposition rule that applies with respect to the Code Sec. 245A dividends received deduction and the disqualified basis rule under the Code Sec. 951A global intangible low-taxed income (GILTI) regime. Information reporting rules are also finalized.

Final regulations issued by the Treasury and IRS coordinate the extraordinary disposition rule that applies with respect to the Code Sec. 245A dividends received deduction and the disqualified basis rule under the Code Sec. 951A global intangible low-taxed income (GILTI) regime. Information reporting rules are also finalized.

Extraordinary Disposition Rule and GILTI Disqualified Basis Rule
The extraordinary disposition rule (EDR) in Reg. §1.245A-5 and the GILTI disqualified basis rule (DBR) in Reg. §1.951A-2(c)(5) both address the disqualified period that results from the differences between dates for which the transition tax under Code Sec. 965 and the GILTI rules apply. GILTI applies to calendar year controlled foreign corporations (CFCs) on January 1, 2018. A fiscal year CFC may have a period from January 1, 2018, until the beginning of its first tax year in 2018 (the disqualified period) in which it can generate income subject to neither the transition tax under Code Sec. 965 nor GILTI.

The extraordinary disposition rule limits the ability to claim the Code Sec. 245A deduction for certain earnings and profits generated during the disqualified period. Specifically, Reg. §1.245A-5 provides that the deduction is limited for dividends paid out of an extraordinary disposition account. Final regulations issued under GILTI address fair market basis generated as a result of assets transferred to related CFCs during the disqualified period (disqualified basis). Reg. §1.951A-2(c)(5) allocates deductions or losses attributable to disqualified basis to residual CFC income, such as income other than tested income, subpart F income, or effectively connected taxable income. As a result, the deductions or losses will not reduce the CFC’s income subject to U.S. tax.

Coordination Rules
The coordination rules are necessary to prevent excess taxation of a Code Sec. 245A shareholder. Excess taxation can occur because the earnings and profits subject to the extraordinary disposition rule and the basis to which the disqualified basis rule applies are generally a function of a single amount of gain.

Under the coordination rules, to the extent that the Code Sec. 245A deduction is limited with respect to distributions out of an extraordinary disposition account, a corresponding amount of disqualified basis attributable to the property that generated that extraordinary disposition account through an extraordinary disposition is converted to basis that is not subject to the disqualified basis rule. The rule is referred to as the disqualified basis (DQB) reduction rule.

A prior extraordinary disposition amount is also covered under this rule. A prior extraordinary disposition amount generally represents the extraordinary disposition of earnings and profits that have become subject to U.S. tax as to a Code Sec. 245A shareholder other than by direct application of the extraordinary disposition rule (e.g., inclusions as a result of investment in U.S. property under Code Sec. 956).

Separate coordination rules are provided, depending upon whether the application of the rule is in a simple or complex case.

Reporting Requirements
Every U.S. shareholder of a CFC that holds an item of property that has disqualified basis during an annual accounting period and files Form 5471 for that period must report information about the items of property with disqualified basis held by the CFC during the CFC’s accounting period, as required by Form 5471 and its instructions.

Additionally, information must be reported about the reduction to an extraordinary disposition account made pursuant to the regulations and reductions made to an item of specified property’s disqualified basis pursuant to the regulations during the corporation’s accounting period, as required by Form 5471 and its instructions.

Applicability Dates
The regulations apply to tax years of foreign corporations beginning on or after the date the regulations are published in the Federal Register, and to tax years of Code Sec. 245A shareholders in which or with which such tax years end. Taxpayers may choose to apply the regulations to years before the regulations apply.

For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.

For 2021, the Social Security tax wage cap will be $142,800, and Social Security and Supplemental Security Income (SSI) benefits will increase by 1.3 percent. These changes reflect cost-of-living adjustments to account for inflation.

2021 Wage Cap
The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:

• a 6.2 percent Social Security tax, also known as Old Age, Survivors, And Disability Insurance (OASDI); and
• a 1.45 percent Medicare tax, also known as hospital insurance (HI).

For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:

• a 12.4 percent OASDI tax; and
• a 2.9 percent HI tax.

OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.

For 2021, the wage base is $142,800. Thus, OASDI tax applies only to the taxpayer’s first $142,800 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $142,800.

There is no wage cap for HI tax.

Maximum Social Security Tax for 2021
For workers who earn $142,800 or more in 2021:

• an employee will pay a total of $8,853.60 in social security tax ($142,800 x 6.2 percent);
• the employer will pay the same amount; and
• a self-employed worker will pay a total of $17,707.20 in social security tax ($142,800 x 12.4 percent).

Additional Medicare Tax
Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:

• $250,000 for married taxpayers who file a joint return;
• $125,000 for married taxpayers who file separate returns; and
• $200,000 for other taxpayers.

The annual wage cap does not affect the Additional Medicare tax.

Benefits Increase for 2021
Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2019 by 1.3 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.

The IRS has issued final regulations that provide guidance for employers on federal income tax withholding from employees’ wages.

The IRS has issued final regulations that provide guidance for employers on federal income tax withholding from employees’ wages. The final regulations:

• address the amount of federal income tax that employers withhold from employees’ wages;
• implement changes made by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
• reflect the redesigned Form W-4, Employee’s Withholding Certificate, and related IRS publications.

TCJA Changes
The TCJA made many amendments affecting income tax withholding on employees’ wages. The TCJA made many amendments affecting income tax withholding on employees’ wages.After the TCJA was enacted, the IRS issued guidance to implement the changes (for example, Notice 2018-14, I.R.B. 2018-7, 353; Notice 2018-92, I.R.B. 2018-51, 1038; Notice 2020-3, I.R.B. 2020-3, I.R.B. 2020-3, 330). The IRS updated Form W-4 and its instructions with significant changes intended to improve the accuracy of income tax withholding and make the withholding system more transparent for employees. It also released IRS Publication 15-T, Federal Income Tax Withholding Methods, which provides percentage method tables, wage bracket withholding tables, and other computational procedures for employers to use to compute withholding for the 2020 calendar year.

On February 13, 2020, the IRS published a notice of proposed rulemaking ( REG-132741-17) to update the regulations under Code Sec. 3401 and Code Sec. 3402 to reflect the legislative changes, and expand the rules to accommodate changes necessary to fully implement the redesigned Form W-4 and its related computational procedures, along with most existing computational procedures that apply to 2019 or earlier Forms W-4.

The final regulations adopt the proposed regulations with a few revisions.

Form W-4
The final regulations do not require all employees with a 2019 or earlier Form W-4 in effect to furnish a redesigned Form W-4. Comments expressed concerns that the proposed regulations and the related forms, instructions, publications, and other IRS guidance would require employers to maintain two different systems for computing income tax withholding on wages: one for 2019 or earlier Forms W-4, and another for the redesigned Forms W-4.

In response, the IRS is acknowledging concerns with (1) instructions to the redesigned Form W-4 for employees with multiple jobs and (2) optional computational “bridge” entries permitted under the regulations and described in Publication 15-T that will allow employers to continue in effect 2019 or earlier Forms W-4 as if the employees had furnished redesigned Forms W-4.

The final regulations revise Reg. §31.3402(f)(4)-1(a) to provide that an employer’s use of the computational bridge entries to adapt a 2019 or earlier Form W-4 to the redesigned computational procedures as if using entries on a redesigned Form W-4 will continue in effect such a Form W-4 that was properly in effect on or before December 31, 2019.

Lock-in Letters
The IRS issues a "lock-in" letter to notify an employer that an employee is not entitled to claim exemption from withholding, or is not entitled to the withholding allowance claimed on the employee’s Form W-4. The lock-in letter prescribes the withholding allowance the employer must use to figure withholding. After the lock-in letter becomes effective, the IRS may issue a subsequent modification notice, but only after the employee contacts the IRS to request an adjustment to the withholding prescribed in the lock-in letter.

Under the final regulations, employers are not required to notify the IRS that they no longer employ an employee for whom a lock-in letter was issued. Further, the final regulations do not require the IRS to reissue lock-in letters or modification notices solely because of the redesigned Form W-4.

The final regulations revise Reg. §31.3402(f)(2)-1(g)(2)(iv) relating to lock-in letters. and Reg. §31.3402(f)(2)-1(g)(2)(vii) relating to modification notices, to provide that an employer may comply with a lock-in letter or modification notice that is based on a 2019 or earlier Form W-4, as required by the regulations, if the employer implements the maximum withholding allowance and filing status permitted in a lock-in letter or modification notice by using the computational bridge entries as set forth in forms, instructions, publications, and other IRS guidance to calculate withholding for such a Form W-4.

Estimated Tax Payments
The final regulations revise Reg. §31.3402(m)-1(d) to allow employees to take estimated tax payments into account, as long as the employee (1) follows the instructions to the IRS’s Tax Withholding Estimator (available at https://www.irs.gov/individuals/tax-withholding-estimator) or IRS Publication 505, (2) is not subject to a lock-in letter or modification notice, and (3) does not request withholding from wages that falls below the pro rata share of income taxes attributable to wages determined under forms, instructions, publications, and other IRS guidance. The IRS intends to update its Tax Withholding Estimator and Publication 505 to reflect this rule.

Applicable Date
The final regulations generally apply on the date they are published in the Federal Register. Reg. §31.3402(f)(2)-1(g), regarding withholding compliance, applies as of February 13, 2020. Reg. §31.3402(f)(5)-1(a)(3), regarding the requirement to use the current version of Form W-4, applies as of March 16, 2020. The removal of Reg. §31.3402(h)(4)-1(b), regarding the combined income tax withholding and employee FICA tax withholding tables, applies on and after January 1, 2020.

Except for the removal of Reg. §31.3402(h)(4)-1(b), taxpayers may choose to apply the final regulations on and after January 1, 2020, and before their applicability date set forth in the regulations.