Form 56- Notice Concerning Fiduciary Relationship

Form 1040-Final Individual Income Tax Return and the State Tax Return

Form 706-United States Estate (and Generatino-Skipping Transfer) Tax Return 

TAX FILINGS FOR ESTATES AND TRUSTS

FORM 56 – NOTICE CONCERNING FIDUCIARY RELATIONSHIP

This form is filed with the IRS to notify the Service that you are acting as the representative for the estate or trust. It is important to file this form as soon as possible so that the Service sends any tax notices or other correspondence to the correct address.  By filing this form, you notify the IRS that you are the responsible party for filing and paying taxes for the estate or trust.

FORM 1040 – FINAL INDIVIDUAL INCOME TAX RETURN AND THE STATE TAX RETURN

The decedent’s final individual tax returns, Form 1040 and state return.  The executor, administrator, or trustee is responsible for filing this form. It includes all income, deductions, credits, and withholdings from January 1 to through the date of death. As of the date of death, the decedent’s tax filing ends.

FORM 706 – UNITED STATES ESTATE (and GENERATION-SKIPPING TRANSFER) TAX RETURN

This return reports all the assets and liabilities of the decedent as of the date of death or an alternate valuation date. It is a snapshot of a moment in time.  It does not report income and it is not an income tax return.

The assets are reported at the fair market value as of the date of death. The executor of the estate must obtain documents to prove the date of death values of the decedent’s assets. These documents would include bank statements, CD certificates, broker statements, IRA and/or 401k statements, annuity statements, etc. dated as of the date of death or very close to it. The estate must also include life insurance proceeds on policies owned by the decedent and payable on his/her death. It will include income earned but not yet received by the decedent such as a paycheck, a bonus, and award, etc.

There will be a need for appraisals of the value of certain assets if the decedent owned any of the following:

• real estate
• a closely held business
• partnership interests
• jewelry
• art, antiques, and collectibles

The return is required if the net value is in excess of $5.43 million in 2015.  This amount is referred to as the exemption amount. This amount is estate-tax free. It is adjusted annually for inflation.

The return may be required if the surviving spouse elects to carry over her/his deceased spouse’s unused exemption amount (the DSUE).  In general, we advise a spouse to file the Form 706 to make this election if the couple’s entire estate is valued at $4 million or more at the date of the first spouse’s death.

The Form 706 is due exactly 9 months after the date of death. For example, if the date of death is February 7, the Form 706 is due by November 7. An extension may be available for the filing for 6 months.  The extension is for filing, not paying. The estate tax is due by the original filing date.

FORM 1041 – US INCOME TAX RETURN FOR ESTATES AND TRUSTS and THE STATE RETURN

Income earned or received and deductions incurred after the date of death are reported on this return. For example, if the date of the decedent’s date of death is May 6, there could be a final decedent’s return for the period January 1 through May 6 reporting income and deductions during that period. The estate or trust would file a Form 1041 reporting income and deductions for the period May 7 through December 31.  It is important to keep track of income and deductions during these two periods of time.

FORM 709 – UNITED STATES GIFT (and GENERATION-SKIPPING TRANSFER) TAX RETURN

• Every individual may gift (give a gift) up to $14,000 per gift recipient in 2015 without incurring a gift tax.
• Gifts are never taxable to the recipient.
• Gifts may be taxable to the giver. 
• You may give or bequest up to the Exclusion Amount, $5.43 million in 2015, during your lifetime or at your death.
• All gifts and the net estate value are totaled on the Form 706.
• Annually, any gifts in excess of $14,000 are reported on the Form 709.
• The Form 709 is due by 4/15 each year. The due date can be extended to 10/15.

What is Propositon 60 & 90, 58 & 193 re transfer of base year property tax values

 FAQ’s REGARDING THE TRANSFER OF THE PROPERTY TAX BASE

 What is Proposition 60?

Prop. 60 was a constitutional amendment approved by the voters of California in 1986. It allows the transfer of an existing Proposition 13 base year value from a former residence to a replacement residence, if certain conditions are met. This benefit is open to homeowners who are at least 55-years old and are able to meet all qualifying conditions, (see below).

 What is Proposition 90?

Proposition 90 has the same provisions and qualifications as Proposition 60.  The difference is that it allows base year transfers from one county to another county in California.  The only counties that have adopted an ordinance to allow values from other counties are:

o    Alameda

o    El Dorado

o    Los Angeles

o    Orange

o    Riverside

o    San Bernardino

o    San Diego

o    San Mateo

o    Santa Clara

o    Ventura

This list can change at any time.  Please contact the local assessor to see if the value of your original property can be transferred to a replacement in that county.

How do I qualify for these property tax benefits?

1. Proposition 60 - Both the original property (former residence) and its replacement must be located in the same county.
2. Proposition 90 - The original property is located in a different county from replacement, (see Proposition 90 information above).
3. As of the date of transfer of the original property, the seller or a spouse living with the seller must be at least 55 years old.
4. The original property must have been eligible for the Homeowners' Exemption or entitled to the Disabled Veterans' Exemption.
5. The replacement dwelling must be of equal or lesser value than the original property.
6. The replacement dwelling must have been purchased or newly constructed on or after 11/06/86.
7. Without exception, the replacement dwelling must be purchased or newly constructed within two years (before or after) of the sale of the original property.
8. The original property must be subject to reappraisal at its current fair market value as the result of its transfer, in accordance with Sections 110.1 or 5803 of the Revenue and Taxation Code.
9. Without exception, a Claim for Relief must be filed within three years of the date a replacement dwelling is purchased or new construction of a replacement dwelling is completed to receive the full relief. A claim filed after the three year time period will receive a prospective relief only.

Is it true that only one claimant, out of several co-owners of a replacement dwelling, need be at least 55 as of the date of sale of an original property?

Yes, but the claimant must be an owner of record. Either the claimant or his/her spouse must also have been an occupant of the original property and at least 55 years old on the date of sale.

Can a taxpayer apply for and receive the benefit of Prop. 60/90 more than once?

 No, this is a one-time benefit. You are not eligible if you have been previously granted this benefit.

What is meant by "equal or lesser value" than the original dwelling?

In general, "equal or lesser value" means:
 
100 % of the market value of an original property if a replacement dwelling is purchased before the original property is sold.

105 % of the market value of an original property if a replacement dwelling is purchased within one year after the sale of the original property.

110 % of the market value of an original property if a replacement dwelling is purchased within the second year after the sale of the original property.

Is the "equal or lesser value" test a simple comparison of the sales price of the original property and the purchase price or cost of new construction of the replacement dwelling?

 No. The comparison must be made using the full market value of the original property and the full market value of the replacement dwelling as of its date of purchase or completion of new construction. This is important because sales prices are not always the same as market value. The Assessor must determine the market value for each property, which may differ from sales price.

If the current full cash value of my replacement dwelling slightly exceeds the full market value of my original property, can I still receive a partial benefit?

No. Unless the replacement dwelling satisfies the "equal or lesser value" test, no benefit is available.

May I give my original property to my child and still receive the Prop. 60/90 benefit when I purchase a replacement property?

No. The law provides that an original property must be sold for consideration and subject to reappraisal at full market value at the time of sale. Original property transferred to a child or disposed of by gift or devise does not qualify.  See the FAQ’s below re Propositions 58 and 193.

Can I qualify for the benefits of Prop. 60/90 when I sell my original property (owned by me alone) and purchase a replacement dwelling with several co-owners? What if I own only a 10 percent interest in the replacement dwelling?

Yes. The base year value of your original property can be transferred to your replacement dwelling, as long as you are otherwise qualified.  You may receive the benefits of Prop. 60 regardless of how many co-owners of record there are on the replacement dwelling.  In this situation, the total market value of the original property is compared to the total market value of the replacement property regardless of the fact that the qualified principal claimant may only own 10 percent of both original and replacement dwelling properties.  

You and your spouse, as the claimants, will use your "one time only" benefit.  An owner of record of the replacement property who is not the claimant's spouse is not considered a claimant, and a claim filed for the property will not constitute use of the one-time-only exclusion by the co-owner even though that person may benefit from the property tax relief.

Can two otherwise qualified taxpayers who have recently sold their separately owned original properties combine their claim for Prop. 60/90 benefit when they buy a single replacement dwelling together?

No. they can only receive the benefit if one or the other, not both together, qualifies by comparing his or her original property to the jointly purchased replacement dwelling. The implementing legislation specifically disallows combining a claim, whether or not the co-owners of the replacement dwelling are married.

May I, as a former co-owner of an original property, receive partial benefit on my replacement dwelling, along with other co-owners who purchase separate replacement dwellings?

No. The law provides that only one co-owner of an original property that is, or was, qualified for the Homeowners' Exemption may receive the benefit in a situation like this where all co-owners purchase separate replacement dwellings. The co-owners must determine, between themselves, which one should receive the benefit. Only in the case of a multiple-residential original property, where several co-owners qualify for separate Homeowners' Exemptions, may portions of the factored base year value of that property be transferred to several qualified replacement dwellings.

What if I am the co-owner of a property with more than one residential unit?

 A portion of the original property may qualify for the Homeowners' Exemption for you. The base year value of that portion can be transferred to your replacement dwelling. The other portion(s) of the original property may qualify for a separate Homeowners' Exemption(s). The base year value(s) of that other portion(s) can be transferred to another replacement dwelling(s).

Does a person qualify for the Prop. 60/90 benefit when he/she sells an original property, then buys a replacement dwelling within two years, but no longer qualifies for a Homeowners' Exemption on the original property that sold nearly two years before?

Yes. The statute requires that the original property be eligible for the Homeowners' Exemption at the time of sale. It is eligible if the claimant owns and occupies the property as his or her principal residence at the time of sale.

Can I receive Prop 60. benefits if my original property is outside Orange County but my replacement dwelling is inside Orange County?

No. Both properties must be within Orange County. 

Can I receive Prop. 60 benefits if my original property is inside Orange County but my replacement dwelling is in another county in California?

You may qualify under Prop. 90. Call the county Assessor's Office where the replacement dwelling is located and ask if that county allows transfers of base year values between counties.

If the transfer of my base year value to the replacement dwelling results in a supplemental assessment that is a refund, do I still have to pay the existing annual roll tax bill on the replacement property or will that bill be adjusted to reflect the new, lower value?

Unfortunately, you must pay the existing annual roll tax bill on your replacement property. That bill cannot be adjusted or canceled to reflect the Prop. 60 benefit. Additionally, you must pay that bill before any refund resulting from the Prop. 60 benefit will be sent to you.

However, after the existing bill has been paid, you will later receive a refund that will reflect the Prop. 60 benefit. In other words, when the entire process is complete, you will not have overpaid any taxes,.

May parents transfer the family home to their children without a property tax reassessment?

YES.  Proposition 58 allows parents to transfer by gift, bequest, or sale their principal residence to their child(ren) and there will be no property tax reassessment. There is no limit on the value of the principal residence.  The parents must have a Homeowner’s or Disabled Veterans Exemption on the home.

May parents transfer other property to their children without a property tax assessment?

Yes. Each parent may transfer up to a total of $1 million of other property to their children without a property tax assessment. 

May grandparents transfer property to their grandchildren without a property tax assessment?

Proposition 193 expanded the benefits of family transfers of real property to grandparents.  They may transfer the property to a grandchild(ren) without a tax reassessment if the middle generation had already died.

How do the transferor and transferee obtain the relief of Propositions 58 and 193?

In order to obtain such relief, a Claim for Reassessment Exclusion for Transfer form must be signed by  both the property owner or deceased owner’s estate and by the person to whom title is being transferred.  The Claim must be filed within three years of the date of the transfer of the real property.  It is filed with the county Assessor.

International estates, an increasing concern.

Situation:  One of our clients referred a challenging fiduciary issue to our firm.  A U.S. citizen had died and left his assets to relatives in India.  The benficiaries of the estate were not U.S. citizens.  The trustee had to travel to the U.S. to settle the estate, creating a compressed timeline.  The trustee was facing a large tax bill as the rule for income paid to a non-U.S. citizen is that tax must be withheld at a rate of 30%, and the trustee is liable for the withholding.

Action:  The fiduciary accounting team at Green Zahn & Associates determined that the tax convention with The Republic of India provided for relief from double taxation and that the fiduciary was not required to withhold tax.

Results:  GZA saved the taxpayer tens of thousands of dollars in tax withholdings, and the cost of a second year's tax return preparation, by being proactive in researching and understanding international tax laws.

We need to prepare a burden calculation, what?!

Situation:  Our client needed to submit burden calculations, in a proposal, to a major customer.

Action:  We helped our client determine what costs should be included in the burden pool to enable the client to accurately calculate the burden.

Results:  Our client received acceptance of their proposal to produce parts for the customer.

We need to expand to another state...

Situation:  A construction company client wanted to be qualified to do business in another state.  The state required audited financial statements to be submitted in the qualification process.

Action:  Our client included reviewed financial statements prepared by Green Zahn & Associates in the qualifications package submitted to the state.

Results:  The state accepted the reviewed financial statements and the company received its license to operate in the state.

We love to help!

As a firm, we believe in giving back to our community.  This year we have achieved this through cash and time donations.  We regularly support the Long Beach Symphony, the Long Beach Rescue Mission, the Orange County School of the Arts, and (of course!) UCLA.  Allison dedicates quite a bit of time to the National Association of Women Business Owners' Mentoring Committee where she helps new business owners receive invaluable coaching from seasoned professionals.  Several staff members participated in the Run Seal Beach 5k & 10k this year and Rachel went on to participate in the Long Beach Half Marathon, the rest of the staff was happy to cheer for her!

In July the entire staff headed over to the Ronald McDonald House in Long Beach to prepare lunch for the families staying there.  We toured the facility, learned about the charity and its services, and prepared a fresh Chinese chicken salad luncheon.  It was very gratifying to help an organization with such a noble cause.  We highly reccomend adding this charity to the list you support, there are many ways to get involved, from preparing meals, to helping out with odd jobs, or donating household supplies. Cash donations are always useful as well.  Did you know that you can rent their beautiful, high tech boardroom for your company's off-sites?  Find out more at their website:

     http://www.longbeachrmh.org/about_us.php

In November we headed over to Working Wardrobes in Costa Mesa to help prepare for a workshop they hold at Camp Pendleton in suport of our returning troops.  Working Wardrobes is a smart organization that not only helps individuals put together a professional wardrobe, but offers workshops, mentoring and training on subjects such as networking the art of management, marketing, and change management.  Check out their offerings at:

     http://www.workingwardrobes.org/

We are always looking for opportunities to get involved, so let us know if you have a favorite not-for-profit that could use the likes of us for a day's worth of labor.  You can email your ideas to: greenzahn@greenzahn.com

Help!  Are we growing too fast?

Situation:  A manufacturing client was experiencing extremely rapid growth and their accounting needs were not being met by their in-house team, creating hazards on their path to success.

Action:  GZA stepped in to provide additional support to their existing accounting department as well as assisting with creating a policies and procedures manual to provide a basis for future growth.

Results:  The client was able to maintain stability and meet the demands of their clients while sustaining the rapid growth.

The IRS has released long-awaited guidance on new Code Sec. 199A, commonly known as the "pass-through deduction" or the "qualified business income deduction." Taxpayers can rely on the proposed regulations and a proposed revenue procedure until they are issued as final.

The IRS has released long-awaited guidance on new Code Sec. 199A, commonly known as the "pass-through deduction" or the "qualified business income deduction." Taxpayers can rely on the proposed regulations and a proposed revenue procedure until they are issued as final.

Code Sec. 199A allows business owners to deduct up to 20 percent of their qualified business income (QBI) from sole proprietorships, partnerships, trusts, and S corporations. The deduction is one of the most high-profile pieces of the Tax Cuts and Jobs Act ( P.L. 115-97).

In addition to providing general definitions and computational rules, the new guidance helps clarify several concepts that were of special interest to many taxpayers.

Trade or Business

The proposed regulations incorporate the Code Sec. 162 rules for determining what constitutes a trade or business. A taxpayer may have more than one trade or business, but a single trade or business generally cannot be conducted through more than one entity.

Taxpayers cannot use the grouping rules of the passive activity provisions of Code Sec. 469 to group multiple activities into a single business. However, a taxpayer may aggregate trades or businesses if:

• each trade or business is itself a trade or business;
• the same person or group owns a majority interest in each business to be aggregated;
• none of the aggregated trades or businesses can be a specified service trade or business; and
• the trades or businesses meet at least two of three factors which demonstrate that they are in fact part of a larger, integrated trade or business.

Specified Service Business

Income from a specified service business generally cannot be qualified business income, although this exclusion is phased in for lower-income taxpayers.

A new de minimis exception allows some business to escape being designated as a specified service trade or business (SSTB). A business qualifies for this de minimis exception if:

• gross receipts do not exceed $25 million, and less than 10 percent is attributable to services; or
• gross receipts exceed $25 million, and less than five percent is attributable to services.

The regulations largely adopt existing rules for what activities constitute a service. However, a business receives income because of an employee/owner’s reputation or skill only when the business is engaged in:

• endorsing products or services;
• licensing the use of an individual’s image, name, trademark, etc.; or
• receiving appearance fees.

In addition, the regulations try to limit attempts to spin-off parts of a service business into independent qualified businesses. Thus, a business that provides 80 percent or more of its property or services to a related service business is part of that service business. Similarly, the portion of property or services that a business provides to a related service business is treated as a service business. Businesses are related if they have at least 50-percent common ownership.

Wages/Capital Limit

A higher-income taxpayer’s qualified business income may be reduced by the wages/capital limit. This limit is based on the taxpayer’s share of the business’s:

• W-2 wages that are allocable to QBI; and
• unadjusted basis in qualified property immediately after acquisition.

The proposed regulations and Notice 2018-64, I.R.B. 2018-34, provide detailed rules for determining the business’s W-2 wages. These rules generally follow the rules that applied to the Code Sec. 199 domestic production activities deduction.

The proposed regulations also address unadjusted basis immediately after acquisition (UBIA). The regulations largely adopt the existing capitalization rules for determining unadjusted basis. However, "immediately after acquisition" is the date the business places the property in service. Thus, UBIA is generally the cost of the property as of the date the business places it in service.

Other Rules

The proposed regulations also address several other issues, including:

• definitions;
• basic computations;
• loss carryovers;
• Puerto Rico businesses;
• coordination with other Code Sections;
• penalties;
• special basis rules;
• previously suspended losses and net operating losses;
• other exclusions from qualified business income;
• allocations of items that are not attributable to a single trade or business;
• anti-abuse rules;
• application to trusts and estates; and
• special rules for the related deduction for agricultural cooperatives.

Effective Dates

Taxpayers may generally rely on the proposed regulations and Notice 2018-64 until they are issued as final. The regulations and proposed revenue procedure will be effective for tax years ending after they are published as final. However:

• several proposed anti-abuse rules are proposed to apply to tax years ending after December 22, 2017;
• anti-abuse rules that apply specifically to the use of trusts are proposed to apply to tax years ending after August 9, 2018; and
• if a qualified business’s tax year begins before January 1, 2018, and ends after December 31, 2017, the taxpayer’s items are treated as having been incurred in the taxpayer’s tax year during which business’s tax year ends.

Comments Requested

The IRS requests comments on all aspects of the proposed regulations. Comments may be mailed or hand-delivered to the IRS, or submitted electronically at www.regulations.gov (indicate IRS and REG-107892-18). Comments and requests for a public hearing must be received by September 24, 2018.

The IRS also requests comments on the proposed revenue procedure for calculating W-2 wages, especially with respect to amounts paid for services in Puerto Rico. Comments may be mailed or hand-delivered to the IRS, or submitted electronically to Notice.comments@irscounsel.treas.gov, with “ Notice 2018-64” in the subject line. These comments must also be received by September 24, 2018.

The IRS’s proposed pass-through deduction regulations are generating mixed reactions on Capitol Hill. The 184-page proposed regulations, REG-107892-18, aim to clarify certain complexities of the new, yet temporary, Code Sec. 199A deduction of up to 20 percent of income for pass-through entities. The new deduction was enacted through 2025 under the Tax Cuts and Jobs Act (TCJA), ( P.L. 115-97). The pass-through deduction has remained one of the most controversial provisions of last year’s tax reform.

The IRS’s proposed pass-through deduction regulations are generating mixed reactions on Capitol Hill. The 184-page proposed regulations, REG-107892-18, aim to clarify certain complexities of the new, yet temporary, Code Sec. 199A deduction of up to 20 percent of income for pass-through entities. The new deduction was enacted through 2025 under the Tax Cuts and Jobs Act (TCJA), ( P.L. 115-97). The pass-through deduction has remained one of the most controversial provisions of last year’s tax reform.

A legislative package that would make permanent the pass-through deduction, as well as other individual tax cuts, is expected to move though the House this fall. However, the House’s legislative efforts are not expected, at this time, to pass muster in the more narrowly GOP-controlled Senate.

Criticism

Several Democratic lawmakers and tax policy experts have already started to weigh in on the proposed regulations, which were released on August 8 while Congress remained in its annual August recess. Democrats have criticized the new deduction for primarily benefiting the wealthy. Meanwhile, several tax policy experts have taken to Twitter to note that the deduction is overly complex and administratively burdensome.

Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., has reportedly said that the proposed regulations "confirm that the fortunate few win," under the new tax law. "Tax planners are already scouring through the nearly 200 pages of regulations in search of new ways to keep wealthy clients from paying their fair share."

Compliance Burdens

The pass-through deduction could add 25 million hours to taxpayers’ annual reporting burden, according to the proposed regulations. Additionally, the IRS has estimated that gross reporting annualized costs to taxpayers will total approximately $1.3 billion over 10 years.

Furthermore, the IRS has estimated that the compliance burden will vary between taxpayers, averaging between 30 minutes and 20 hours. The administrative burden on smaller pass-through entities is anticipated to be on the lower end of the estimate, according to the IRS.

Comment. Ryan Kelly, partner at Alston & Bird LLP, told Wolters Kluwer on August 13 that the IRS’s 25 million-hour estimate, whether accurate or not, suggests that there will be a significant increase in administrative compliance costs. "There is a real cost to tax compliance in lost time and productivity for taxpayers," Kelly said. However, Kelly predicted that taxpayers’ Code Sec. 199A compliance burden will eventually decrease. "Time will reveal the extent of taxpayers’ administrative burden to comply; however, it is likely that as time goes on the taxpayers’ compliance burden will fall as taxpayers, tax practitioners, and the Service all become more familiar with section 199A and how it is intended to operate."
Meanwhile, the chairs of the House and Senate tax writing committees have both praised Treasury and the IRS for quickly releasing the much anticipated regulations. Additionally, several tax policy experts have also praised the proposed regulations for alleviating confusion, as well as taxpayer anxiety, about ambiguous provisions of the law.

"This first-ever 20 percent deduction for small businesses allows our local job creators to keep more of their money so they can hire, invest, and grow in their communities," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in a statement. "These proposed regulations are intended to provide certainty and flexibility for Main Street businesses in this historic new small business deduction."

Improvements to the proposed regulations are expected in the coming months as stakeholders submit comments. A public hearing at IRS headquarters in Washington, D.C., has been scheduled for October 16. "Evolution of tax regulations is generally never a pretty process, but it is a necessary process that in this case will hopefully happen sooner rather than later," Kelly told Wolters Kluwer.

The House’s top tax writer has unveiled Republicans’ "Tax Reform 2.0" framework. The framework outlines three key focus areas:.

The House’s top tax writer has unveiled Republicans’ "Tax Reform 2.0" framework. The framework outlines three key focus areas:

• making permanent the individual and small business tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97);
• promoting family savings by streamlining retirement savings accounts and creating a new Universal Savings Account; and
• spurring business innovation by allowing new businesses to write off more initial start-up costs.

Tax Reform 2.0

The GOP’s tax reform "phase two" framework—otherwise known as "Tax Cuts 2.0"—was released by House Ways and Means Committee Chairman Kevin Brady, R-Tex. on July 24. The outline is expected to be used for GOP "listening sessions" to be held among lawmakers.

Brady has said that making permanent the TCJA’s individual and small business tax cuts, enacted last December temporarily through 2025, will be the "centerpiece" of the next tax reform package. Further, Brady told reporters on July 24 that he anticipates Tax Reform 2.0 to move forward as three separate tax bills. A House vote on the package is expected sometime in September.

Preliminary Analysis

Republicans’ Tax Reform 2.0 framework is a "good start," according to a July 24 report released by the independent, yet widely-considered conservative-leaning, think tank Tax Foundation. The report praised the framework’s proposal to streamline retirement savings accounts and make permanent the TCJA’s individual tax cuts. Additionally, the Tax Foundation estimates that making permanent the individual tax cuts set to expire in 2026 would grow the U.S. economy by 2.2 percent while reducing federal revenue by $165 billion annually on a static basis.

Democrats Disagree

However, several Democratic lawmakers began issuing statements criticizing the Tax Reform 2.0 framework shortly after its release. Democrats have remained united in their disapproval of the TCJA, criticizing last year’s tax code overhaul for primarily benefiting the wealthy and corporations.

"Republicans’ first tax bill exposed the party’s real priorities: big corporations and people at the top," House Ways and Means Committee ranking member Richard Neal, D-Mass., said in a July 24 statement. "This new framework is more of the same – it rewards the well-off and well-connected, fails to reinstate the state and local tax deduction, and leaves the middle class behind."

Corporate Tax Cuts

The Tax Reform 2.0 framework did not include a proposal to further reduce the corporate tax rate. President Trump has called for lowering the corporate tax rate to 20 percent. The corporate tax rate was lowered from 35 to 21 percent last December under the TCJA. Brady previously told reporters that House Republicans and the White House are continuing discussions on the idea.

Tax Reform 3.0, 4.0

"Tax Reform 2.0 is a new commitment to improve the tax code each and every year for American families and local businesses," the framework says. Congress will examine the tax code each year to identify areas of needed improvement, according to the outline. Additionally, Brady has said he hopes to see a Tax Reform 3.0, 4.0, and so on.

Senate

At this time, the Tax Reform 2.0 package is not expected to clear the Senate in its entirety. It is thought on Capitol Hill that Democrats may support measures that focus on retirement and education savings and business innovation. However, several lawmakers view it as unlikely that Democrats would support a bill that makes permanent the individual tax cuts under the TCJA.

Brady has reportedly said that extending TCJA’s individual provisions would increase the deficit by $600 billion over 10 years but would be offset, at least in part, by beneficial economic factors. Several Senate Democrats and Republicans have said they would not vote for extending or creating tax cuts that increase the federal deficit.

The IRS faces numerous challenges, most of which are attributable to funding cuts, the National Taxpayer Advocate Nina Olson told a Senate panel on July 26. "The IRS needs adequate funding to do its job effectively," Olson told lawmakers.

The IRS faces numerous challenges, most of which are attributable to funding cuts, the National Taxpayer Advocate Nina Olson told a Senate panel on July 26. "The IRS needs adequate funding to do its job effectively," Olson told lawmakers.

IRS Funding

Olson, while testifying at a Senate Finance Committee (SFC) Taxation and IRS Oversight Subcommittee hearing, placed blame on both congressional appropriations and IRS management for the Service’s challenges. "While some of the IRS’s struggles can be addressed by better management, much of the IRS’s challenges are attributable to funding cuts," Olson said.

The IRS has simultaneously seen an increased workload and budget reduction of 20 percent when accounting for inflation between fiscal years 2010 and 2018, according to Olson. "Because of these reductions, the IRS does not have enough employees to answer the phones, to conduct outreach and education, or to provide basic taxpayer service," she added.

Further, Olson noted that the IRS answered only 29 percent of telephone calls received on the Accounts Management lines during this year’s filing season. Additionally, IRS compliance and enforcement efforts have also struggled, Olson said, adding that the audit rate is at its lowest level in "memory."

Likewise, Phyllis Jo Kubey, testifying on behalf of the National Association of Enrolled Agents, IRS Advisory Council, remarked on decreased IRS funding. "The agency is handicapped by budgeting that is not only insufficient to meet its large and growing portfolio, but also inefficiently structured," Kubey told lawmakers.

IRS Reform

The SFC subcommittee hearing came just days after the 20-year anniversary of the IRS Restructuring and Reform Act of 1998. The House and Senate are currently working toward approving bipartisan legislation that would significantly reform the IRS for the first time in 20 years.

SFC Taxation and IRS Oversight Subcommittee Chairman Rob Portman, R-Ohio, and Sen. Ben Cardin, D-Md., unveiled on July 26 the bipartisan Protecting Taxpayers Bill. The measure aims to reform a number of IRS functions and administrative practices, according to a joint press release issued the same day.

"It has been 20 years since the last significant IRS reform, and it is time to update the agency once again," Portman said in the press release. Similarly, Cardin praised the bill for including needed updates to modernize the IRS. "Americans of all income levels deserve a responsive, effective IRS, and the updates contained in this bipartisan bill will help keep the IRS on that path," Cardin said.

Additionally, SFC Chairman Orrin G. Hatch, R-Utah, and ranking member Ron Wyden, D-Ore., recently introduced the bipartisan Taxpayer First Bill ( Sen. 3246). The measure would also reform certain administrative practices at the IRS.

To that end, the House approved its bipartisan IRS reform package, the Taxpayer First Bill ( HR 5444) last April. The House package contains several proposals, which would, among other things:

• establish a single point of contact for tax-related identity theft victims;
• expand the use of Low-Income Taxpayer Clinics (LITCs); and
• require electronic filing for certain tax-exempt organizations

Path Forward

Hatch previously told Wolters Kluwer that the House’s IRS reform proposals are a "welcomed step forward." Additionally, Hatch told Wolters Kluwer that he will work with his "colleagues in Congress to find a path forward that reflects both the House and Senate views."

Senate Finance Committee (SFC) Republicans are clarifying congressional intent of certain tax reform provisions. In an August 16 letter, GOP Senate tax writers called on Treasury and the IRS to issue tax reform guidance consistent with the clarifications.

Senate Finance Committee (SFC) Republicans are clarifying congressional intent of certain tax reform provisions. In an August 16 letter, GOP Senate tax writers called on Treasury and the IRS to issue tax reform guidance consistent with the clarifications.

The letter, addressed to Treasury Secretary Steven Mnuchin and Acting IRS Commissioner David Kautter, identifies three sections of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) needing clarification:

• Section 13204 – qualified improvement property expensing;
• Section 13302 – net operating losses (NOLs) deduction; and
• Section 13307 – sexual misconduct settlement deduction.

Real Property Depreciation

Congressional intent for Section 13204 under the TCJA was to provide a 15-year modified accelerated cost recovery system (MACRS) recovery period for qualified improvement property, the lawmakers wrote. Additionally, the letter states that the new law should also provide a 20-year alternative deprecation system (ADS) recovery period for qualified improvement property.

NOLs

The TCJA contains a typographical error in Section 13302. The law should state that the NOL carryforward and carryback modifications are effective for NOLs arising in tax years beginning after December 31, 2017, the lawmakers noted. Currently, the legislative text states the effective date is for tax years ending after December 31, 2017.

Attorney’s Fees

Generally, section 13307 of the TCJA denies a deduction for attorney’s fees related to a settlement or payment stemming from a sexual harassment/abuse nondisclosure agreement (NDA). Congressional intent was that attorney’s fees would not be subject to the rule prohibiting the deduction, the letter states.

Technical Corrections

SFC Republicans intend to introduce a technical corrections bill addressing other needed clarifications of the TCJA, the letter notes. The intended technical corrections bill is not expected to be a part of Republican "Tax Reform 2.0" efforts.

"While this letter focuses on these three important provisions, we are continuing a thorough review…to identify other instances in which the language as enacted may require regulatory guidance or technical corrections to reflect the intent of the Congress. After this review, we intend to introduce technical corrections legislation to address any items identified in the on-going review."

Taxpayers and practitioners need clarity on certain S corporation issues by next tax filing season, the American Institute of CPAs (AICPA) has said. In an August 13 letter sent to Treasury and the IRS, the AICPA requested immediate guidance on certain S corporation provisions under the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97).

Taxpayers and practitioners need clarity on certain S corporation issues by next tax filing season, the American Institute of CPAs (AICPA) has said. In an August 13 letter sent to Treasury and the IRS, the AICPA requested immediate guidance on certain S corporation provisions under the Tax Cuts and Jobs Act (TCJA) (P.L. 115-97).

S Corporations

S corporations elect to pass corporate income, losses, deductions, and credits through to shareholders for federal tax purposes. Thus, S corporations are considered a pass-through entity. This election allows S corporations to avoid double taxation on the corporate income, according to the IRS.

"Taxpayers and practitioners need clarity on S corporation issues in order to comply with their 2018 tax obligations and to make informed decisions regarding cash-flow, entity structure, and tax planning issues," Annette Nellen wrote in the letter on behalf of the AICPA. Generally, the letter noted the following three areas for which guidance is needed:

• application of the new laws on loss carryforwards;
• clarification of certain provisions relating to the post-termination transition period (PTTP) and the eligible terminated S corporation period (ETSC Period); and
• treatment of deferred foreign income upon transition to participation exemption system of taxation for S corporation trust shareholders.

Earlier this year, the AICPA also called for guidance on the Code Sec. 199A new pass-through deduction.

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

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

Taxes and spending

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

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

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

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

Possible scenarios

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

Filing season

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

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

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

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

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

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

Additional tax on higher-income earners

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

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

Passthrough treatment

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

Withholding rules

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

Planning techniques

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

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

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

Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.

Generally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.

To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.

Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.

The IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.

If a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.

Recently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.

If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.

More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.

Your most important responsibility is depositing all of your payroll taxes on time. Before you do that, however, you have to know:

• Who are your taxable workers?
• What payroll taxes apply?
• What compensation is taxable?
• When are your payroll taxes due?
• What payroll and other returns should you file?

 Taxable workers

The first step is to determine who is a taxable worker. If you hire only independent contractors, they, and not you, are responsible for paying federal payroll taxes.

It's more likely that you hire employees.  In that case, you are responsible for withholding federal income tax and Social Security and Medicare taxes. You are also responsible for federal unemployment (FUTA) taxes along with any state taxes.

There are some exceptions to who is an employee for payroll taxes but they are few. The most common are real estate agents and direct sellers.

If you have any questions about the status of your workers, give our office a call. Misclassifying workers is a common mistake. If you treat an employee as an independent contractor, and your treatment is wrong, you will be liable for federal income tax and Social Security and Medicare taxes. They add up very quickly.

What taxes apply

Once you've determined that your workers are taxable employees, you have to determine what federal payroll taxes apply. Most employers must withhold federal income tax and Social Security and Medicare taxes. You are also liable for federal unemployment taxes (FUTA) but these are not withheld from an employee's pay. Only you pay FUTA taxes.

You have to withhold at the correct rate. Form W-4, which your employee fills out, tells you how much federal income tax to withhold for an employee. The Social Security, Medicare and FUTA tax rates are set by statute.

Failing to withhold at the correct rate is a surprisingly common mistake. Sometimes, an employee completes a new W-4 but the employer forgets to adjust his or her withholding. It's a good idea to review the W-4s of all your employees and make sure they are current.

Compensation

Almost every type of compensation, and not just wages, is taxable. The IRS wants its share of tips, bonuses, employee stock options, severance pay, and many other forms of compensation. This includes non-cash or in-kind compensation.

There are exceptions. Health insurance plans generally are not subject to federal payroll taxes. Per diem payments and other allowances, if they do not exceed rates set by the government, are generally not taxable as wages. Some fringe benefits are not taxable, such as employee discounts, an occasional taxi ride when an employee must work overtime and inexpensive holiday gifts.

Determining what compensation is taxable and what is not is often difficult. The complex tax rules are easy to misinterpret and you may be failing to withhold taxes on taxable compensation. It's a mistake that can be avoided with our help.

Deposit schedule

Most small employers deposit payroll taxes monthly. Large and mid-size businesses make semi-weekly deposits. Very small employers may make annual deposits.

Your deposit schedule is based on the total tax liability that you reported during a four-quarter "lookback" period. The lookback period begins July 1 and ends June 30. If you reported $50,000 or less of taxes for the lookback period, you make monthly deposits. If you reported more than $50,000, you make semi-weekly deposits.

Determining the lookback period is tricky. If the IRS finds that your lookback period is wrong, you could be heavily penalized for not making timely deposits. Your deposit schedule can also change and you have to know what can trigger a change.

Forms

If you withhold federal payroll taxes, you must file Form 941 quarterly. Of course, there are exceptions. The most important one is for very small employers. They file their returns annually instead of quarterly.

The IRS encourages employers to file Form 941 electronically. Depending on how large your business is, you may have no choice but to file electronically. A common mistake is filing more than one Form 941 quarterly. This only causes unnecessary delays.

Penalties are costly

Often, a small business just doesn't have the cash on hand to make a timely deposit. The owner thinks that he or she will double-up the next time and make things right. More often than not, that doesn't happen and the unpaid liability snowballs.

The penalties for failing to withhold or deposit federal income tax and Social Security and Medicare taxes are severe and they can be personal. If your business cannot pay the unpaid taxes, the IRS will go after you personally.

You may be using a payroll agent to pay your taxes. Keep in mind that you are still liable for those taxes if your agent doesn't pay them. Reliance on a payroll service, or anyone else, does not excuse your failure to pay.

Reporting obligations

Your payroll tax obligations also do not end with filing tax returns and depositing payments. You have reporting obligations to your employees and, in some cases, to your independent contractors.

Staying out of trouble with the IRS

Even if you believe you understand and are compliant with the federal payroll tax rules, give our office a call. The rules are riddled with exceptions that we haven't even touched on in this brief article. We'll take a look at your operations and make sure you are 100 percent compliant. It's worth avoiding any costly mistakes down the road.