2016 usiness Tax Update (Full Day ourse)media01.commpartners.com/WK CCH/11_29_16/LIVE HANDOUTS - 2… · 2016-11-29 · Reporting and Other Tax Issues for Expat Workers Marc J. Strohl,

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2016 Business Tax Update

(Full-Day Course)

Presented by

Bradley Burnett, J.D., LL.M. (Taxation)

November 29, 2016

http://www.cchwebinars.com/


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9 : 0 0 a m – 9 : 0 5 a m Moderator opening comments

9:05 am – 10:50 am

Content Session #1 – (100 minutes)

Includes 5 minute break and

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1 0 : 5 0 a m – 1 1 : 0 0 a m 10 Minute Break

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Includes 10 minute Question and Answer Session

4 : 3 5 p m – 4 : 4 0 p m Moderator closing comments

Course Agenda

2016 Business Tax Update (Full-Day Course)

November 29, 2016

All times are Central Time Zone


About Our Speaker


Bradley Burnett, J.D., LL.M., is a practicing tax attorney, licensed in Colorado, with 34 years of tax

practice experience. His practice emphasis is on tax planning and tax controversy resolution. Prior to

establishing his own law firm in 1990, he practiced tax accounting with national and local CPA firms,

worked as a trust officer for a Denver bank, and managed the tax department as partner in a medium-

sized Denver law firm. After receiving his undergraduate degree in accounting and law degree (J.D.),

he earned a Master of Laws (LL.M.) in Taxation from the University of Denver School of Law Graduate

Tax Program.

Mr. Burnett has delivered more than 3,000 presentations on U.S. tax law throughout all 50 states,

Washington, D.C., the Bahamas, Italy, Greece, Turkey and Canada. He has authored texts of 35 CPE

courses. Mr. Burnett served as adjunct professor at the University of Denver School of Law Graduate

Tax Program, where he pioneered an employment tax course and taught IRS practice and procedure.

He has appeared on television answering tax questions for call-in viewers of Denver NBC affiliate KUSA

Channel 9. Brad received the Illinois Society of CPAs Instructor Excellence Award for teaching in

Chicago and five times has been the top rated, most requested instructor for CPA Society annual tax

conferences.

Bradley Burnett

© 2016 CCH and its affiliates. All Rights Reserved 2700 Lake Cook Road, Riverwoods, IL 60015– 3867 1-800-248-3248

November 2016

UPCOMING WEBINARS

Thank you for attending today’s CCH Webinar!

Please check out additional programs at www.cchwebinars.com

Wed 30 How to Review Tax Returns: Best Practices Edward Mendlowitz, CPA

Wed 30 Key Tax and Non-Tax Issues for Clients

Considering Moving Outside the U.S.

Marc J. Strohl, CPA

http://www.cchwebinars.com


December 2016

UPCOMING WEBINARS



Thu 1 The Landmark Chevron Transfer Pricing Case:

Insights and Impact for Multinational

Corporations

Chris Kinsella

Fri 2 New York Sales Tax for Construction Contractors Timothy P. Noonan,

Esq.

Fri 2 QuickBooks® Basics for Accountants Renee Prince, CPA

Mon 5 S Corporation Eligibility and Elections James R. Hamill,

CPA, Ph.D.

Tue 6 CCH Webinars Monthly Federal Tax Update

(December 2016)

Mark A. Luscombe,

J.D., LL.M., CPA

Tue 6 Fundamentals of U.S. International Taxation

(Full-Day Course)

Robert Misey,

LL.M., J.D., M.B.A., B.A.

Wed 7 S Corporation and Shareholder Tax Reporting James R. Hamill,

Ph.D., CPA

Wed 7 Avoiding the Referral to the IRS OPR and

Defending Your Practice

Karen L. Hawkins, M.Ed., M.B.A.



December 2016

UPCOMING WEBINARS



Thu 8 2016 Individual Federal Tax Update

(Full-Day Course)


Thu 8 Partnership Tax Filing Issues James R. Hamill,

CPA, Ph.D.

Fri 9 Ethical Issues for Tax Practitioners James R. Hamill,

CPA, Ph.D.

Fri 9 Nonresident Alien Information Reporting Using

Forms 1042-S and W-8

Miles Hutchinson, CGMA

Mon 12 C and S Corporation Taxation: A ‘Life Cycle’

Approach (Full-Day Course)

James R. Hamill,

CPA, Ph.D.

Mon 12 1040 Individual Income Tax Forms and Law

Update

Claudia Hill, EA,

M.B.A.

Tue 13 S Corporation Built-In Gains Tax: Rules, Tips and

Traps

Tony Nitti, CPA,

M.S.T.



December 2016

UPCOMING WEBINARS



Wed 14 Introduction to ASC 740/FAS 109

(Half-Day Course)

Shamen Dugger,

Esq., CPA

Wed 14 Foreign Earned Income: Form 2555 Exclusion

Reporting and Other Tax Issues for Expat

Workers

Marc J. Strohl, CPA

Thu 15 Excel: Client Template Ideas Jeff Lenning, CPA,

CITP

Thu 15 CCH Webinars Monthly Federal Tax Update

(December 2016-Rebroadcast)

Mark A. Luscombe,

J.D., LL.M., CPA

Fri 16 When Death Meets Taxes: What to Do When a

Taxpayer Dies (Half-Day Course)

Claudia Hill, EA,

M.B.A.

Mon 19 Using CCH® IntelliConnect to Conduct Federal

Tax Research

John Payne,

Research Consultant

Thu 22 Excel: Lookup Function Competition—VLOOKUP

and Alternatives

Jeff Lenning, CPA, CITP



December 2016

UPCOMING WEBINARS



Wed 28 How to Have Your Best Tax Season EVER Edward Mendlowitz,

CPA

Thu 29 A&A Issues and Opportunities for Busy Season Alan W. Anderson, CPA

Fri 30 Ethical Issues for Tax Practitioners James R. Hamill, CPA, Ph.D.

Fri 30 2016 Individual Federal Tax Update

(Full-Day Course)

Bradley Burnett, J.D.,

LL.M. (Taxation)


PRESENTATION

This presentation and these materials are designed to provide accurate and authoritative information in regard to

the subject matter covered. This presentation and these materials are provided solely as a teaching tool, with the

understanding that the publisher and instructor are not engaged in rendering legal, accounting, or other

professional service and that they are not offering such advice in this presentation and these accompanying

materials.

Practitioners should always determine and incorporate all of the material facts and circumstances that apply to a

particular situation and conduct the necessary research to determine whether any new statutory or regulatory

requirements are relevant and should be applied. If legal advice or other expert assistance is required, the service

of a competent professional person should be sought.

CCH® Webinars 2016 Business Tax Update

2016 Business Tax Update


Full-Day Course

2 2016 Business Tax Update

New Tax Developments for Business Entities

• What’s new with entities?

S Corp legislation, cases and rulings

Partnership legislation, cases and rulings

C Corp cases

Disregarded entity regs




• What’s new with cost recovery?

Extender bill extended cost recovery tax breaks

Extender bill expanded cost recovery tax breaks

TPR regs expansion of de minimis amount



• What else is new?

Extender bill extends tax credits

Odds and ends cases and rulings

Fringe benefit, qualified plan and employment tax activity

Health benefit chaos

IRS activity affecting business




• Stir building about Tax Reform

• What is tax planning in response?


Tax Reform

• Huge momentum building for major Tax Reform

“Tax reform” is “code” for stripping current tax breaks away

Strip away tax breaks (deductions and credits), lower the rates (or not) – Then, there’s fewer places to hide – Raise the rates later (and the American taxpayer is dead in the water)



Post-Election Tax Proposals Hillary Clinton Bernie Sanders Donald Trump

Capital Gains Rates Top 39.6% (20% 6 year) Top rate 39.6% 0%, 15% and 20%

Extra Tax: Buffet Rule Over $1 mill pays + 30% None

Extra Tax: Fair Share Surcharge

Over $5 mill pays + 4% None

Extra Tax: Wall Street None Transaction tax on stocks, bonds and derivatives

None

Ordinary Income Rates Up to 39.6% (+ surtaxes) Up to 52% Up to 25%

3.8% NII Tax No change Increase to 10% No change

Broaden base (strip deductions)

Axe some deductions, limit some to 28%

Limit some deductions to 28%, eliminate AMT

Axe some deductions, steepen PEP & Pease

Social Security Taxes No change Blow cap off wage base, add 3 new payroll taxes*

No change

Estate and Gift Taxes $3.5 mill exemption, no indexing, top rate 45%, gift tax exemption $1 mill

$3.5 mill exemption, top rate 65%, eliminate discounting, hurt GRATs

Eliminate estate tax

Affordable Care Act Expand Premium Tax Credit *Add 2 new payroll taxes Eliminate ACA


Post-Election Tax Proposals

Democrat Republican Donald Trump

Corporate Tax Rate Possibly agree to cut if repatriation tax proceeds go to U.S. infrastructure improvements

20% 15%

Corp Repatriation Tax Rate ? 8.75% for cash; 3.75% for other

10%

Proceeds of repatriation tax Fund U.S. infrastructure improvements

Offset broader corporate tax rate cuts

?

U.S. infrastructure improvements

Funded by Corp repatriation tax

? $1 trillion infrastructure renewal plan w/ $137 billion tax credits for private investment in projects

Future of international Corp tax

? Territorial system (taxing only economic activity in U.S.) (no more tax on overseas income)

End deferral (companies m/ pay tax annually on all overseas earnings)




Democrat Republican Donald Trump

Pass-Through Tax Rate ? 25% after assigning some portion as compensation

15% for “small business”. “Large business” taxed as C Corp

AMT ? Repeal, except for 90% limit on NOLs

Repeal

Business Incentives ? Repeal all, except R&D credit

Repeal all, except R&D credit

Depreciation ? Full expensing Expensing only for manufacturing only if company forgoes interest deductions*

Interest deduction

? Limited to interest income, except for financing and leasing industries

* See depreciation immediately above

Affordable Care Act Keep ACA Axe ACA + ACA taxes Axe ACA + ACA taxes



Democrats Republicans Donald Trump

Ordinary Income Rates

Status quo (7 brackets up to 39.6%)

12%, 25% and 33% 12%, 25% and 33%

Capital Gains Rates

?

Half excluded (thus, rates of 6%, 12.5% and 16.5%) (Interest income treated same)

Status quo (0%, 15% and 20%)

NII (Net Investment Income) Tax Status quo (3.8% tax) Repeal Repeal

Carried interest (portion of investment returns paid to fund managers)

? ? (Status quo is capital gains rate)

Ordinary income

Standard Deduction Status quo (joint $12,300, single $6,300)

$24,000 joint, $18,000 single parents, $12,000 other singles

$30,000 joint, $15,000 single

Itemized Deductions ? Keep only mortgage and charitable deductions

Keep only mortgage and charitable deductions. Cap at $200,000 married, $100,000 single

Estate and Gift Taxes Status quo Repeal Repeal



Polling Question #1

What is tax planning?

Keeping this year’s taxes down low at all costs

Attending a Willie Nelson concert while you still ca, and he still can

Keeping taxes at their lowest possible level through time

Sending voluntary contributions to the federal treasury


Tax Planning

• Tax planning = Planning to keep taxes at their lowest possible level through time

Avoid big swings of income from high to low

Avoid big swings of tax liability from high to low



Tax Planning

• Tax planning = Keep taxes at lowest possible level through time

1. Exclude

2. Timing (usually defer)

3. Convert

4. Shift

5. Die

6. Qualify for low tax rate(s)

7. Qualify for a credit

8. Avoid penalty

• Successful tax planning must involve:

1. Proper design

2. Proper execution; and

3. Proper documentation


2015 Federal Tax Legislation

• 5 new legislative acts in 2015 containing federal tax provisions, including

PATH Act (Extender Bill)

2015 Bipartisan Budget Act

2015 Highway Transportation Act

2015 Trade Package Legislation

FAST Act



PATH Act Business Tax Provisions

• Research and Development (R & D) Credit made permanent

2016 and later, R & D credit offsets alternative minimum tax (AMT) for businesses up to $50 million in gross receipts

2016 and later, R & D credit offsets payroll tax for businesses up to $5 million in gross receipts



• Work Opportunity Credit (Extended through 2019)

Notice 2016-40 provides additional transition relief for employers claiming WOTC (extends by 3 months transition relief for meeting 28-day deadline for requesting required certifications from a designated local agency for employees in targeted groups

Extended to 09/29/16




• Five year built-in gain period for S corporations

Made permanent

• Empowerment zones

Extended through 2016

• Energy tax extenders

Extended through 2016


S Corps and Charitable Contributions

• If an S Corp donates long term capital gain property, its shareholder only reduces basis in his (her) stock by only his (her) share of the adjusted basis of underlying property contributed

PATH Act retroactively (to tax years beginning after 2014) and permanently extends this “reduce S Corp stock by underlying property’s adjusted basis (not fmv)” rule. §1367(a)(2)



§1202 Stock

• PATH Act permanently extends §1202 exclusion

• Much Ado About Nothing?

• Will §1202 (QSBS stock) become hottest thing since sliced bread?

• Are we missing something extremely relevant if we don’t bring it up to client?

• C Corp rates lower than individual

Likely headed lower

And yet, I wonder …


W-2 and 1099-MISC Due Dates

• Change to Due Date of Forms W-2s and 1099- MISC for 2016 Year (Filed in 2017) – All Forms Due by January 31 No Matter What

Effective for forms filed on or after January 1, 2016, Forms W–2 and Forms 1099-MISC for non-employee compensation must be filed by January 31

Must be filed by January 31 EVEN IF FILED ELECTRONICALLY

Bye-bye to February 28 and March 31



2015 Trade Package Legislation

• Delinquent information reporting penalties dramatically increase

Applies to Forms 1099, W-2, 1095 (Health Care Reporting), 1098, K-1s, etc.

Example of penalty

• $530 (twice) for intentional disregard of requirement to file each Form 1099 ($530 x 2 = $1,060 for each delinquent 1099)

If in doubt, fill it out. If in doubt, send it out

• ON TIME!!


Delinquent Information Report Penalty

Increased Delinquent Information Report Penalty

§6721 Penalty Before 2016 After 2015

Fixed w/in 30 days $30 $50

Fixed > 30 days, but < Aug 1 $60 $100

Fixed Aug 1 or later $100 $250

Intentional disregard $250 $530

Penalty may be applied twice (doubled) if return not supplied both to payee and government



2015 Highway Funding Bill

• Health insurance employer mandate penalty exemption for recipients of Tricare (or VA) health care benefits

Recipients of Tricare (or VA) health care benefits NOT counted in testing for 50 (full time) employee threshold

• Recipients of Tricare (or VA) health care benefits eligible to make HSA contributions


PATH Act – Cost Recovery

• §179 Expense Election

Extended to 2015 and beyond and made permanent

Maximum §179 expense $500,000*

Start of phase out $2,000,000*

* Indexed for inflation starting in 2016



§179 Indexing for Inflation

§179 Indexing

Year §179 Expense Limit Phase-Out Begins

2015 $500,000 $2,000,000

2016 $500,000 $2,010,000

2017 $510,000 $2,030,000


PATH Act Cost Recovery

• §179 and 15-year life for real estate

Made permanent

• §179 for Real Estate - $250,000 in 2015, increases to $500,000 (inflation adjusted) for 2016 and beyond

• HVAC units qualify §179 property (2016 and beyond)

• Real estate sourced §179 recapture is ordinary income



PATH Act – Cost Recovery

• 15 year life for real estate applies to

Qualified leasehold improvements;

Qualified restaurant buildings; and

Qualified retail improvements

• Effect of Extender Bill

15 year life did not revert to 39-year life. Bonus depreciation still available unless elect out


PATH Act Bonus Depreciation

§168(k) Bonus Depreciation

2012 - 2017 2018 2019 2020 & beyond

50% 40% 30% 0%



Depreciation of Luxury Autos

• Lesser of $3,160 (for 2016) or 20% of basis *

* Plus $8,000 bonus depreciation ($6,400 in 2018, $4,800 in 2019, $0 thereafter)

Bonus depreciation only available if vehicle is new

If not 100% business use, above amounts are reduced


Polling Question #2

What is “qualified improvement property”?

Property eligible for §179

Property eligible for 15 year life

Property eligible for 27.5 year life

Property eligible for bonus depreciation



Cost Recovery for Real Estate

• Qualified Improvement Property

PATH Act added ability to take bonus depreciation on 39-year qualified improvement property

1. Need not be leasehold improvement

2. Need not be property more than 3 years old

3. Must be property previously originally placed in service §168(k)(2), (3)



• Qualified Improvement Property §168(k)(3)


Category did not exist before 2016

Must be improvements to interior of building

Cannot be an expansion, improvement made to internal structural framework, elevator or escalator






Must be nonresidential property

Improvements must be made after property originally placed in service

Must otherwise qualify for bonus depreciation





Thinking process 2016 and later

1. Determine if 39 year nonresidential or 15 year qualified leasehold, restaurant or retail

2. Determine if eligible for bonus as qualified improvement property






If don’t want it, must elect out

Must make sure client understands what it is

Make sure client’s accounting system (chart of accounts) scouts it out

Make sure tax organizer scouts it out





Example

• Landlord (or tenant) makes qualifying improvement in 2016 (or later), after building placed in service, to 39 year building originally placed in service by landlord

─ Improvement is “qualified improvement property” qualifying for bonus

─ Must elect out to avoid bonus



TPR Partial Disposition Election

• In Field Attorney Advice 20154601F, IRS determined the partial disposition rules did not apply since the disposition related to non MACRS assets

- Partial disposition election applies to MACRS assets only


Capitalize or Expense De Minimis Safe Harbor

• $5,000 per invoice may be expensed if business has applicable financial statements (AFS)

• $500 per invoice may be expensed for business without AFS (before 2016)

• $2,500 per invoice may be expensed for business without AFS (2016 and later)

• Higher amounts allowed if do not distort income

• Written de minimus policy m/ be in place, book tax consistency and election made on tax return



IRS Exam Stats / Rates by Entity FY 2014

Returns Filed Returns Audited % Audited

Small Corp 1,812,140 17,257 0.95%

Large Corp 64,261 7,858 12.2%

S Corporation 4,518,765 16,317 0.4%

Partnership 3,649,385 15,779 0.4%

Individual 145,236,429 1,242,479 0.85%


IRS Exam Rates Individuals FYE 2014

% of Total Returns Filed % of Returns Audited

No AGI 1.83% 5.26%

$1 - $24,999 39.08% 0.93%

$25,000 - $49,000 23.32% 0.54%

$50,000 - $74,999 13.12% 0.53%

$75,000 - $99,999 8.33% 0.52%

$100,000 - $199,999 10.70% 0.65%

$200,000 - $499,999 2.87% 1.75%

$500,000 - $999,999 0.48% 3.62%

$1,000,000 – $4,999,999 0.24% 6.21%

$5,000,000 - $9,999,999 0.02% 10.53%

$10,000,000+ 0.01% 16.22%



IRS Exam Rates Individuals FY 2011 - 2014

FY 2011 FY 2012 FY 2013 FY 2014

Total Returns Filed Prior CY

140,837,499 143,399,737 145,819,388 145,236,429

Total Audits Conducted

1,564,690 1,481,966 1,404,931 1,242,479

Percentage Audited

1.11% 1.03% 0.96% 0.85%


IRS Exam Stats / Rates by Entity FY 2014

Returns Filed Returns Audited % Audited

Small Corp 1,812,140 17,257 0.95%

Large Corp 64,261 7,858 12.2%

S Corporation 4,518,765 16,317 0.4%

Partnership 3,649,385 15,779 0.4%

Individual 145,236,429 1,242,479 0.85%



Polling Question #3

Are 2015 through 2017 sleepy years for partnerships in the federal tax law?

2016-2017 are excellent years for a siesta

2016-2017 are great years to catch up on z’s

2016-2017 is an important time frame for partnerships to prepare for new tax rules effective in 2018

2016-2017 are nice years to take a nice nap


Bipartisan Budget Act of 2015

• Huge change to how IRS audits partnerships

• Effective 2018, new rules replace current TEFRA rules

• New rules allow IRS to audit partnerships at entity level and assess and collect taxes against partnership, UNLESS partnership elects out of new regime

• Impacts the formation and operations of partnerships, disposition of partnership interests and admission of new partners

• Huge planning issue requiring prompt attention for both new and existing partnerships and LLCs



Centralized Partnership Audit Rules

• 2012 IRS Audit Rate (%)

Large Corporations

• 27.1%

Large Partnerships

• 0.8%

Sept. 2014 GAO Report to Congress

• TEFRA rules are a hindrance to effective IRS auditing of large partnerships



• IRS Auditor Focus Group

“Income is pushed [up] so many tiers, you are never able to find out where the real problems ... exist. ...[T]here is no way to figure it out unless you drill down and audit all tiers, all tax returns.”




• IRS difficulty identifying tax matters partners

• “Some [IRS auditors] said large partnerships are purposely unclear about TMP as an audit-delay strategy.”

• IRS experienced a 92 percent reduction in available training funds from 2009 to 2013

• Koskinon

“The solution is to amend [the law] and say we can audit a partnership"


Partnership Stats

• Partnerships are a screamingly popular form of entity

- 3.9% growth rate annually since 2003

- Partnerships w/ 100 or more partners comprise 47.3% of all partnerships in 2012

- In 2012, partnerships passed through $1,400.8 billion in total income (43.4% increase from 2011)




• New law Repeals TEFRA Audit Rules

IRS computes an “imputed underpayment” and it is paid at the partnership level

Imputed refund?

• No such thing

Shift in the audit procedural burdens from IRS to partnership

New law eliminates of IRS tracking adjustments up through the maze



• More tax risk on new partners if adjustment is at partnership level

Year of the audit = “adjustment year”

The year being audited = “reviewed year”




• Example of audit under new rules

An entity taxed as a partnership timely files a 2018 Form 1065 in 2019

In 2021, IRS audits the 2018 Form 1065

In 2022, IRS proposes an adjustment to tax

2018 = Reviewed year

2022 = Adjustment year



• Two choices (if partnership did not elect out)

1. Accept IRS’ partnership level imputed underpayment (§6225)

• Avoid this like the plague

2. 2. Elect to push up the adjustment to partners (§6226)

• Do this




• Imputed underpayment rule

IRS nets all at partnership level, applies highest tax rate 39.6%

Partnership has burden of proving lower rate more appropriate

No adjustments to outside basis

• Result = Double tax

─ NASTY!!



• Push Up Election

Partnership issues adjusted Form K- 1 for the “adjustment year” to each partner of the partnership for the reviewed year

Partner, not partnership, liable for tax if elected

Elected within 45 days of notice of final partnership adjustment




• If push up election made

Reviewed year partners receive income adjustment and pay tax, penalty and interest

Interest rate on partner tax deficiency 2% higher

Outside basis is adjusted upwards, thus eliminating double taxation §6226(b)(3)



• If partnership elects out of new centralized audit regime, then

Imputed underpayment not possible

Push up election not necessary

Election out made annually

Probably made on annual Form 1065

If elect out, audits conducted under rules applicable to individual taxpayers




• Annual Election Out Of New Rules (§6221) Partnerships with 100 or fewer partners* can opt out, if all

partners are

• Individuals

• C Corps

• Foreign Corps

• Estates

• S Corps (each shareholder counts as a partner*)

Pshps cannot elect out if have partner which is

• Partnership

• Trust

• SMLLC (not sure yet)

• Grantor trusts (not sure yet)



• Who acts for partnership under new centralized partnership audit rules?

“Partnership representative” (PR)

Replaces tax matters partner (TMP) under TEFRA rules



No Regulatory Guidance Yet

• IRC §§6221-6235 contain new centralized partnership audit rules

• IRS has issued no regulatory or other meaningful guidance yet

• American Bar Association (ABA) submitted a 91 page response to Treasury’s request for comments

• Treas. guidance will likely change the game we have to play considerably


History of IRS Audits of Partnerships

• Pre-TEFRA – Returns of partnerships and individual partners audited separately

Partnership items could be subject to separate admin procedures, inconsistent treatment

• TEFRA – In 1982, Congress added unified audit rules for partnerships with > 10 partners

• ELP – In 1997, Congress added rules to allow partnerships with > 100 partners (an electing large partnership (ELP)) to elect simplified reporting and streamlined audit and adjustment procedures




• TEFRA - In 1982, Congress added unified audit rules for partnerships with > 10 partners

Partnerships w/ > 10 partners audited under unified TEFRA procedures binding on partners

Partnerships w/ 10 or fewer partners audited as part of each partner’s individual audit



• TEFRA - In 1982, Congress added unified audit rules for partnerships with > 10 partners

Partnership w/ 10 or < partners could elect in

If any partner is a nonresident alien or not an individual, C corporation or estate of an individual, the TEFRA unified audit procedures apply w/o regard to number of partners




• ELP – A partnership with > 100 partners (an ELP) may elect simplified reporting and streamlined audit and adjustment procedures

Adjustments made at pshp level flow through to partners for year in which adjustment takes effect, rather than year being audited

Few companies elect ELP rules

• Only 103 (< 1%) nationally in 2012 filed electing Form 1065-B



• Recent Legislative Proposals

Obama’s prior Green Books proposed mandatory application of ELP streamlined audit and adjustment procedures to large partnerships w/ 1,000 partners

Feb 2014 Dave Kamp (R-Mich.) in comprehensive reform plan proposed streamlined audit procedures for partnerships with 100 or more partners

June 2015 James Renacci (R-OH) introduced Partnership Audit Simplification Act (similar to Kamp’s)




• Bipartisan Budget Act (BBA) of 2015, enacted on 11/02/15, includes new Centralized Partnership Audit Rules

Based largely on June 2015 Renacci proposal

Amended by PATH Act on 12/18/16

BBA also

1. Repealed automatic enrollment under ACA

2. Revised and expanded some pension rules



• Passed House 266 – 167

• Passed Senate 64 – 35

• Promptly signed by President on 11/02/15

• Since bill sold as a revenue raiser

Everyone bought into it

Will be difficult to repeal

But, is it really a revenue raiser?



Current Partnership Audit Rules

• Currently (pre 2018), there are 3 partnership audit regimes

1. Partnerships w/ 10 or fewer partners audited as part of each partner’s individual audit

2. Partnerships w/ > 10 partners audited under unified TEFRA procedures binding on partners

3. Partnerships w/ 100 or > partners electing to be an ELP are: Subject to unified audit; and adjustments are for current year, not prior audited year



• In 2018, the 3 current law partnership audit regimes get replaced with 1 audit regime

New centralized partnership audit rules

• If a partnership elects out of the 1 new audit regime, partnership is audited under rules applicable to individuals



Centralized Audit Rules Revenue Estimate

• Centralized Audit Rules are projected to

Enhance IRS’ ability to examine partnerships

Raise $9.3 billion in net tax revenues over 10 years


Centralized Audit Rules Effective Date

• BBA 2015 enacted new Centralized Partnership Rules

Effective for partnership income tax returns filed after 2017

Some partnerships may apply the new regime early to any partnership tax year beginning after 11/02/15 and before 01/01/18



BBA 2015 Axes TEFRA and ELP

• BBA 2015 repeals current law TEFRA and ELP

• BBA 2015 replacement

One set of partnership audit rules apply to all partnerships

• Qualifying partnerships w/ 100 or fewer partners can elect out

• But, wait

─ Partnerships with partnership, trust (and maybe single member LLC) partners cannot elect out


Centralized Rules Entity Level Tax

• Unless partnership elects out of new rules, IRS will examine partnership at entity level

• Under new rules, partnership has 2 choices

1. Accept IRS’ partnership level imputed underpayment (§6225)

• Avoid this like the plague

2. Elect to push up (push out) the adjustment to partners (§6226)

• Do this



Centralized Rules Entity Level Tax

• Unless partnership elects out, IRS will examine partnership at entity level and compute imputed underpayment

Partnership pays tax, penalty and interest on underpayments at entity level

Tax computed by multiplying net of adjustments by highest rate (highest of either individual or corporate current tax rates)


Centralized Audit Rules – Entity Level Tax

• If imputed underpayment applies (i.e., partnership does not elect out and push up election not made)

Partnership liable for tax

Partners not jointly and severally liable for tax

• If push up election made

Partnership not liable for tax

Partners liable for tax



Imputed Underpayment Logistics

• Imputed Underpayment logistics

Income, gain, loss, deduction and credit from reviewed year (e.g., 2018) computed (netted)

Any net adjustments taken into account by partnership (not individual partners) in adjustment year* (e.g., 2022)

*Adjustment year = Year the audit, appeal review or judicial review is completed


Adjustment Year

• Adjustment year = Year in which the adjustment for the reviewed year

1. Year in which the partnership adjustment becomes final under a court decision;

2. Year in which an adjustment is made under an administrative request; or

3. In all other cases, year in which final partnership adjustment is mailed



Imputed Underpayment Netting

• All adjustment to income, gain, deduction and loss netted

• Any increase or decrease in loss treated as increase or decrease in income

• Net adjustment multiplied by highest rate in §1 (individual) or §11 (corporate)

• Credits, after any increase or decrease, offset imputed underpayment amount

• Tax assessment made for adjustment year, not reviewed year


Imputed Underpayment Netting

• All adjustment to income, gain, deduction and loss netted

• Imputed underpayment apparently calculated w/o regard to nature of adjustments

All positive or negative adjustments to capital gains, losses (whether short term or long term), ordinary income and other are netted

Passive activity losses seem eligible to be netted

Restrictions on deductibility at partner level do not seem to matter



Imputed Underpayment Reduction

• Partnership has opportunity to prove adjustment would be lower if based on certain partner level info from reviewed year

• Underpayment at partnership level could be reduced by:

Tax rate differential due to lower tax rate

Tax reported by partners on amended returns

Tax attributable to tax-exempt partners



• Underpayment at pshp level reduced by tax reported by partners on amended returns

Partnership reduces imputed underpayment by tax attributable to partners who filed amended returns

Reduction in imputed underpayment amount based on partners’ distributive share of pshp adjustments

Partners for reviewed year pay tax (notwithstanding statute of limitations (S/L) otherwise applicable to partner’s return)




• Time for submission of documents/evidence to reduce imputed underpayment

Partnership has 270 days from date IRS mails “Notice of Proposed Adjustment” (§6231) to present evidence

IRS must approve modification of imputed underpayment amount


Imputed Refund? No Such Thing

• If partnership level audit (if no elect out or push up election made) yields taxpayer favorable adjustment

Adjustment will be either decrease in non-separately stated income or increase in non-separately stated loss

Adjustment taken into account in “adjustment year”, not “reviewed year”

• Thus, no amended return

“Reviewed year” partners get cheated out of tax loss



Partnership Level Determination

• If imputed underpayment at partnership level, all partners bound by final resolution

Unlike TEFRA, partners have no right to participate in proceeding

Unlike TEFRA, partners have no right to receive notice of proceeding from IRS



Determination of penalties

• Penalties determined at partnership level

• No partner level defenses to penalties




• Statute of Limitations

Only partnership level S/L relevant

Partner S/L only matters if partnership “elects out” of new centralized partnership audit regime


“Push Up” Election for Partners to Pay Tax

• Partnership may make “push up” election to issue adjusted information returns to reviewed year partners

Partners adjust reviewed years returns through “simplified” amended return (“adjusted partner statements”) process

Partners pay tax, penalty and late interest (+2%) for reviewed year

Partnership need not ensure compliance by partners

Partnership owes no tax




• Any partnership may elect to issue “adjusted statements” (basically amended K-1s) to partners in reviewed year

• Election m/ be made by partnership w/in 45 days of receiving notice of final partnership adjustment

• Partners receiving adjusted statement subject to tax, penalty and interest in reviewed year




Tax due = Amount of tax owed in reviewed year, plus amount of tax owed in subsequent years to extent of tax increase due to adjustment of tax attributes

Tax attributes in adjustment year may also be adjusted





Interest charged by IRS at higher rate (2 points higher than §6621(c) rate) from due date of reviewed year partnership return

Reviewed year partners have no right to administrative or judicial review, not required to consent to issuance of statements and are bound by pshp level determination (elect out to have a say)

No joint and several liability for tax


Polling Question #4

For a partner to have any “say” at all in the conduct of an IRS exam concerning partnership matters, what must the partnership do?

Elect out of the new centralized partnership audit regime

Make the push up election



Statute of Limitations on Assessment

• Statute of limitations (S/L) based on when partnership filed Form 1065 (or extension)

• S/L not based on partner’s situation


Election Out of Centralized Audit Rules Annual Election Out of New Rules (§6221)

• Pshps cannot elect out if have partner which is

Partnership

Trust

SMLLC (not sure yet)

Grantor trust (not sure yet)

• Partnerships with 100 or fewer partners* can opt out, if all partners are

Individuals

C Corps

Foreign Corps

Estates

S Corps (each shareholder counts as a partner*)




• Election must include disclosure of name and TIN of each partner

• S Corp shareholders m/ be counted for 100 partner test and disclosed to IRS

• Special consent and election rules apply to some partners


• Partnership m/ notify each partner of election out

• If election out made, IRS m/ make determinations at partner level (similar to TEFRA)

• From IRS’ perspective, is 100 partners too large?

Will this impose administrative burden on IRS it can’t handle?




IRS Notice Requirements

• IRS must mail to partnership and PR

Notice of any admin proceeding initiated at pshp level

Notice of any proposed partnership adjustment (NOPA)

Notice of any final partnership adjustment (FPA) (may not be mailed earlier than 270 days after NOPA mailed)

No deficiency assessment may be made before 90 days after FPA mailed

If petition filed, decision of court final


Judicial Review

• Suit may be filed w/in 90 days of FPA mailing in either

Tax Court, District Court or Federal Court of Claims

• Court has jurisdiction to determine:

All items of income, gain, loss, deduction or credit of partnership of tax year to which FPA relates;

Proper allocation among partners; and

Penalties, additions to tax and other amounts partnership is liable for



Partnership Request for Admin Adjustment

• Partnership Request for Admin Adjustment (PRAA) = Partnership mechanism for requesting adjustment to tax year

No more amended returns at pshp level

PRAA filed w/in 3 years of date partnership return filed or unextended due date of partnership return

If PRAA shows imputed underpayment, partnership must either pay tax or issue amended K-1s

If no imputed underpmt, pshp issues amended K-1s


Partnership Representative

• Partnership Representative (PR) = Party selected to represent partnership before IRS and make tax decisions on behalf of pshp

Replaces tax matters partner (TMP) under TEFRA

Can, but need not, be a partner

Has sole authority to act on behalf of partnership

Granted broad authority to resolve IRS exam

Actions are binding on all partners



Partnership Representative

• PR m/ be person w/ substantial U.S. presence

§7701(a)(1) Person = Individual, trust, estate, partnership, association, company or corporation

§301.7701(b)(1) provides guidance on “substantial U.S. presence”

• IRS will appoint PR if partnership does not designate one


Effect on Partnership Agreements

“The delayed effective date does not mean partnership advisors can take a siesta.”

“The changes have a profound impact on all new and existing partnership agreements”

Attorney Terry Cuff



Agreements Affected

• Partnership Agreements

• LLC Operating Agreements

• Buy Sell Agreements

• Contribution Agreements

• Redemption and Dissolution Agreements

• Merger Agreements

• Disclosure documents

• Loan Agreements


Partnership and LLC Agreements

• All pshps and multi-member LLCs affected

New

Existing

• Amend prior agreements?

• Will partners agree?

• Who do you represent?

Conflicts of interest abound at every corner



Agreement Provisions Regarding PR

• Partnership Representative Drafting Points

1. Standards to select, terminate, replace PR

2. Total authority vs. partner consent at some level

3. Notice to partners, duty to inform, settling audit, filing petition for readjustment, other material concessions

4. Decisions

• To pay tax or make push up election?

• M/ partners approve?

• Which partners?

• Thresholds?

• De minimis payments?

• Other?

5. Indemnification of PR?

• Compensation of PR?


Agreement Provisions Regarding Imputed Underpayment

• Obligation of PR to seek lower rate of tax

• Authority of partnership to request partner specific info and partner obligation to provide

• Ability to pay tax from partnership accounts or capital call (with penalties for failure to contribute) or loans to pay tax

• Allocation of tax liability among partners

• Indemnification, clawback from prior partners



Agreement Provisions Regarding Election Out

• Criteria for electing out

• Is electing out mandatory?

Optional?

• Should PR have authority to choose?

Should partners have approval rights?

• Transfer restrictions to avoid transfers which would negate ability to elect out

• Covenant in partnership agreement to stay < 100 partners?

• Partners obligated to provide info to support elect out


Agreement Provisions Regarding Push Up Election

• Push up election mandatory or optional?

• If optional, what are criteria for deciding?

• Covenants that partners will pay tax

• Authority for PR to make election after liquidation and termination

• If lender has preference, how does that play?



Agreements Affected

• Partnership Agreements

• LLC Operating Agreements




• Merger Agreements

• Disclosure documents

• Loan Agreements


Other Agreements Affected

• Loan agreements

Lenders likely will want covenant to elect out of new regime or make push up election


Covenants and indemnification to protect buyer from pre-closing tax liability imposed on partnership or buyer

Covenants to make push up election

Additional representations needed by seller

More due diligence



Other Agreements Affected


Same issues as for Buy Sell


Same issues as for Buy Sell

If partnership liquidates, consider provisions to appoint PR to handle post termination audits and making of push up election



• Lots of unanswered questions remain (ABA letter has 91 pages of issues/suggestions)

• IRS guidance, good or bad, will answer some

• In the meanwhile, the new rules are coming like a freight train

• Effective for partnership tax years beginning after 2017, it’s game on for the new rules

• It is best to begin now to prepare for the new



How Best to Prepare

• Get into position to elect out if possible

Eliminate partnership partners

Eliminate trust partners

Eliminate any other partners not allowed

Get below and stay below 100 “partners”


How Best to Prepare

• Partnership agreement provisions

Provisions requiring upper tier partnerships to share info about their owners

Provisions for selecting PR and limiting power of PR re: election out, amended statements, S/L extensions, settlements, litigation of tax matters

Provisions to allow or require elect out

Escrow and indemnify provisions for buying or selling of partnership interests




• Huge change to how IRS audits partnerships

• Effective 2018, new rules replace current TEFRA rules

• Allow IRS to audit partnerships at entity level and assess and collect taxes against the partnership, UNLESS partnership elects out of new regime

• Impacts the formation and operations of partnerships, disposition of partnership interests and admission of new partners


Polling Question #5

Does the original due date for 2016 Form 1120S change (compared to prior years)?

Yes, it changes to 15th day of 4th month

No, it stays 15th day of 3rd month

Yes, but extension period changes

No, but extension period changes



Income Tax Return Due Dates

Income Tax Return Due Dates

Entity Type Current Law New Law Net Change Effective Date

S Corp 15th day of 3rd month

15th day of 3rd month

No change No change

Partnership 15th day of 4th month


Accelerated 1 month

Returns for tax years beginning after 12/31/15

C Corp (non 06/30 year end)


15th day of 4th month

Delayed 1 month Returns for tax years beginning after 12/31/15



15th day of 3rd month*

(* 15th day of 4th month after 2025)

No change (except for *) (* 15th day

of 4th month after 2025)

* No change, until returns for tax

years beginning after 12/31/25


Tax Return Extension Due Dates

Income Tax Return Extension Due Dates

Tax Return Type Current Law New Law Net Change Effective Date

S Corp 6 months 6 months No change No change

Partnership 5 months 6 months 1 month more Returns for tax years beginning after 12/31/15


6 months 5 months 1 month less Returns for tax years beginning after 12/31/15


6 months 6 months* (* 5 months after

2025)

No change * (* until tax years

beginning after 2025, then 1 month less)

* No change, until returns for tax

years beginning after 12/31/25






1041 5 months 5 ½ months ½ month more Returns for tax years beginning after 12/31/15

5500 2 ½ months 3 ½ months 1 month more Returns for tax years beginning after 12/31/15

990 3 months 6 months 3 months more Returns for tax years beginning after 12/31/15








8870 3 months

6 months

3 months more

Returns for tax years beginning after 12/31/15



FBAR (FinCen 114) Due Dates

FBAR

Current Law

New Law Net Change Effective Date

FBAR Return (FinCen

114)

June 30 April 15 2 ½ months less

Tax years beginning after 2015

FBAR Extension

None Up to 6 months

Up to 6 months more

Tax years beginning after 2015


Late Filing Minimum Penalty Increase

• §6051 Increase in Floor of Late Filing Minimum Penalty from $135 to $205 (or, if Less, the Amount of Tax Due) for Certain Returns More Than 60 Days Late (for returns required to be filed after 12/31/15)

For certain returns filed more than 60 days late, minimum penalty has increased (from $135 to) $205 or the amount of tax owed, whichever is smaller



Late Filing Minimum Penalty Increase

• §6051 Increase in floor of late filing minimum penalty from $135 to $205 (or, if less, amount of tax due) for > 60 days late for (2015 returns and later)

1. Form 990-T

2. Forms 1040, 1040A, 1040NR, 1040NR-EZ

3. Form 1041

4. Form 1120, 1120-H, 1120S


Penalty for Late Filing 1120S or 1065

Late Filing Penalty for 1065 or 1120S

Year Amount

2015 $195 *

2016 $195 *

2017 $200 *

* Amount is per shareholder per month (not to exceed 12 months)



Polling Question #6

In order to be eligible to claim an NOL on a federal income tax return, need an NOL schedule be attached to such return?

Not really, but it makes the return look more impressive to the client

Yes


NOL Carryforwards

• §172 NOLs from Operation of S Corp Disallowed Because Not Proven (Mark D. Jasperson v. Comm., CA 11(08/31/16), aff’g TCM 2015-186 (09/22/15))

NOL Schedule Not Attached to 1040

Backup Proof Would Have Been Considered Had It Been Submitted

How Many People Attach an NOL Carry Forward Schedule to Their Return Anyway?



IRS’ Attack on Airplanes

• §183 Leasing Airplane to Closely Held Corp at a Loss Tripped Up by Hobby Loss Rule (David H. Hoffman and Jerrilynn Hoffman v. Comm., TCM 2016-69 (04/19/16))

After main leasing customer bit the dust, individual lessor could have hopped out of airplane lease, but did not


Travel Expenses

• §162 Vehicle for Transportation To and From Worksite and Meal Expenses Not Deductible (Mario Joseph Collidi, Jr. and Elizabeth Louise Collodi, pro sese, v. Comm., TCS 2016-57 (09/19/16))

Not temporary when away for period not defined as less than one year

Employer and employee got slain



Ordinary and Necessary

• §§162, 170 No “Ordinary and Necessary” Business Deductions for NYC Attorney’s Volunteer Work – Volunteer Work on Side Not Connected to Her Day Job (Tracia Callender, pro se, v. Comm., TCM 2016-68 (04/18/16))


Change of Accounting Method

• §446 Switch by Alaskan Mineral Miner from Cash to Accrual on Amended Return to Garner Stepped Up Legal Fees Deduction Not Valid – Must File Form 3115 and Get IRS Consent to Change Accounting Method – Switch from Cash to Accrual is Change of Accounting Method – Oral Instructions by IRS Agent to Switch Don’t Cut the Mustard (Carey Clayton Mills, pro se, v. Comm., TCM 2016-180 (09/27/16))



Abandonment Losses


Abandonment Losses

• §§165, 168(k), 61, 108(a) Immediate Abandonment Loss Allowed When Queens, New York Haagen-Dazs Franchise Hits Skids and Landlords Swoops In (Nayemul B. Chowdhury and Laila Banu, pro sese, v. Comm., TCS 2016-31 (06/30/16))

$300,000 lost in about one year

Abandonment loss immediate when local Sheriff locked them out for not paying rent

Did Tax Attribute Reduction in Bankruptcy Wipe Out the Battered Taxpayer’s Basis (and, thus, Their Losses) in Assets Lost to Abandonment?

• Not until first day of following year

• By then, they’d used some of it up



Abandonment Losses

• Ordinary Loss on Abandonment of Security Allowed on Appeal (Pilgrim’s Pride Corp v. Comm., 141 TC 17 (12/11/13), rev’d 5th Cir. No. 14-60295 (02/25/15))

Texas corporation walked away from security in which it had $98.6 million basis, instead of selling it for $20 million, to garner ordinary loss write off

Tax Court applied §1234A to deny ordinary loss

5th Circuit overturned to allow ordinary loss


Federal Standard Mileage Rates

Federal Standard Mileage Rates

2015 2016

Medical / Moving 23¢ 19¢

Charitable 14¢ 14¢

Business 57.5¢ 54¢



Vehicle Expenses

• §162 Bolt Salesperson Denied Additional Business Mileage Deduction When Carfax Report on His Jeep Disputed His Mileage Log’s Beginning of Year Odometer Reading (John R. and Mary M. Galbraith, pro se, v. Comm., TCM 2016-168 (09/12/16))

The Car Fox says get the Carfax


Hobby Loss

• §183 Restoring Old Plymouths a Business, Not a Hobby (Richard Brewster Main, pro se, v. Comm., TCM 2016-127 (07/05/16))

Restorer ran restoration operation in unsophisticated, but business-like fashion

Plymouths back in the day weren’t that popular and they’re still not



Charitable Contribution by LLC

• §170 Charitable Contribution Appraisal Substantial Compliance – Part Sale, Part Gift Upheld – Court Sided With 3rd Appraisal Obtained Just Before Trial (Cave Buttes, LLC v. Comm., 147 TC No. 10 (09/20/16))

Case extremely good read because substantial compliance victories are rare


S Corps and Duty of Consistency

• “Duty of Consistency” Required California Janitorial Company to Include Income in Wrong Year When It Had Consistent Pattern of Doing So – Result: Paying Income Tax Twice on Same $1,634,720 of Income (Robert J. Squeri, TCM 2016-116 (06/15/16))

Company “sat on” 5 weeks of checks received at year end, deposited in following year

Constructive receipt burned taxpayer into paying tax on same income twice in oldest open year



Affordable Care Act

• Employers With Fewer Than 50 Employees and the ACA (IRS HCTT 2016-41, “Employers: Have Fewer Than 50 Employees? Here’s How ACA Affects You”)

DOL, IRS and INS on rampage reclassifying contract labor workers to employees to collect fines, penalties and back taxes

DOL has lots of funding for lots of auditors


Fines Increased for Form I-9 Violations

• The federal government increased civil fines for I-9 paperwork violations by 96% on 08/01/16 effective for violations that occurred after 11/02/16

New fines for I-9 paperwork errors (per head)

Prior fine New fine

Minimum $110 $216

Maximum $1,100 $2,156



Employer Owned Aircraft Value of Personal Flight on W-2

SIFL Rates for 2016 (Rev. Rul. 2016-10 and Rev. Rul. 2016-24)

Period in Which Flight Taken

Terminal Charges

SIFL Mileage Rates

01/01/16 – 06/30/16 $39.19 Up to 500 miles = $0.2144 / mile 501–1500 miles = $0.1635 / mile 501–1500 miles = $0.1572 / mile

07/01/16 – 12/31/16 $37.68 Up to 500 miles = $0.2061 / mile 501–1500 miles = $0.1572 / mile 501–1500 miles = $0.1511 / mile


Airplanes and Fringe Benefit Rules

• Employer’s Deduction for Cost of Operating Aircraft Limited to Corresponding Amount Included in Income for Personal Use by Key Employee

Income tax deduction for employer’s cost of operating aircraft limited to corresponding amount included in income for personal use by key employee (costs of entertainment, amusement or recreation related goods, services and facilities provided to officers, directors and > 10% owners) §274(e)(2)(B)



Failure to Seek Reimbursement

• §§127, §162 Failure to Seek Reimbursement from Employer for Reimbursable Educational Expenses Yields Tax Benefits for No One – Employer Cannot Deduct or Exclude – Employee Cannot Deduct – She Who Sleeps on Her Rights Loses Them (Michael D. and Jo B. Hastings, TCM 2016-61 (04/05/16))


Qualified Transportation Fringes

• Qualified transportation fringes provided to an employee during 2016 are excludable from the employee's wages up to the following limits

1. $255/month for combined commuter highway vehicle transportation and transit passes;

2. $255/month for qualified parking; and

3. $20/month for qualified bicycle expense reimbursement



Polling Question #7

Do any employer health reimbursement arrangements survive the ACA market reforms?

No, all bit the dust

Only 1 participant plan survived

Four types of HRAs survived

Properly integrated plans survived


Health Related Fringe Benefits

• Most HRAs Incompatible with ACA Market Reforms (Notice 2013-54, Notice 2016-17)

• Four types of group health plans survive ACA

1. Fewer than two participants who are current employees on the first day of the plan year;

2. Provide only “narrow gage” excepted benefits such as accident-only coverage, disability income, certain dental and vision benefits, certain health FSAs, etc.;



Health Related Fringe Benefits

• Most HRAs Incompatible with ACA Market Reforms (Notice 2013-54, Notice 2016-17)

• Four types of group health plans survive ACA

3. Retirees only; or

4. Reimbursement plan integrated w/ group health insurance


Health Insurance Premium Reimbursement Gets the Axe

• Reimbursing employees’ outside health insurance premiums prohibited (Notice 2013-54)

• $100/day/participant penalty = $36,500/partic/yr

• No penalty if remedy problem within 30 days of violation (go back, pay late payroll taxes, etc.)



Health Insurance Premium Reimbursement Gets the Axe

• Penalty self-reported on Form 8928

• No penalty prior to 06/30/15 (or 12/31/15 if >2% S shareholder) (12/31/15 date extended by Notice 2016-17: Reimbursing outside health insurance premium remains available until future notice for > 2% S shareholder)


Exceptions to $100/Day Penalty

• Health Reimbursement Accounts (HRAs) w/ fewer than 2 participants

• HRAs for retirees only

• HRAs limited to narrow benefits

e.g., dental only, vision only, etc.

• HRAs w/ no dollar limits

• HRAs integrated w/ ACA compliant group health plans - Tricare and Medicare (if certain conditions met) may be integrated



Polling Question #8

Is an employer ever deemed to be an “insurance company” (under ACA) which must file Form 1095-B with employees and IRS?

No, an employer is an employer, not an insurance company

Yes, an employer with a medical reimbursement plan must send Forms 1095-B to its employees


HRA Reporting Rules

• Small businesses offering HRAs are required to file Form 1095-B

• Why?

Because HRA is a self insured plan

• Insurance company will also file Form 1095-B to same employee



Professional Employer Organization

• PEO Throws Customer Under the Bus – PEO Embezzles Customer’s Payroll Tax Monies and, Obviously Fails to Deposit – Customer Remains Liable for All Tax, Plus $425,000 in Failure to Pay and Failure to Deposit Penalties and Interest – Due Diligence Required When Utilizing Payroll Service Providers (Kimdun Inc., et al., v. U.S., No. 216-cv-01500-CAS (RAOx), DC CD CA (08/15/16))


Professional Employer Organization

• Certified PEOs (CPEOs) start 01/01/17

New statutory employer that gets CPEO’s customer off hook for unpaid employment taxes

To become certified, must pass background checks, be audited by independent CPA, be bonded/insured, have positive cash flow

Still best to monitor outside employment tax payer weekly

No solution for ACA / qualified retirement plan issues



FICA Wage Base

• FICA Wage Base

$118,500 for 2015

$118,500 for 2016

$127,200 for 2017


Sale of Goodwill and 3.8% NII Tax

• Is the sale of goodwill taxable for 3.8% NII tax purposes?

Q: Who is selling the goodwill?

• Sale of C Corp stock is NII taxable

• Sale of S Corp stock or partnership interest is not NII taxable to extent underlying assets are trade or business and non-passive

If individual shareholder sells personal goodwill, is it NII?

• No known answer – It should not be NII



3.8% NII Tax - Formula

• 3.8% tax on lesser of

1. NII -or-

2. MAGI in excess of floor

• $200,000 for single and HH;

• $250,000 MFJ and SS; or

• $125,000 MFS


Teach Your Children About Tax



Two Ways to Avoid NII Tax

• Two ways to avoid 3.8% NII tax

1. Fly below the radar

• Income below AGI threshold

2. Income not NII


Net Investment Income Defined

• NII = excess of income over deductions from

1. 1. Gross income from:

• Unless such income is derived in the ordinary course of trade or business (other than 2. and 3. below);

2. Gross income from §469 passive activity trade or business;

3. Gross income from trade or business of trading in financial instruments or commodities;

4. Net gain from disposition of property (other than property held in trade or business not described in (2) or (3) above); and

5. Working capital

a. Interest b. Dividends c. Annuities d. Royalties e. Rents




• NII = excess of gross income over deductions from

2. §469 passive activity trade or business



• NII = excess of net income over deductions from

4. Net taxable gain on disposition of property

• When interest in partnership or S Corp disposed of, only net gain or loss from property held by entity which is not attributable to non-passive trade or business is NII

• Net gain or loss calculated as if all applicable property sold at fair market value immediately before disposition of the interest §1411(c)(4), §1.1411-7



Income Excluded From NII

• NII Does Not Include

1. Non-passive business income

• e.g., from S Corp, partnership, LLC (taxed as partnership), trust, estate, SMLLC owned by individual, sole proprietor


Income Excluded From NII

• Income excluded from NII – No exclusive list

Commentators ask Treasury to give exclusive list of income excluded from NII

Treasury refused, instead listing only examples of income excluded from NII



Ordinary Course of Business Income Not NII

Step right up!! Get your 4D glasses!!

See 4 things to exclude business income from NII

1. Derived in ordinary course

2. Trade or business

3. Not passive activity

4. Not trading financial instruments or commodities


Sales of Partnership and S Corp Interests

• NII generally does NOT include gain or loss from the sale of a pass-through interest (partnership or S Corp) if owner is non-passive

Applies only business assets (non-passive and not trading FI & C)

Does not apply to working capital inside pass through

• §1.1411-4(d)(4)(i)(B)(1); REG-130843-13, Preamble, 9; PR §1.1411-7



Ideas to Reduce 3.8% NII Tax

• Ideas to Reduce 3.8% Tax on Net Investment Income (NII)

1. Reduce NII by Maximizing

2. Reduce NII by Minimizing

3. Reduce Passive Income (and, thus, NII)

4. Keep AGI Below Threshold Amount


Ideas to Reduce 3.8% NII Tax

• Reduce NII by Minimizing

1. Passive activity income

2. Limited partnership (passive) income

3. Gains on sale of passive property

4. Rental real estate income

• Convert to ordinary course trade or business of renting

5. Rental income from personal (non-real) property

6. Income from businesses with no material participation

7. Undistributable NII taxable income in a trust



Sale of Goodwill and 3.8% NII Tax

• Is the sale of goodwill taxable for 3.8% NII tax purposes?

Q: Who is selling the goodwill?

• Sale of C Corp stock is NII taxable

• Sale of S Corp stock or partnership interest is not NII taxable to extent underlying assets are trade or business and non-passive

• If individual shareholder sells personal goodwill, is it NII?

─ No known answer – It should not be NII


Partnership Disguised Sales

• §707 Disguised Sale Rules

Example

• Partner A contributes Chicago Cubs’ Ben Zobrist collectible water bottle (basis $1, fmv $10) to partnership

• Partner B contributes $10 cash

• Later, A withdraws $10 cash

Tax result

• Partner A recognizes gain on disguised sale of water bottle



Partnership Disguised Sales

• Route 231, LLC v. Comm., F.3d (4th Cir. 01/08/16) 4th Circuit affirmed Tax Court’s holding

Partnership’s transfer to a 1% partner of 97% of state tax credits generated by donations of conservation easements and land taxable disguised sale under §707

1% partner had contributed $3.8 million to the partnership and the partnership had treated the transaction as a capital contribution followed by an allocation of tax credits to the 1% partner


Sale of Corporate Stock Makric Enterprises, Inc. v. Comm., (TCM 2016-44)

• Makric Enterprises, Inc. v. Comm., (TCM 2016-44) Failure to make sure the right corporation was sold cost $2,839,780 in corporate level tax

2 corps

• Makric (parent) and wholly owned subsidiary (Alpha)

A third party became interested in buying the business conducted by Alpha



Individual shareholders interested in having gain on disposition of Alpha taxed as capital gain with tax paid only at the individual level

Buyer willing to go along with their plan and thus agreed to buy Alpha stock, rather than assets

Preliminary documents drafted that stated buyer would buy Alpha stock from the 3 shareholders of parent as sellers of stock



Corp’s outside accountant recommended deal be restructured so that buyer would buy parent company (Makric) stock, not sub

Seller’s negotiator informed buyer they no longer intended to dissolve Makric and to restructure the sale as a purchase of Makric by buyer




Resulting exchange of emails where buyer indicated its confusion about was happening, with their attorney who was drafting the sales agreement asking questions as to structure

• Seller’s rep responded to that email by stating buyer would buy Makric shares

• However, he never received confirmation that the seller’s representative received this email



Seller’s rep redrafted agreement to make Makric the seller of Alpha stock

Result

• Gain in the C corporation parent

Since C Corps do not have special, lower capital gain rates, gain now taxed at much higher rate

Second tax on dividend at shareholder level when cash (proceeds of Alpha stock sale) distributed




Agreement went through eleven more drafts, each one retaining Makric as the seller

• Seller’s representative reviewed agreement before it was finally signed, but failed to realize it showed Makric as seller of stock



Accountant who had raised initial concerns about structure prepared short period return for Makric

• Did not consult the actual agreement

Sale of Alpha not shown on corporation’s return

Showed sale of Makric stock on individual returns of shareholders, with resulting long term capital gains




Only when the IRS examined Makric’s short period return and the returns of the shareholders did the accountant learn he misreported transaction



The taxpayer, who was involved in the drafting of the agreement, cannot raise a substance over form argument with regard to the transaction unless the taxpayer can show that the contract would either be interpreted under state law in the manner the taxpayer is now arguing or that there would be a valid action to reform the contract in line with the taxpayer’s position

• Danielson v. Comm., 378 F.2d 771, 775 (3d Cir. 1967)




Buyer clearly at all points believed it was buying Alpha, not parent

Court also rejected mutual mistake argument

Agreement identifies parent as selling stock of sub shareholders, who voluntarily signed agreement, had 11 drafts (chances) to object



No one followed up to make sure email received

No one reviewed document carefully

Each member of team merely assumed, without verification, the other did their job

Result

• Disaster

• Millions of dollars in extra tax

• Waste




Polling Question #9

Which checkbook does a client use to pay any bill with?

Every client uses the correct checkbook to pay every bill every time

The client uses the checkbook with the money in it


Blurring the Blur of the Lines Larry Zavadil and Diane Zavdil v. Comm., (8th Cir , No. 14-1053 (07/16/15)

• Blurring the Lines – Don’t Let Your C Corp Pay Your Charitable Contributions When They’re Really Yours and Other Sad Stories (Larry Zavadil and Diane Zavdil v. Comm., (8th Cir , No. 14-1053 (07/16/15))

CEO of C Corp couldn’t claim charitable contributions made by company

Contributions were made by Corp, then reflected by a ledger account and a (sort of) circular flow of funds

CEO couldn’t prove what part, if any, of the charitable contributions were paid with his own funds and not funds advanced by company



Zavadil repaid all funds in first half of 2005, but did not prove he was obliged to do so

No evidence he did so in second half

Smoke and mirrors end of month “settle up” ledger system did not prove Zavadil bore economic burden of expenditures

• Corp was quick to make advances to him at beginning of next month

Blurring the Blur of the Lines Larry Zavadil and Diane Zavdil v. Comm., (8th Cir , No. 14-1053 (07/16/15)


Sale of Stock or Compensation? Brinkley v. Comm., TCM 2014-227, aff’d 5th Cir 12/16/15)

• §83 Court Rules Payment to Founder and Former Chief Technology Officer in Excess of Fair Market Value of Stock is Compensation, Not Long Term Capital Gain – Dagger: Right to Extra Payment Arose From Employment Agreement (Brinkley v. Comm., TCM 2014-227, aff’d 5th Cir 12/16/15))



Brian Brinkley, a founder and chief technology officer of Zave Networks, Inc. initially owned 9.8% of Zave’s stock

In exchange for his services, he received restricted stock grants from Zave and made §83(b) elections on all restricted shares



Each time Zave received an infusion of capital from investors, Brinkley’s ownership percentage dropped

He threatened to leave the company if his ownership percentage fell below 3%

• Later, he got diluted and the company brought him back up to 3%




In 2011, when Brinkley’s ownership percentage had fallen below 1%, Google entered merger negotiations with Zave

• Based on the aggregate negotiated purchase price between Google and Zave, Brinkley’s stock was worth $800,000



• Brinkley and Zave cut deal: Brinkley paid $3.1 million (3% of the aggregate purchase price of Zave) in exchange for

1. All of Brinkley’s Zave stock, and

2. Brinkley’s execution of key employee offer letter and a proprietary information and inventions assignment agreement with Google




After Zave paid the $3.1 million to Brinkley, Zave reported $2.3 million as compensation income on W-2 and withheld payroll taxes

Brinkley reported on 1040 entire $3.1 million payment as capital gain on sale of Zave stock



Court ruled $2.3 million of the payment to Brinkley was compensation income, not sales proceeds. Court focused on intent of parties

• E.g., Letter agreement between Zave and Brinkley included language concerning the nonqualified deferred compensation rules of §409A and a provision for payroll tax withholding

• Brinkley not only was paid for his shares but also to sign agreement with Google




Chutzpah

• Chutzpah is when a man kills both his parents and begs the court for mercy because he’s an orphan

Yiddish phrase used in 231 court cases dating back to 1972

A taxpayer with a large tax debt could waste his money on nonessential goods and then plead poverty when the taxman came. Including dissipated assets in reasonable collection potential solves this chutzpah problem. See Kozinski & Volokh, “Lawsuit, Shmawsuit,” 103 Yale L.J. 463, 467 (1993) (defining “chutzpah”)


Reasonable Compensation Brinks, Gilson & Lione, P.C. v. Comm., TCM 2016-20 (02/10/16)

• §§162, 6662 Large Law Firm Could Not Pay Out All Profits in Salary – Owed Reasonable Investor a Reasonable Rate of Return – No Break on Accuracy Penalty Because Did Not Prove Sought Preparer’s Advice on the Matter (Brinks, Gilson & Lione, P.C. v. Comm., TCM 2016-20 (02/10/16))

Corporation prior to trial conceded issue of whether portion of salaries paid to shareholders should be treated as dividends



Large Chicago intellectual property (cash method) law firm paid annual bonuses to each shareholder based on shareholder’s ownership interest in corporation which zeroed out taxable income

150 attorneys (65 were shareholders), non-attorney staff of 270, business managed by board of directors



• Substantial equity on balance sheet

$8 million (2007) and $9.3 million (2008)

Balance sheets did not reflect value of intangible assets of corporation

Firm’s own expert admitted “firm's reputation and customer lists could be valuable entity-level assets, determining their precise worth might be difficult”




Pediatric Surgical Assocs., P.C. v. Comm., TCM 2001-81, and Mulcahy, Pauritsch, Salvador & Co. v. Comm., 680 F.3d 867 (7th Cir. 2012), aff’g TCM 2011-74 hold it is not reasonable for a service firm to pay all income out to shareholders as compensation if there exists substantial numbers of non-shareholder employees and/or substantial invested capital



Under Mulcahy “reasonable investor” test, inquiry is whether a theoretically independent investor would receive a reasonable return on investment in entity and would approve the payment of compensation in the amount in question




Since Brinks law firm did not pay out dividends and had zeroed out income by paying out all earnings as comp, Court found a reasonable investor would not approve this level of comp



Court rejected Corp’s argument that, because the shareholders held their stock only as long as they remained employees of the firm and had to sell their stock back at book value, they lacked normal rights of equity owners and, thus, independent investor test should not apply




Court concluded firm did not have substantial authority for position that all payments to shareholders were deductible compensation rather than dividends as return on capital

Corporation argued it had reasonable cause for having claimed the deduction and acted in good faith because well-known major accounting firm prepared its corporate tax return each year



Tax Court: Merely paying a professional to prep a taxpayer’s return is not automatically reasonable

1. Error was that of the taxpayer (provided accounting firm with books and records and W-2s showing payments as compensation, did not bring accounting firm in to decision making process regarding bonuses, instead presented as an accomplished fact)

2. Law firm did not show it asked for or received advice from accounting firm on question of reasonable compensation




Polling Question #10

How does one determine what is a reasonable amount of rent to pay for the use of property for federal income tax purposes?

Comparable rents in the vicinity

A certain rate of return on investment in real estate

All of the above

None of the above


Reasonable Rent

• §162 Tax Court Trims Rent Paid by Arkansas Wholesaler – Reclassified to Constructive Dividend (K&K Veterinary Supply, Inc. v. Comm., TCM 2013-84 (03/25/13))

Court allowed 8.5% rate of return to shareholders on land, office building and warehouse buildings

• Rate of return based in part on comparable rents



S Corp Reasonable Compensation Scott Singer Installations, Inc. v. Comm., TCM 2016-161 (08/24/16)

• §§6302, 3121 and 3306 Funds Drawn from S Corp Were Loan Repayments, Not Salary – Though Promissory Note Protocol Not Followed Perfectly, Substance Provided Foundation for Loan Repayment Integrity – Major League Employment Tax Disaster Averted – Glory Day (Scott Singer Installations, Inc. v. Comm., TCM 2016-161 (08/24/16))

- Monies drawn from S Corp to pay employee/owner’s personal expenses were loans, not salary


Amounts had always been reflected on books (including financials provided to bank) and 1120S as loans

Other evidence of loans (though no promissory note) existed (including consistent monthly amounts drawn)

Cf: Glass Blocks Unlimited (TCM 2013-180 (08/07/13)) – Frederick Blodgett’s personal draws deemed as salary

S Corp Reasonable Compensation Scott Singer Installations, Inc. v. Comm., TCM 2016-161 (08/24/16)



S Corp Reasonable Compensation

• §3121 S Corp Liable for Employment Taxes on All Payments to Sole Shareholder President – Loan Repayment and Low-Ball Salary Theories Denied – Poor Documentation of Operating Loans to Corp Proved Costly – No “Split the Baby” This Time (Glass Blocks Unlimited v. Comm., TCM 2013-180 (08/07/13))



• §§3121, 3301 California Real Estate Broker S Corp Hit With Reasonable Salary on Part, Not All, of Distribution – “Split- the-Baby” Analysis – Percentage of Gross Receipts Test (To Arrive at Salary) Rejected, Facts and Circumstances Test Adopted (Sean McAlary Ltd, Inc. v. Comm., TCS 2013-62 (08/12/13))

Tax Court rejects IRS’ higher salary estimate (from $100,755 ($48.44/hr) to $83,200 ($40/hr) of $240,000 distribution




• §§162, 3121 Cash Cow S Corp Gored To Yield W-2 Wages – Wages Arrived At By Averaging 5 Years of Prior Years’ Salaries (Patrick M. and Suzanne M. Herbert, pro se, v. Comm., TCS 2012-124 (12/26/12))

$2,400 salary re-classed to $30,000

$27,000 of distribution not re-classed

Court didn’t like pay cut from $30,000 to $2,400 after he bought company from his prior employer



Which type of entity, S Corp or partnership, is having an easier time in the federal tax law paying its owner part employment taxable pay and part distribution of profits?

S Corp

Partnership

Both S Corps and partnerships are pretty much a cake walk right now for safely splitting draws to owners between employment taxable pay and distribution of profits



Partnership Reasonable Compensation

• Payments from a partnership to a partner generally fall into one of three categories (Cahill v. Comm., TCM 2013-220)

1. Partner may receive payments representing distributions of his or her distributive share of partnership income §731

2. Partner may receive payments in circumstances where he or she is not treated as a partner §707(a)

3. Partner may receive guaranteed payments §707(c)



• Investment management partners not exempt from self-employment tax (CCA 201436049 (09/05/14))

CCA evidences IRS’ desire to restrict scope of limited partner exemption in §1402(a)(13), particularly where the entity is providing services

Income from partnership was not of an investment nature




• §707(c) Payments to Partner Were SE Taxable Guaranteed Payments for Services (Seismic Support Services, LLC v. Comm., TCM 2014-78 (05/05/14))

All comp was for services – No “split the baby”

Partner Scott Whittington was just a scammer – No way he could win – Extreme fact pattern

Problem: Other courts rely on this case for premise “you cannot split the baby”

Case really says: You lost because you are a cheater



• NM Federal District Court: “General Member” of LLC Treated as Partner Subject to SE Tax on All Payments Received – W-2 Wages LLC Paid To “Partner” Inappropriate (Riether v. U.S., 919 F. Supp. 2nd 1140 (DC NM 06/21/12))

Distributions of profits on partnership interest re-classed as SE taxable

Court ignores that there are 3 ways to draw money from a partnership




• Kansas City Law Firm Partners SE Taxable on All Income from Service Partnership – Trying to Pretend Away a Portion Based on a “Limited Interest” Did Not Get Them Far (Renkemeyer, Campbell & Weaver, LLP v. Comm., 136 TC 137 (2011))

Partners were not members of a limited partnership, nor did they resemble limited partners, which are those who "lack management powers but enjoy immunity from liability for debts of the partnership”



• Payments from a partnership to a partner generally fall into one of three categories (Cahill v. Comm., TCM 2013-220)

1. Partner may receive payments representing distributions of his or her distributive share of partnership income §731

2. Partner may receive payments in circumstances where he or she is not treated as a partner §707(a)

3. Partner may receive guaranteed payments §707(c)




• LLC Member Received Guaranteed Payments Subject to Self-Employment Tax (Lauren A. and Michael H. Howell v. Comm., TCM 2012-303 (11/01/12))

LLC member Lauren Howell provided marketing advice, signed documents, entered contracts on behalf of LLC, allowed LLC to use her credit cards and credit rating

Return originally filed reporting SE tax liability, amended return changed it


Commingling and Consequences

• Company A must pay its own business expenses in order to take a deduction

• If Company A pays a Company B expense, several things happen – none good

1. Company A does not get a deduction for the expense, increasing its net profit, thus increasing its federal income tax (if a C corporation) or the owner's income tax (if a S corporation);

2. Company B does not get a deduction for the expense because Company B didn't pay the expense ... Company A did; and




3. Owner of Company A is charged with a constructive dividend, which is nondeductible to Company A and taxable to the owner

• Transaction is deemed to occur as though Company A distributed the money to Owner, then Owner paid the expense for Company B



Payment by C Corp of a Related Corporation’s Expenses Deductible To No One, Taxable Dividend to Shareholder (Key Carpets v. Comm., TCM 2016-30 (02/25/16))



Constructive Payments and Deductions

• Shareholder’s Real Estate Tax Bill Paid by S Corporation Was Constructive Distribution by S Corp and Constructively Paid by Shareholder – Shareholder May Deduct It (Garada and Elghosein v. Comm., TCS 2016-1 (01/07/16))

S corporation paid the real estate tax bill of its shareholders (who deducted it on 1040)

IRS denied deduction, arguing it was not allowable because taxes had been paid by Corp


Constructive Dividends

• §316 Reimbursement to C Corp by Shareholder for Labor and Materials at Cost Did Not Generate Constructive Dividend – No Obligation Exists to Pay Corporation a Profit (Terry J. and Chrisse J. Welle v. Comm., 140 TC 420 (06/27/13))



Constructive Dividends

• Bad Nebraskan Nets $371,892 in Constructive Dividends from C Corp – Resulting Damage Includes Double Tax – Being Paid for Past Service Argument Falls on Deaf Ears (Terry M. Schank v. Comm., TCM 2015-235 (12/19/15))

Corp built a barn and out buildings for stockholder with corporate funds, ran related expenses through cost of goods sold, bought personal cars and paid off personal credit cards



Is it a good idea to put child locks on your computer to keep your minor child from going onto your state’s Secretary of State’s website?

Actually, it’s great when your kid goes to the Secretary of State’s website, especially in Michigan.

No. Keep your kid away from the Secretary of State’s Website. It can cause colossal damage.



C Corp or Schedule C? Manjit Rochlani and Bony M. Rochlani, pro se, v. Comm., TCM 2015-174

• Sole Proprietor’s Minor Child, Unbeknownst to Pops, Goes Online and Incorporates Pop’s Business – Pop’s Losses End Up Trapped in a C Corp – Living Proof You Need Child Restrictions on Your Computers (Manjit Rochlani and Bony M. Rochlani, pro se, v. Comm., TCM 2015-174 (09/08/15))


Corporation did not have any checking accounts or credit cards in corporate name

Only official corporate action was filing of an annual report with State of Michigan where all activity of Ultimate Presales reported

On 1040, taxpayer reported income on Schedule C




Disastrous result = Losses trapped inside C Corp

Failing to appreciate tax consequences of incorporating cost the taxpayer dearly

Simply forming an LLC instead of a corporation may have changed the result

• An LLC would have been disregarded for federal income tax purposes and the taxpayer’s business activity would have been properly reportable on Schedule C




What is a disregarded entity?

An entity disregarded for state law purposes

An entity disregarded for tax purposes

An entity disregarded for some purposes, but not others

An entity which is ignored for some purpose



What Is a Disregarded Entity?

• Disregarded entity (DE) = An entity recognized under state (or local) law, but ignored for federal income tax purposes


What Does “Disregarded” Mean?

Disregarded = Ignored



What Is a Disregarded Entity?

Under check-the-box regs (§301.7701-2(a))

DE =

1. a “business entity”

2. not classified as a corporation

3. which has a single owner


Examples of Disregarded Entities

• Examples of DEs (§301.7701-2(a))

1. Domestic single member limited liability company that does not elect to be classified as a Corp for federal income tax purposes;

2. Qualified subchapter S subsidiary (under §1361(b)(3)(B)); or

3. Qualified REIT subsidiary



Disregarded Entities not Disregarded for All Tax Purposes

DEs (beyond the federal income tax context) are not disregarded for other federal tax purposes, such as

Employment tax purposes

Excise tax purposes

Foreign asset reporting purposes

• DEs are not always disregarded for income tax purposes


Disregarded Entities Don’t Follow the Beaten Path

• In most of tax law, tax consequences follow non-tax (state law) status and rights

Example

• Owner of real estate taxed on its income, may deduct its expenses

• By contrast, with a DE, tax consequences generally do not follow state law status

Example

• Solo owned LLC affords creditor protection under state law, but not separate and distinct entity for fed income tax purposes



Disregarded or Regarded?

• The color of the chameleon depends on the context within which you find it

• As context varies, so does whether the entity is disregarded or regarded

• Now you see it, now you don’t


Disregarded or Regarded?

• If an entity is not disregarded for tax purposes, it is regarded

• DE is disregarded (most of the time, but not all of the time) for fed income tax purposes

• DE is regarded sometimes for fed tax purposes

• DE is regarded (most of the time) for state non-tax purposes



DE Thinking Process

DE Thinking Process =

1. Is the entity disregarded?

• If so, for what purpose(s)?

2. Is the entity regarded?

• If so, for what purpose(s)?


DEs – Why Do We Care?

1. DEs are all around us – Need to know what to do with them

2. Prevent being caught off guard and resulting train wrecks

3. Plan for maximum asset protection at lowest tax cost

4. Plan to accomplish other non-tax objectives at lowest tax cost



Tax Consequences of Being a DE

• If the entity is disregarded for income tax purposes, its activities are treated in the same manner as a sole proprietorship, branch or division of the owner

Reg. §301.7701-2(a)


Tax Recognition of Entity Disregarded for Income Tax Purposes

• An otherwise DE may be regarded for tax purposes in various contexts, such as

1. 1. Employment and excise taxes;

2. 2. Foreign asset (e.g., FBAR) reporting;

3. 3. Gift tax valuation



DEs and Employment Taxes

• DE (for Income Tax Purposes) Regarded for Administration, Assessment and Collection of Employment and Excise Taxes

DE regarded as separate entity for employment or excise tax purposes is treated as a corporation for payment, reporting and administration purposes

Reg. §301.7701-2(c)(2)(iv)(A) and (v)(A)



• Employment tax payment and reporting by DE

• Since DE is regarded (treated as a corp) for employment tax purposes, DE responsible to pay employment taxes

• Thus, DE must, under its own separate federal EIN, pay its employer share of employment taxes, withhold federal income tax (FIT) from employees’ pay, make required payroll tax deposits (e.g., EFTPS payments), file Forms 941 quarterly, file Form 940 annually, file Forms W-2 and W-3 annually, backup withhold and comply with related requirements



DEs and Employment Taxes Example

• Single member LLC (SMLLC) with employees is separate entity for employment tax purposes

Must pay employment taxes;

Must withhold employment taxes;

Must file 941s, 940s, W-2s, W-3s; and

Must fulfill related requirements



• SMLLC (which has employees and, thus, is separate entity for employment tax purposes) is also a partner in a partnership

SMLLC with employees is separate entity for employment tax purposes

Must have its own separate EIN for employment tax purposes



Taxpayer ID Numbers (TIN) for DEs

• DE uses employer identification number (EIN) of its owner for federal income tax purposes

• If a DE has employees or excise tax liability, it must have its own EIN to be used as its TIN for employment tax or excise tax purposes (but not for income tax purposes)



• Beware the income tax K-1 TIN trap

If SMLLC (which pays employees) is a partner in a partnership, make sure to report the owner’s income tax identification number (TIN), not employment tax EIN, on such partner’s K-1 from the partnership

A common, yet tragic, mishap occurs when SMLLC’s employment tax EIN is used to identify it as partner for income tax purposes on the K-1 it receives

Since IRS can’t match partner’s employment tax EIN to its income tax identity (TIN), IRS scrutiny results which may lead to an IRS examination




• If a DE becomes regarded, it must obtain an EIN if it does not already have one

Reg. §301.6109-1(h)(2)(ii)



• Partnership forms and owns SMLLC. SMLLC (DE), in turn, hires a partner in the partnership as an employee of DE

For income tax purposes, SMLLC is a DE

For employment tax purposes, DE is treated as a Corp

Arguably allows DE to withhold FICA and HI (Medicare) from, match such FICA and HI taxes and issue a W-2 to individual (employee)

IRS doesn’t like it - New temp regs (TD 9766) disallow it




• IRS doesn’t like partners to receive W-2s

New temp regs (TD 9766, issued 05/04/16) confirm Rev. Rul. 69-184 is good law

Rev Rul 69-184, 1969-1 CB 256 Partners not employees:

1. Bona fide members of a partnership are not employees of partnership for FICA, FUTA and FIT; and

2. Partner who devotes time and energy in conduct of business of partnership is self-employed individual, not an employee (pays SE tax)



• New IRS temp regs (TD 9766, issued and effective 05/04/16)

Partner cannot be employee of DE owned by partnership

Regs leave open possibility of (and asks for comments re:) partner in tiered partnership structure being treated as employee

Example

• Upper tier pshp owns lower tier pshp

• Partner in upper tier does not own interest in lower tier

• That partner is employee of lower tier pshp




• No state law liability shield for SMLLC DE’s federal employment taxes

Courts have routinely held owner of SMLLC liable for the entirety (not just trust fund portion) of federal employment taxes unpaid by LLC

Entity is disregarded as an entity for purposes of collection of federal employment taxes

Liability protections afforded by state law ignored

S.P. McNamee v. U.S., 2nd Cir, 05-6151-cv (05/23/07). Frank A. Littrello v. U.S., 6th Cir., No. 05-6494 (04/13/07), Peter M. Comensoli v. Comm., 6th Cir. 10-1145 (2011)



• Liability shield for non-trust fund employment taxes for multimember LLC

IRS may generally not collect non-trust fund (i.e., employer FICA and HI taxes, FUTA taxes and IRS penalties, interest and collection costs) from owners of a multimember (two or more member) LLC

In FAA 20093701F, IRS proclaimed if a multimember LLC later becomes a SMLLC, IRS cannot collect unpaid employment taxes from the single member for period LLC was multimember

• Taxed as a partnership



DE (for Income Tax Purposes) Regarded for FBAR Reporting Purposes • DEs subject to FBAR reporting requirements

Certain U.S. persons, including DEs, having a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other type of foreign financial account, must file FBAR (FinCEN Form 114)

DE is regarded for this purpose, must itself file FBAR

DE owner also must file FBAR (owns 100% of entity, thus controls it, thus must independently file FBAR on same account)


DE (for Income Tax Purposes) Regarded for Gift Tax Valuation Purposes

• For gift tax purposes, is SMLLC a DE or regarded?

1. If disregarded, no valuation discounts (gift tax savings)

• If DE disregarded, donor treated as gifting away portions of underlying assets. Thus, no valuation discounts




2. If regarded, valuation discounts and gift tax savings result

If an interest in regarded entity is gifted, the interest in the entity is what is transferred as opposed to underlying assets owned by entity

Gift of an interest in entity may qualify for valuation discounts, such as marketability and minority discounts



• Tax Court rules SMLLC is regarded for gift tax valuation purposes (Pierre v. Comm., 133 TC 24 (08/24/09))

Transfers of interests in SMLLC valued as interests in a regarded entity rather than transfers in interests in underlying assets (mostly marketable securities)

Restrictions on control diminish value



Interaction of DEs with Various Topical IRC Sections

• §108 Discharge of Indebtedness and DEs

• §170 Charitable Contributions and DEs

• §446 Accounting Methods and DEs


DEs and §108 Discharge of Indebtedness

• Law unclear whether IRC §108(a) relief applies to exclude COD discharged in bankruptcy (or while insolvent) where the DE, not DE’s owner, is in bankruptcy

• IRS released final regs taking position owner must be in bankruptcy or insolvent to be entitled to §108(a) relief TD 9771 (effective 06/10/16)



DEs and §108 Discharge of Indebtedness

• IRS final regs taking position owner must be in bankruptcy or insolvent to be entitled to §108(a) relief TD 9771 (effective 06/10/16)

Qualification for non-recognition of debt relief income applies at owner, not entity, level

For partnership, qualification for relief applies at partner, not entity, level

• Reg flies directly in face of Gracia (TCM 2004-47 (06/22/04)) (Tax Court held partnership is party whose insolvency is relevant)


DEs and §170 Charitable Contributions

• Charitable organization might use a DE to accept gift of real property (or contribution of operating business) to insulate from potential liability

Example: LLC used as a liability shield

• American Red Cross desires to accept a gift of land from a donor

• Gun shy about whether land carries with it unwanted environmental liability, Red Cross desires to insulate itself from potential liability

Donor contributes land to SMLLC and donates all of SMLLC’s units to Red Cross. This arguably earns donor a charitable contribution deduction and shelters Red Cross from unwanted liability See Notice 2012-52



DEs and §446 Accounting Methods

• Separate businesses may have separate methods of accounting

Only if businesses truly separate and distinct and accounting methods for each clearly reflect income Reg. §1.446-1(d)(1)

No business will be treated as separate and distinct unless a complete and separate set of books and records kept for business Reg. §1.446-1(d)(2)

Not allowed to use different accounting methods if creation or shifting of profits or losses between businesses so that income not clearly reflected Reg. §1.446-1(d)(3)



• DE Was Separate Trade or Business Entitled to Use Own Accounting Method (CCA 201430013)

In a CCA, IRS concluded a Corp and its former sub (which converted to a LLC) were separate and distinct trades or businesses under §446(d)

Fact that LLC was DE wasn't dispositive as to whether it was a separate and distinct business

Whether Company and LLC were separate and distinct trades businesses is factual determination




• DE Was Separate Trade or Business Entitled to Use Own Accounting Method (CCA 201430013)

Company and LLC were separate and distinct trades or businesses under §446(d)

• Primarily engaged in different activities;

• Had separate books and records;

• In different geographical locations; and

• Shared only high-level executive employees


Comparison of QSubs and SMLLCs

• QSub offers only a few benefits and significant detriments as compared with SMLLC DE

Variety of ways QSub can lose disregarded status, triggering immediate incorporation (C corp) of QSub’s assets

This incorporation can be taxable event in itself

May lead to taxable liquidation if assets of QSub ultimately removed from corporate solution




What is the somewhat stunning turn about going on in the Tax Court regarding passive activity loss cases?

The Tax Court is disregarding the passive loss rules for disregarded entities

IRS is winning almost every case

It is getting a lot easier to prove material participation, even in the absence of a contemporaneous time log

If you don’t have a contemporaneous time log, kiss any hope of material participation goodbye


Passive Activity Loss Material Participation 1. 500 hours (Stephan Tolin (TCM 2014-65))

2. Do substantially all the work (Michel Moreno (DC LA 05/19/14))

3. >100 hours and no one else does more (Larry Kline TCM 2015-144))

4. SPA (significant participation activity = at least 100 hours in each, combined exceeds 500 hours) (Jose Lamas (TCM 2015-59))



Passive Activity Loss Proving Material Participation • Cell phone (billing statement) call records

• Emails

• Travel itineraries and receipts

• Credit card charges

• Affidavits from customers

• Other documentary evidence


Passive Activity Loss Proving Material Participation

• Real estate professional status upheld despite lack of contemporaneous time log (Moon, TCS 2016-23 (05/23/16))

Material participation proven in spite of absence of contemporaneous time log

Court bought later prepared logs amplified by taxpayer testimony at trial



Passive Activity Loss Proving Material Participation • §469 Ohio Woman is Real Estate Professional Who May

Fully Deduct All Rental Losses Currently (Beth M. Hailstock v. Comm., TCM 2016-146 (08/08/16))

Failure to Aggregate Properties and File §469(c)(7) Election Not Fatal – It’s a Miracle

Qualifies as Material Participating Under Seldom, If Ever, Successful “Facts and Circumstances” Test

Passive Loss Case of the Century – Does It Help Us Sign Return of Our Client Who is Less Than Perfect?


Trusts & Material Participation

• Look to trustee for material participation (Mattie K. Carter Trust (256 F. Supp. 536 DC ND Texas (2003)) (Frank Aragona Trust, 142 TC 165 (03/27/14))

Must pick trustee who actually runs the business!!

Don’t let the estate planner, without thought of income tax implications, throw you under the bus on this one!!

IRS plans “unfriendly to taxpayer” reg project in 2017 Treasury Guidance Plan



Effect of IRS Budget Cuts

• IRS, Reeling Under Budget Cuts, is Out of Control

IRS staffing at bare bones level. IRS’ computers continue to generate matching notices at an escalating pace, yet IRS does not have manpower to answer taxpayer responses to IRS’ notices.

Example: 941 matching goes off the train track

Go to Taxpayer Assistance Service (via Form 911)


Employment Taxes and CDP Hearings

• §§6320, 6330 One Day Late and Thousands of Dollars Short – Don’t Miss Your Collection Due Process (CDP) Filing Deadline by One Day, You’ll Get Your Head Handed to You – Seller of Construction Company Liable for Taxes Incurred After He Sold Company (Eric L. Cox, pro se, v. Comm., TCS 2016-53 (09/06/16))



Change of Address

• §§6212, 6213(a), 7502 Failure to Notify IRS of Change of Address Aces Texan Out of Ability to Challenge Tax Deficiency in Tax Court – Details Do Matter (William Thomas Taylor, pro se, v. Comm., TCM 2016-81 (04/28/16))

- Need to change address both with IRS and U.S. Post Office



What need one do to make sure a change of address is duly reported to be protected regarding the receipt of IRS correspondence after moving to a new physical address?

Mention it to the friendly clerk at the post office and mention it to your friendly neighborhood IRS agent

File Form 8822 (or 8822-B) with IRS via certified U.S. mail and change address w/ U.S. Post Office online

Electronically file Form 8822 (or 8822-B) with IRS online



Change of Address

• Businesses change address with IRS by filing Form 8822-B via provable delivery

• Businesses change “responsible person” with IRS by filing Form 8822-B via provable delivery

• Change address with U.S. Post Office by completing process online

Keep proof of it!


Private Delivery Services

• IRS Notice 2016-30 updates list of approved Private Delivery Services which satisfy “date of mailing = date of filing” rule

• FedEx Ground and UPS Ground conspicuously absent from list

• Better get electronic receipt to prove date of “mailing”

• By comparison, U.S. Certified Mail still works (extremely well) to satisfy “date of mailing = date of filing” rule



Question and Answer Session

Conclusion



A Final Thought

“As I sit looking at the place my piano used to be before I had to sell it to pay my income tax, I find myself in a thoughtful mood”.

P. G. Wodehouse


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Thank You for Attending Today’s Program

SUPPLEMENTAL

MATERIALS

Special Report

Tax Briefing

September 16, 2016

HIGHLIGHTS

2016 Affordable Care Act Update

The Affordable Care Act in 2016: Reporting Changes, Excise Tax Relief, and Other Developments

New Draft Forms for Employers and Coverage Providers

Applicable large employer members (ALEMs) and health coverage provid-ers now have at least one year of Afford-able Care Act (ACA) reporting under their belts, and have hopefully recovered enough to start thinking about next year’s filing sea-son. Recently, the IRS released draft forms and instructions for 2016 reporting.

COMMENT: Note that draft forms are provided by the IRS as a courtesy and subject to change. Do not rely upon these forms before final versions are released.

Forms 1094-B and 1095-B (Code Sec. 6055): Used by anyone that provides “minimum essential coverage” (i.e., medical coverage) to an individual during a calendar year, to support en-forcement of the individual mandate. Code Sec. 6055 is generally applicable to entities such as insurance carriers, but self-insured employers may also be responsible for filing Code Sec. 6055 reports.

Forms 1094-C and 1095-C (Code Sec. 6056): Used by ALEMs to report whether and what kind of coverage was provided to employees. Even if an ALEM does not of-fer coverage to any, or only some, of its full-time employees, it must file returns with the IRS and furnish statements to each of its full-time employees to report informa-tion specifying that coverage was or was not offered. This information is used to determine (1) whether an employee is eli-gible for a tax credit if they purchased their coverage on the Exchange, and (2) whether the ALEM is subject to a penalty under the employer shared responsibility provisions. Some employers may be subject to report-ing under both Code Sec. 6055 and Code Sec. 6056. Those employers will report the information required by both sections on a single combined “C” series form.

COMMENT: The format for this informa-tion reporting is similar to other informa-tion reporting that many employers are already familiar with, such as Forms W-2 and Form W-3. Each employee or covered individual is furnished with a form (Form 1095-B or C) and then a copy of each of those forms, along with a transmittal form (Form 1094-B or C), is filed with the IRS.

Developments have continued at a good clip over the past year for the Affordable Care Act (ACA). The IRS is proposing reporting form changes for 2016. Congress has provided some welcome excise tax relief, narrowed the definition of “employee” for purposes of determining applicable large em-ployer status, and clarified the status of expatriate health plans. In the regulatory field, the govern-ment is still searching for the right balance with respect to the religious employer accommodation for providing contraceptive coverage. Market reform transition relief largely expired last year, but transition relief is still available under some circumstances. Marketplace exchange rules have been tightened somewhat to reduce the availability of special enrollment periods.

IRS Releases Draft Reporting Forms

Excise Tax Relief

Contraceptive Religious Accommodation Still Unsettled

Reimbursement Plan Transition Relief

Expatriate Plan Clarification

Health Care Exchanges

INSIDEIRS Releases Draft Forms for Large Employer and Coverage Provider Reporting ................................................. 2

Applicable Large Employer Definition ............................................... 3

Excise Tax Relief ..................................... 3

Expatriate Health Coverage ................ 3

Market Reforms ..................................... 3

Exchanges ............................................... 4

HIGHLIGHTS

Tax Briefing

2

Affordable Care Act Update

© 2016 CCH Incorporated and its affiliates. All rights reserved.

Employers and health insurance carriers were able to take advantage of a small ex-tension to furnish and file forms in 2016 for the 2015 plan year. No such exten-sion currently exists for the 2016 plan year. 2016 Forms 1095-B and 1095-C must be furnished to individuals by January 31, 2017. 2016 Forms 1094-C and 1095-C are required to be filed by February 28, 2017, or March 31, 2017, if filing electronically.

While the updates are fairly minor, there are some changes reporting entities ought to be aware of.

Changes to Form 1095-B Part I, lines 2 and 3, and Part IV, col-umns (b) and (c) were updated to reflect the rule that a taxpayer identification number (TIN) may be entered in place of a social security number (SSN);Form 1095-B, line 9 is now reserved—on the 2015 form, this line was used to report the SHOP identifier, if applicable;The instructions to the form’s heading to Part II was revised to read “Information about Certain Employer-Sponsored Coverage” to clarify that Part II will be blank for some individuals with employ-er-sponsored coverage and reassures in-dividuals that they do not need to take it upon themselves to fill out that section or return the form to the employer.

Form 1094-B, the transmittal form for Form 1095-B, is unchanged.

Changes to Form 1094-C

In Part III, column (b), “Section 4980H” was inserted before “Full-Time Employee Count for ALE Member” to remind filers that the Code Sec. 4980H definition of “full-time employee” ap-plies for purposes of this column, not any other definition that an ALEM may use for other purposes;Line 22, box B is designated “Reserved”.

COMMENT: Line 22, Box B was pre-viously the “Qualifying Offer Method Transition Relief ”, which is not appli-cable for 2016. Several forms of transi-tion relief were available to employers for 2015, but only limited transition relief continues to apply in 2016, and they ap-ply only for certain ALE Members and only for certain calendar months in 2016 (for example, for employers with non-calendar year plans).

Changes to Form 1095-C

The language “Do not attach to your tax return. Keep for your records” was inserted under the title of the form to clarify that recipients should not submit Form 1095-C with their return;The “Plan Start Month” box will remain optional;Code 1I for line 14 (“Qualifying Offer Transition Relief 2015”) is no longer ap-plicable and has been reserved’Code 2I for line 16 (“Non-calendar year transition relief applies to this employ-ee”) is no longer applicable and has been reserved; New codes 1J (“Minimum essential coverage providing minimum value of-fered to you; minimum essential cover-age conditionally offered to your spouse; and minimum essential coverage NOT offered to your dependent(s)”) and 1K (“Minimum essential coverage providing minimum value offered to you; minimum essential coverage conditionally offered to your spouse; and minimum essential cov-erage offered to your dependent(s)”) have been added for line 14.

COMMENT: In 2015, codes 1J and 1K did not exist. All offers to an employee’s spouse were reported the same, whether or not the offer was conditional. A condi-tional offer is an offer of coverage that is subject to one or more reasonable, objective conditions (for example, an offer to cover an employee’s spouse only if the spouse is not eligible for coverage under Medicare or a group health plan sponsored by another

DO NOT FILEJuly 7, 2016

DRAFT AS OF120217

Form 1094-C (2016) Page 2Part III ALE Member Information—Monthly

(a) Minimum Essential Coverage Offer Indicator

Yes No

(b) Section 4980H Full-Time Employee Count for ALE Member

(c) Total Employee Count for ALE Member

(d) Aggregated Group Indicator

(e) Section 4980H Transition Relief Indicator

23 All 12 Months

24 Jan

25 Feb

26 Mar

27 Apr

28 May

29 June

30 July

31 Aug

32 Sept

33 Oct

34 Nov

35 Dec

Form 1094-C (2016)


DRAFT AS OF120217

Form 1094-C (2016) Page 2Part III ALE Member Information—Monthly

(a) Minimum Essential Coverage Offer Indicator

Yes No

(b) Section 4980H Full-Time Employee Count for ALE Member

(c) Total Employee Count for ALE Member

(d) Aggregated Group Indicator

(e) Section 4980H Transition Relief Indicator

23 All 12 Months

24 Jan

25 Feb

26 Mar

27 Apr

28 May

29 June

30 July

31 Aug

32 Sept

33 Oct

34 Nov

35 Dec

Form 1094-C (2016)

DRAFT FORM 1094-C

DRAFT FORM 1095-C


DRAFT AS OF

600117

VOID

CORRECTEDForm 1095-CDepartment of the Treasury Internal Revenue Service

Employer-Provided Health Insurance Offer and Coverage ▶ Information about Form 1095-C and its separate instructions is at www.irs.gov/form1095c

OMB No. 1545-2251

2016Part I Employee

1 Name of employee 2 Social security number (SSN)

3 Street address (including apartment no.)

4 City or town 5 State or province 6 Country and ZIP or foreign postal code

Applicable Large Employer Member (Employer) 7 Name of employer 8 Employer identification number (EIN)

9 Street address (including room or suite no.) 10 Contact telephone number


Part II Employee Offer of Coverage Plan Start Month (Enter 2-digit number):All 12 Months Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

14 Offer of Coverage (enter required code)15 Employee Required Contribution (see instructions) $ $ $ $ $ $ $ $ $ $ $ $ $

16 Section 4980H Safe Harbor and Other Relief (enter code, if applicable)

Part III Covered Individuals If Employer provided self-insured coverage, check the box and enter the information for each individual enrolled in coverage, including the employee.

(a) Name of covered individual(s) (b) SSN or other TIN(c) DOB (If SSN or other TIN is not available)

(d) Covered all 12 months

(e) Months of Coverage

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

17

18

19

20

21

22

For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 60705M Form 1095-C (2016)

▶ Do not attach to your tax return. Keep for your records.


DRAFT AS OF

600117

VOID



OMB No. 1545-2251

2016Part I Employee















17

18

19

20

21

22




DRAFT AS OF

600117

VOID



OMB No. 1545-2251

2016Part I Employee















17

18

19

20

21

22



DRAFT FORM 1095-B

DO NOT FILEJune 22, 2016DRAFT AS OFForm 1095-B

2016Department of the Treasury Internal Revenue Service

Health Coverage▶ Do not attach to your tax return. Keep for your records.

▶ Information about Form 1095-B and its separate instructions is at www.irs.gov/form1095b.

OMB No. 1545-2252

560116

VOID

CORRECTED

Part I Responsible Individual1 Name of responsible individual 2 Social security number (SSN or other TIN) 3 Date of birth (If SSN or other TIN is not available)

4 Street address (including apartment no.) 5 City or town 6 State or province 7 Country and ZIP or foreign postal code

9 Reserved

Part II Information about Certain Employer-Sponsored Coverage (see instructions)10 Employer name 11 Employer identification number (EIN)

12 Street address (including room or suite no.) 13 City or town 14 State or province 15 Country and ZIP or foreign postal code

Part III Issuer or Other Coverage Provider (see instructions)16 Name 17 Employer identification number (EIN) 18 Contact telephone number


Part IV Covered Individuals (Enter the information for each covered individual.)

(a) Name of covered individual(s) (b) SSN or other TIN (c) DOB (If SSN or other TIN is not available)


(e) Months of coverage

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

23

24

25

26

27

28

For Privacy Act and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 60704B Form 1095-B (2016)

8 Enter letter identifying Origin of the Health Coverage (see instructions for codes): . . . ▶





OMB No. 1545-2252

560116

VOID

CORRECTED



9 Reserved










23

24

25

26

27

28


8 Enter letter identifying Origin of the Health Coverage (see instructions for codes): . . . ▶DO NOT FILEJune 22, 2016DRAFT AS OFForm 1095-B




OMB No. 1545-2252

560116

VOID

CORRECTED



9 Reserved










23

24

25

26

27

28






OMB No. 1545-2252

560116

VOID

CORRECTED



9 Reserved










23

24

25

26

27

28







OMB No. 1545-2252

560116

VOID

CORRECTED



9 Reserved










23

24

25

26

27

28






OMB No. 1545-2252

560116

VOID

CORRECTED



9 Reserved










23

24

25

26

27

28



Tax Briefing

September 16, 2016

3

employer). A conditional offer generally would impact a spouse’s eligibility for the premium tax credit under section 36B only if all conditions to the offer are satis-fied (that is, the spouse was actually offered the coverage and eligible for it). To help employees and spouses who have received a conditional offer determine their eligibility for the premium tax credit, ALEMs should be prepared to provide, upon request, a list of any and all conditions applicable to the spousal offer of coverage.

APPLICABLE LARGE EMPLOYER DEFINITION

Only applicable large employers are sub-ject to the employer shared responsibility provisions of ACA. Under recent legisla-tion, individuals who have medical cover-age under the TRICARE program or the Veteran’s Administration are not considered “employees” in determining whether an em-ployer meets the 50-employee threshold to be an applicable large employer (Code Sec. 4980H(c)(2)(F)).

EXCISE TAX RELIEF

Congress has provided temporary relief re-garding three ACA excise taxes:

The start date for the 40 percent excise tax on high-cost employer-sponsored health coverage under Code Sec. 4980I (the “Cadillac plan tax”) is postponed from tax years beginning after Decem-ber 31, 2017, to tax years beginning after December 31, 2019. In addition, when the tax does go into effect, the cost of the tax may be taken as a deduction. For 2017 only, there is a one year moratorium on the annual fee on health coverage providers imposed by Act Sec. 9010 of the ACA. The fee will resume after December 31, 2017. This moratorium does not affect the filing requirement and payment of these fees for 2016. Form 8963 (Rev. February 2016) must be filed by April 18, 2016.

The excise tax on sales of medical devices has been suspended for a two year peri-od, for sales on or after January 1, 2016, through 2017.

EXPATRIATE HEALTH COVERAGEExpatriate Health Coverage Clarification Act of 2014 (Div. M, P.L. 113-235) provides that the ACA generally does not apply to: (1) expatriate health plans;(2) employers with respect to expatriate

health plans but solely in their capac-ity as plan sponsors of these plans; and

(3) expatriate health insurance issuers with respect to coverage offered by such is-suers under expatriate health plans.

The ACA continues to apply to expatriate health plans with respect to the employer shared responsibility rules of Code Sec. 4980H, the reporting requirements of Code Secs. 6055 and 6056, and the excise tax pro-visions of Code Sec. 4980I. Expatriate health plans can satisfy individual shared responsibil-ity requirements either as an eligible employer sponsored plan or as a plan in the individual market depending on the arrangement.

COMMENT: Until further guidance, ex-patriate health plans do not have to com-ply with the market reforms as long as they continue to comply with the pre-Affordable Care Act group plan rules. For purposes of this relief, an “expatriate health plan” is an insured group health plan with respect to which enrollment is limited to primary insureds who reside outside of their home country for at least six months of the plan year and any covered dependents, and its associated group health insurance coverage (Notice 2015-43).

The Expatriate Health Coverage Clarifi-cation Act specifically excludes expatriate health plans issued or renewed on or after July 1, 2015, from the ACA Section 9010 fee. The IRS has provided a special rule for expatriate health plans for the 2016 fee year. The rule provides one procedure for covered entities that file Supplemental Health Care Exhibits for 2016 in which they report direct

premiums written for expatriate health plans and include some or all of those direct premiums on their Form 8963, Report of Health Insurance Provider Information. A different procedure applies to a non-SHCE filer. Both procedures require the covered entity to attach to its 2016 Form 8963 a statement relating to premiums written for expatriate health plans that include various certifications (Notice 2016-14).

MARKET REFORMS

The market reforms are a technical set of cov-erage rules embodied in a massive set of regu-lations under Code Sec. 9815. These rules apply to most employer plans. Since their general application in 2014, they have proven to be relatively uncontroversial as ACA provi-sions go. A small portion regarding contracep-tives, plus an implication for reimbursement plans from different small portions regarding cost sharing, have provided the most interest.

Religious Accommodation for Contraceptives Still Unsettled

Under the ACA market reforms, coverage without any cost sharing must be provided for a long list of preventive health services including contraceptives. The government al-lows religious non-profit employers and small for-profit employers with religious objections to avoid this mandate under a religious ac-commodation safe harbor. Under the accom-modation, the employer does not have to contract, arrange, pay, or provide a referral for contraceptive services. However, the accom-modation ensures that women enrolled in the employer’s health plan receive full coverage for contraceptive services through the same issu-ers or third-party administrators that provide or administer the rest of their health coverage.

An employer can invoke the accommoda-tion by self-certifying its eligibility using a particular form (EBSA Form 700) which it then provides to its health insurance issuer or third-party administrator. Alternatively, the employer can self-certify by providing certain information to the Department of

Tax Briefing

4

Affordable Care Act Update

© 2016 CCH Incorporated and its affiliates. All rights reserved.

Health and Human Services without use of a particular form.

The U.S. Supreme Court, in Zubik v. Bur-well, 136 S. Ct. 1557 (2016), considered claims that, even with the accommodation, employers’ rights under the Religious Free-dom Restoration Act were being violated by having to notify the government. With-out deciding the issue, the Court noted that the government and the religious objectors agreed that it would be possible to fashion an accommodation that would not require no-tice from the objecting employers. Accord-ingly, the Court gave the government the chance to fashion such an accommodation.

As a result, the government is asking for input from interested parties on whether it is feasible for issuers to implement the ac-commodation without written notification, whether the issuer should be required to offer women the opportunity to enroll in contra-ceptive-only insurance policies, and whether the affected women should be required to take affirmative steps to enroll in those contraceptive-only policies rather than be-ing automatically eligible for payments. The government is also asking for comments on alternative processes for self-insured plans.

Reimbursement Plan Transition Relief

The IRS has taken the position that an ar-rangement under which an employer pays the premiums for current employees’ individual health coverage or reimburses them for such coverage violates the ACA market reforms that limit cost sharing. As a result, such a plan can cost an employer a $100 per day per affected employee in penalties. Under transition relief for 2014 and the first half of 2015 for small employers, the IRS agreed not to assert the ex-cise tax solely for violation of this rule.

This transition relief generally expired af-ter June 30, 2015, but it continues to be available until further notice for payment or reimbursement arrangements for S cor-poration 2-percent plus shareholders. In addition, this relief has been extended to

colleges that employ students if the reim-bursement arrangement is offered in con-nection with other student health cover-age (insured or self-insured) for a plan year or policy year beginning before January 1, 2017 (Notice 2016-17).

Health Reimbursement Arrangements (HRAs)

Unlike premium reimbursement plans which are all but banned for arrangements that include more than one current em-ployee reimbursement accounts aimed at co-pays and deductibles for employer health coverage are permissible under the market reforms. However, there are a lot of details that plans have to get right for that to work.

An HRA is allowed under the market reforms only if it is integrated with primary health coverage offered by an employer (whether the individual’s employer or spouse’s). An HRA is integrated with such coverage only if under the terms of the HRA, the HRA is available only to employees who are cov-ered by primary group health plan coverage provided by the employer and that coverage meets the annual dollar limit prohibition.

An HRA available to reimburse the medi-cal expenses of an employee’s spouse and/or dependents (a family HRA) may not be integrated with self-only coverage under the employer’s other group health plan. However, an HRA would be integrated if eligibility for coverage automatically applied only to indi-viduals covered under the employer’s other group health plan, so that eligibility for ex-pense reimbursement would expand auto-matically if the employee changed coverage from employee-only coverage to coverage in-cluding a spouse and/or dependents (and vice versa, for example, if the employee changed coverage from family coverage to employee-only coverage).

The IRS has provided transition relief for this rule allowing employers to continue using an HRA that is available for the ex-penses of family members not enrolled in the employer’s other group health plan

for plan years beginning before January 1, 2016. Furthermore, the IRS will not treat an HRA and group health plan that other-wise would be integrated based on the terms of the plan as of December 16, 2015, as fail-ing to be integrated with an employer’s oth-er group health plan for plan years begin-ning before January 1, 2017, solely because the HRA covers expenses of one or more of an employee’s family members even if those family members are not also enrolled in the employer’s other group health plan (Notice 2015-87).

EXCHANGES

Employer-sponsored health care has re-mained stronger than expected under the ACA, but problems have developed in the individual marketplace exchanges where individuals go for subsidized coverage. Enrollment is less than expected especially among healthy individuals, which makes it hard for insurers to make money.

One specific complaint is that individuals have used special enrollment periods to buy coverage only when they find out they are sick. In response, Health Insurance Market-place CEO Kevin Counihan announced be-fore the close of open enrollment for 2016 that the special enrollment period rules were being tightened to clarify eligibility rules, increase enforcement, and eliminate a num-ber of special enrollment periods including the one for tax season.

COMMENT. Despite these changes, several major health insurers have announced they are pulling out from certain ex-changes especially in less populated states. Insurers that specialize in low-cost basic Medicaid coverage are apparently doing reasonably well as they expand into the ex-change environment, but their customers are limited to narrow provider networks.

COMPLIANCE TIP: Please check out the Health Care Reform topic on the Intel-liconnect menu for newly added tools to assist in health care planning and com-pliance.

When you have to be right

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Documents

2016 usiness Tax Update (Full Day ourse)media01.commpartners.com/WK CCH/11_29_16/LIVE HANDOUTS - 2… · 2016-11-29 · Reporting and Other Tax Issues for Expat Workers Marc J. Strohl,