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New Legislation - AdditionalChapter 13 pp. 487-560
2018 National IncomeTax Workbook™
1
New Legislation – Additional p 487
Additional New Legislation Foreign Tax Matters Table of Expiration Dates
2
Disaster Tax Relief and Airport and Airway Extension Act of 2017
pp. 488-489
Tax Relief for Hurricanes Harvey, Irma, Maria No additional tax on early withdrawal Employee retention credit Suspension of limit on charitable contributions Personal casualty losses
▪ No requirement to exceed 10% of AGI▪ Add to standard deduction
Use prior year income for EIC and CTC
3
Hurricane Relief p 488
1. Up to $100K of retirement distributions2. Repayment over 3 years (option) or3. Taxed ratably over 3 years4. Recontribute withdrawals for cancelled
home purchaseSpecific dates relation to 3 hurricanes
4
Employee Retention Credit p 488
IRC Section 503 – hurricane relief 40% on up to $6,000 of wagesMaximum credit - $2,400
5
Charitable Contributions p 488
Suspends limit on charitable contributions Between August 23 & December 31,
2017 Cash only Originations providing hurricane relief
6
Personal Causality Loss p 489
In a P.D. disaster area only No 10% AGI requirement May increase Standard Deduction if you
don’t itemized May use 2017 earned income to
calculate EIC & CTC
7
Federal Register Printing Savings Act of 2017 p. 489
Suspends ACA taxes:▪ Cadillac tax suspended to 12/31/2021▪ Medical device excise tax suspended to
12/31/2019▪ Fee on health insurance providers
suspended for 2019
8
Bipartisan Budget Act of 2018p. 490
Relief for victims of CA wildfires Additional hurricane relief Extenders
9
BBA CA Wildfire Relief pp. 490-491
No additional tax on early withdrawal Increase plan loan limits and time to pay Amend plans to conform w/ new law Employee retention credit Suspends charitable contribution limit Personal casualty loss changes Use prior year income for EIC and CTC
10
BBA Hurricane Relief pp. 491-492
Extension to 10/17/17 to declare disaster area for Hurricanes Harvey, Irma, Maria
Additional relief for Puerto Rico and Virgin Islands
11
The BBA retroactively extends the following business provisions through 2017 p 492
I.R.C. § 168(i)(15)(D) 7-year recovery period for motor sports entertainment complexes I.R.C. § 181(g) special expensing rules
for certain film, television, and theatrical productions I.R.C. § 1201(b) special rule for
qualified timber gain
BBA Extenders pp. 492-493
Qualified principal residence indebtedness not COD income (2017) Deductible mortgage insurance (2017) Deduction for qualified tuition (2017) Business extenders (2017) Energy extenders (most 2017 but
residential energy, solar, etc. longer)
13
BBA Other Provisions pp. 493-495
Extends time to claim refund for wrongfully incarcerated
Hold IRS harmless from wrongful levy on retirement plan
Locks in installment agreement user fee Form 1040SR for seniors
14
BBA Other Provisions pp. 493-495
Above the line deduction for attorney fees from whistleblower action Repeal 6-month prohibition on
contribution after a hardship waiver
BBA Other Provisions Con’tp. 495
Puerto Rico communities designated as opportunity zones Tax home for TP in combat zone is
foreign country Repeals 2020 accelerated estimated tax
for large corps.
16
2018 Consolidated Appropriations Act p. 496
1099A deduction for cooperative Increases state housing ceiling credit
17
Rev. Proc. 2018-18 pp. 496
Safe harbor methods to determine personal casualty loss of residential real property▪ Personal use residential real property
is real property (building, trees, shrubbery) that contains a residence
▪ Doesn’t include condo, coop, mobile home, trailer
18
Estimated Repair Cost Safe Harbor p 496-497
Residential real property Measuring decrease in FMV Lessor of 2 repair estimates Independent & Licensed contractors No addition costs to increase FMV Limited to $20,000
19
De Minimis Safe Harbor Method p 497
Residential real property TP – estimates cost of repairs to pre-
existing conditions No additional improvements Limited to $5,000 or less
20
Insurance Safe Harbor Method p 497
Residential real property Estimates from homeowners or flood
insurance company
21
Federally Declared Disasters p 497
Personal use residence & personal property Contractor safe harbor method or Disaster loan method
22
Personal Belongings p 497
Tangible personal property Not used in a trade or business Not a boat, aircraft, mobile home, trailer,
auto, antique… De Minimis Safe harbor method $5,000
23
Federally Declared Disaster Areas p 497
Replacement cost method Start with current cost Reduce by 10% for every year owned 9 years or more = 10% of original cost
24
Rev. Proc. 2018-9 p. 498
Cost indexes safe harbor method for casualty loss of residential real property b/c 2017 hurricanesUse cost indexes in section 4 to determine decrease in valueCost indexes based on sq. footage and location
27
Reg. 102951-16 p. 498
250 returns must file electronically Reg. will aggregate all returns (1099,
W-2) Not effective until final regs issued (but
not before 1/1/19)
28
New Form 1040pp. 498-502
New Form 1040 replaces 1040A and EZTwo half pages (Figure 13.1)6 Schedules (Figure 13.2)
29
Small Business Accounting Method p 49
Expands eligibility for cash method Average GR for prior 3-yr-period ≤ $25M C corps & farms w/C PN qualify if ≤ $25MEases requirements for maintain’g inventory $25M gross receipts test applied Treat as non-incidental materials &
supplies or treat as in TP’s books
30
Small Business Accounting Method p 49-50
Expands exception from UNICAP using $25M GR testExpands exception for small construction contracts from required % of completion1. Is expected to be completed w/in 2 yrs &2. In year of contact TP meets $25M GR test
Change in Accounting Method: 481(a) adjmtbut for % of completion (cut off)
31
Rev. Proc. 2018-40pp. 502-503
Automatic consent for change in accounting b/c new accounting rules Change to cash method (include open A/R as
actually or constructively received) Change from capitalizing Change from inventories Change from % of completion method for long-
term contracts (cut off basis)
32
Reg. 104397-18p. 504
Proposed regs. for AFYD for property placed in service after 9/27/17 Eligible if:1. Specified type2. Original use or meets used requirements3. Placed in service w/in specified time4. Acquired after 9/27/17
33
AFYD pp. 504-505
Specified Type
Included (list pp. 504-505) Excluded (list p. 505) Includes new and used property New property must be original use – first
use to which property is put
34
Excluded Property p 505
Autos – using the standard mileage rate Property required to use ADS Property where TP elects out of AFYD Specified plants – TP elects 168(k)(5) for
the prior year Property where the TP elects IRC
168(K)(4) Floor Plan property (auto dealerships)
35
Used Property pp. 505-506
AFYD for used property if:1. Not used by TP or predecessor anytime
before acquisition2. Not acquire from related, gift,
inheritance, non-recognition3. Cost not determined w/reference to
basis of other property
36
Used Property pp. 505-506
Used by TP or predecessor if had a depreciable interest (regardless of whether depreciation claimed)
Partners have depreciable interest proportionate to interest in partnership property
Placed in service after 9/27/17 before 1/1/2027 (2028 for certain property)
Acquired after 9/27/1737
AFYD Regs. pp. 506-507
Deduction = unadjusted depreciable basis of qualified property x applicable percentage Elect out for a class of property – applies
to all property in that class Elect to deduct 50% first year Revoke election w/ IRS consent
38
AFYD Phasedown NIB
Year Percent2023 80%2024 60%2015 40%2026 20%
39
TD 9839 pp. 538-539
Expansion of the scope of tax adjustments under new partnership rules Shifts labilities to partnership level
40
New Partnership Rules NIB
Partnership adjustable items include –anything relevant in determining the tax liability of any person without regard to weather the item appears on the partnership return
41
New Partnership Rules NIB
Statute of limitations Old law – SOL determined at the
partner level New law – SOL based on partnership
filing
42
TD 9839 pp. 538-539
Final regs re partnership representative (PR) Eligibility – can be disregarded entity or
partnership itself Substantial presence – reasonable time
and place for examination Capacity to act – remove criteria
43
PR Final Regulations pp. 539-540
Time to change – can change before administrative proceedings starts Resignation – resigning PR can’t
designate successor Revocation – any partner, no reason Effective date – upon receipt
44
PR Final Regulations p. 540
Notice of change – only to IRS IRS designates PR – if designation not
in effect, can consider factors including profits interest Authority of PR – partnership contests
notice
45
Reg. 2018-17614 pp. 542-543
“Income, gain, loss, deduction, credit”Changed to “partnership-related items” Adjustments, assessment, and
collection at the partnership level Partnership-related items can include
amounts not on a return
46
Imputed Underpayments pp. 543
If adjustments lead to imputed underpayment, partnership must pay in adjustment year If adjustments don’t result in
underpayment, partnership must still take into account in adjustment year Tax rate is highest rate for that year
47
Partnership Adjustmentspp. 544-545
Process to determine imputed underpayment▪ Adjustments are grouped▪ Not netted between groupings▪ Partners and partnership must adjust
specified tax attributes b/c adjustment and payment
48
Alternative Payment pp. 545-546
Elect to have reviewed year partners take into account adjustments and pay tax
No assessment or levy against the partnership
Partnership must file and furnish tracking statement
Partner can raise partnership level defense -first pay penalty and then claim refund
49
AARs pp. 546-547
Partnership procedures to file administrative adjustment request (AAR) to correct errors Procedures for notice of proceedings
and adjustments Rules for assessment, collection, and
payment
50
Partnership Audit Regs pp. 548-549
Rules for interest and penalties on imputed underpayments 90 days to seek judicial review Mailing final partnership adjustment
doesn’t suspend SOL
51
Partnership Options
Electing out – using old rules under TEFRA Adjustments flow directly to partners Election made each year with a timely
filed return Must notify each partner
52
Making the Election
Timely filed return – each year Notify each partner/former partner IRS can challenge
53
54
55
Foreign Tax Matters pp. 550-551
US has worldwide taxation – US persons taxed on worldwide income Most other countries have territorial
taxation – tax income earned in their borders
56
CFC’s p. 551
Controlled foreign corporations (CFCs) – US persons own more than 50% Formed to reduce impact of worldwide
taxation Shareholder not subject to tax until
income distributed (dividend)
57
Repatriation Tax pp. 551-552
IRC 965 one-time tax on US TPs who own CFCs (10% or more) Include pro rata share of accumulated
post 1986 deferred foreign income
58
Repatriation Tax p. 552
Reported in 2017 Corps. - 15.5% rate on cash/equivalents 8.0% rate on other assets Individuals – 17.5% on cash/equivalents 9.0% on other assets
59
Election/Relief p. 553
Elect to pay over 8 years Penalty waiver if failed to timely make
first payment (pay by 4/15/19) Late election to pay over 8 years (by
2017 deadline w/ ext.)
60
GILTI Tax pp. 553-554
US shareholder in CFC subject to tax on share of global intangible low-taxed income (GILTI) Corporations can deduct 50% but not
individuals 962 election or own through C
corporation?
61
New Foreign Tax Laws p. 555
21% corporate tax rate Repatriation tax (one time) GILTI tax (each year) Reduced rate for foreign derived intangible
income Exemption for foreign dividends (only C
corporations) Change in definition of intangibles
62
New Laws pp. 555-556
New foreign tax credit categories Source of income rules changed Foreign tax credit changes No exception for offshore transfers New stock attribution rules Repeal of 30-day CFC exception
63
GILTI Glitch Smoothed Over
Calculating foreign income Calculating foreign tax credit
64
Breweries, Wineries, and Distillery Issues p 345
There are over 150 wineries in Ohio There are over 200 micro breweries in
Ohio How many can you name?
65
Where are the breweries?
66
Wineries NIB
Unique tax issues for wineries Several businesses1. Growing grapes2. Making wine3. Sales (retail, wholesale)
67
Breweries NIB
Growing hops (some) Production of beer Retail & Wholesale
68
Breweries, Wineries, and DistilleriesUNICAP p. 345
§263A: Capitalize direct & indirect costs:▪ To produce certain real & tangible ▪ To acquire certain property for resale
Add costs to inventory or basis Recover costs – CGS, depreciation,
amortization, adjustment to basis
Breweries, Wineries, and DistilleriesUNICAP – Interest Costs p. 345
Indirect interest subject to UNICAP if:▪ Real property w/class life ≥ 20 years▪ Property w/production period > 2 years▪ Property w/production period > 1 year and
costs > $1,000,000 Production period: ▪ Production start to date ready for service/sale▪ Plants: published nat’l weighted average
Starting Grapes Vines
How long does it take from planting to harvesting enough for production? Why does it matter?
71
Breweries, Wineries, and DistilleriesProduction Period pp. 345-346
Wine grape vines: 4 year production pd. Wine grapes: Acquisition of the vine to
production of marketable quantities▪ Covers harvest costs & > de minimis
amount of production costs of plant/crop
Pre-Productive Period
Q. When does the pre-productive period end for grapes?
Why does it matter?
73
Breweries, Wineries, and DistilleriesProduction Period p. 346
TCJA temporarily excludes the aging period from production period▪ For aged wine, beer, distilled spirits▪ Not for distilled spirits unfit as beverage
Exclusion applies only for interest incurred > 12/31/2017 and < 1/1/2020▪ May shorten period such that §263A N/A
Breweries, Wineries, and DistilleriesExcise Taxes pp. 346-347
Producers and importers▪ Beer, wine and distilled spirits▪ Form 5000.24
TCJA provides credit for certain wine products removed during 2018 & 2019 Filing schedule dependent on prior-year
and expected current-year liabilities
Form 5000.24 NIB
76
Form 500.24 NIB
77
Breweries, Wineries, and DistilleriesExcise Taxes - Beer p. 347
Liability arises when produced or imported Tax payable when removed from brewery
or customs for consumption or sale No tax if exported or w/drawn for certain
authorized uses (e.g. industrial, nonbeverage) Go to commonly owned brewery w/o tax Tax Rates – Figure 10.18
Breweries, Wineries, and DistilleriesExcise Taxes - Wine p. 348
Small Producer Rates/Credits – Fig. 10.19 Due: Removed from wine cellar or winery
for consumption or sale No tax on certain transfers
▪ Transfer in bond – customs to winery (bulk), between bonded premises (bulk/bottled)
▪ Exported or w/drawn for specific uses
Breweries, Wineries, and DistilleriesWine –TCJA Credit Changes pp. 348-9
Expanded to include sparkling wines Available to all domestic producers &
importers regardless of size Eliminates phaseout of the credit Allows credit transfer from foreign producer
to domestic importer Increases alcohol level for lowest tax Tax Rates 2018-2019 – Figure 10.19
Breweries, Wineries, and DistilleriesExcise Tax – Distilled Spirits pp. 349-350
2017 rate: $13.50/proof gallon Liability at production or importation Due: domestic bottled when leave distillery Due: imported when leaves customs No tax if transferred in bond TCJA
▪ Reduced 2018 & 2019 rates – Figure 10.21▪ Removed size limit on exempt bulk transfers
Good New For Small Businesses
Section 263A provides several exceptions to the general capitalization requirements, including an exception for taxpayers that have $25,000,000 or less in average annual gross receipts for the preceding 3 tax years.
82
Health Savings Accounts NIB
Individuals with High Deductibles Individual - $1,350 Family - $2,700 Contributions Limits Individual - $3,400 Family - $6,900
83
Business Expense ChangesFood and Beverage pp. 50-51
Can deduct 50% of food/beverage in Tor B (such as when EEs traveling)
12/31/17-12/31/2025: 50% to apply to cost of de minimus fringe eating facility & cost of meals for convenience of ER
After 12/31/2025: No deduction for de minimus fringe facility/convenience meals
Listed Property p. 51
Vehicle into service > 2017, yr ended > 2017 Auto with no bonus depreciation▪ Year 1: $10,000▪ Year 2: $16,000▪ Year 3: $ 9,600▪ Year 4 +: $ 5,760/year
W/bonus dep: $18,000 for Year 1Computer/peripherals no longer listed prop.
Syndicated Conservation Easements
Merrill Fromer
IRC 170 Charitable Contribution
1976 the IRC was amended to allow land owners to report easements as a charitable deduction Congress intent was to protect land and
historical buildings from development The Easement is donated to a “Land
Trust” in perpetuity (for ever without restrictions)
IRC 170 Conservation Easements NIB
The land trust is a 501(C)3 tax exempt organization The deduction amount is the difference
between the FMV before and after the easement
88
Conservation Easement
Voluntary legal agreement between a land owner and a Land Trust or Government agency that permanently limits uses of the land in order to protect the conservation values
Requirements NIB
Must provide public benefits▪ Wildlife habitat▪ Scenic views, Recreation, ▪ Education and or historic preservation▪ Water quality
90
Advertisement/Solicitation
Looking for high wealth investors who need to offset income
Promoters purchase land divide the land Each parcel becomes a separate partnership Contract an appraiser to do a “Best Use”
appraisal New appraisal is generally 20 times or more of
cost Deduction is $4 for every $1 invested (varies)
Example
Purchase land for $9,500,000Appraisal 190,000,000
Investor/partner contribution 1,000,000 Contribution deduction 4,000,000Tax rate X 35%Tax benefit 1,400,000
Example
Seller of land received a partnership interest and reduced his/her gainPromoters made $M on the sales of partnership interestAppraisals were bogus - used a templateCompared unlike properties sales in major cites to land in rural in the deep SouthFMV increased in 10 months from 100 times
New Group Formed to Address Issue
Two new groups of RA’s New group is opening $B in
conversation easement cases New promoter investigations Counsel is winning cases at trial
Other Tools in the Box
40% overvaluation penalty IRC 6700 penalties (50% of promoter
revenues) Promoter & Appraiser injunctions Issue is a Listed Transaction
What Can You Do
Warn your clients Do your due diligence Google Earth the property Review County sales records of the
properties Review the appraisal
96
Questions?
97