Independent Contractors Effective January 1, 2020

Independent Contractors effective January 1, 2020

To our business clients:

In an effort to get accurate and timely filed 1099 forms, the date that 1099s are due continues to be January 31st. The penalty for each instance of failing to file a correct 1099 form by the due date with the IRS is as follows:

• $50 per form if correctly filed within 30 days of the due date;
• $110 per form if correctly filed after 30 days of the due date but by August 1;
• $270 per form if filed after August 1 or not filed (assuming there was no intentional disregard)
• At least $550 per form with no maximum penalty if due to intentional disregard of the requirements.

A similar additional penalty framework applies if the payee isn’t provided their copy by these deadlines.

California may impose its own penalties when conducting an audit, the most severe of which is for failure to file 1099-MISC forms* to independent contractors. In those cases, California can effectively negate the deduction for those expenses by imposition of its penalties.

Federal business tax returns currently contain two questions regarding the filing of 1099 forms. We'll be checking with you about your fulfilment of the 1099 form filing requirements in order to answer those questions correctly.

WHAT IS A 1099 FORM?

A 1099 form is an informational return on which businesses report various sorts of payments they've made to partnerships, sole proprietorships, individuals and certain types of corporations during the calendar year. Some of the most common types of 1099 forms are:

WHO SHOULD WE SEND A 1099 FORM TO?

They should be sent to partnerships, sole proprietorships, limited liability companies (LLC), limited liability partnerships (LLP), and individuals you made payments to in the course of your business. A 1099 should also be sent to any attorney, physician, or a supplier of medical services even if they are a corporation. Any payment on which you take backup withholding for Federal income taxes must be reported on the appropriate Form 1099, regardless of the amount of the payment. This means:

1. Only send 1099s for payments you made related to the operation of your business.              
2. You don't need to send 1099s for materials or products you purchased.
3. You don't need to send 1099s to corporations (unless it is for medical or legal services). However, the burden to find out if it's a corporation is on you. If the name has "Incorporated", "Inc.", "Corporation", or "Corp." in it, you can assume it's a corporation. Otherwise, you need to ask.
4. You don't need to send 1099s to exempt organizations, retirement trusts, or IRA accounts.

FILING RETURNS WITH THE IRS

If you must file any Form 1098 or 1099 with the IRS and you are filing paper forms, you must send a Form 1096 with each type of form as the transmittal document.

For businesses located in California the government copies need to be mailed to:

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201

Businesses who file 250 or more informational returns are required to file electronically through the IRS' FIRE System (Filing Information Returns Electronically). We can help you with this.

CALIFORNIA REPORTING REQUIREMENTS

If you file IRS Forms 1099 series, Forms 5498, 1098 and W-2G with the IRS on paper, you are not required to file a paper copy of the same form with the Franchise Tax Board. The IRS will forward the information to them. When the Federal and State payment amounts differ, you may file information returns directly with the Franchise Tax Board.

WHAT INFORMATION DO YOU NEED FOR THE 1099 FORM?

1. Name and address of whom you paid.
2. The amount you paid them during 2019.
3. Their identification number. For an individual this would be their social security number. For a proprietorship, LLC, partnership, or corporation this would be their employer identification number which is a nine-digit number, usually beginning with "94-" or "77-".

IMPORTANT:   It is extremely important that the name recorded on the 1099 agrees with the name listed on the Social Security Administration's records for the specified identification number. Therefore, in the case where an individual is self-employed, care must be taken to make sure that the proper name is listed on the 1099. Any "dba" name should be listed on the 1099 underneath the individual's legal name which agrees with the Social Security Administration's records.
 

WHAT IF SOMEONE WON'T GIVE US THEIR IDENTIFICATION NUMBER?

If someone won't give you their identification number, you're not sure they're giving you the correct number, or you're not sure they're incorporated as they say, then you should send them a W-9 form (available at the IRS website) by certified mail, return receipt requested. The receipt will document your request for their number and help you avoid the penalty for filing a 1099 form without an identification number. If the W-9 form is completed and returned to you, it will take you off the hook for both the accuracy of the identification number used and as to whether they're really a corporation.

WHAT CAN SEEBA & ASSOCIATES DO TO HELP?

Please give us a call if you would like us to help in the preparation of these 1099 forms. We can:

1. Answer your questions regarding the issues discussed above,
2. Prepare 1099 forms for you from information you've gathered, consisting of name, address, identification number, and amount paid in 2019, or
3. Figure the amount you've paid for 2019 from your books and records. Along with the address and identification number supplied by you, we'll prepare the 1099 forms.
4. eFile your 1099 forms via the IRS system.

*         *         *         *         *

IMPORTANT

Please let us know as soon as possible if we can assist you since the 1099s are now due by January 31^st.

You should be getting an identification number or completed W-9 form from anyone you pay for services, even if less than $600, before you pay them. Otherwise, you are obligated to withhold 24% of their payment and remit it to the IRS. Please call us if you run into problems where the 24% "backup withholding" may come into effect. 

You should also keep in mind that you will need to maintain records of amounts paid to independent contractors as payments are made or contracts are signed in order to comply with the 2020 Employment Development Department reporting requirement for independent contractors. 

If you have any questions regarding 1099 filings, feel free to contact us.

To our business clients:

2020 FEDERAL PAYROLL DEPOSIT REQUIREMENTS:

Standard Mileage Rates for 2020

For 2020, the standard rate for business mileage will be 57.5 cents per mile. The previous rate was 58 cents per mile.

The standard rate for the use of a car when providing services to a charitable organization will be remain at 14 cents per mile.

The 2020 standard mileage rate for the use of your car for medical expenses or deductible moving expenses will be 17 cents per mile. The previous rate was 20 cents per mile.

BONUSES- Just a reminder - holiday bonuses are subject to all payroll taxes.

This is true whether the bonus is paid in cash, by check or by a gift card. For income tax withholding, the rates are 25% federal and 10.23% state. If you have a net figure in mind, the gross amount can be calculated as follows:

1. If the employee has not passed the wage limits for SDI ($118,371) or FICA ($132,900), divide the desired net by .5612 to arrive at the gross.
2. If the employee has exceeded the SDI limit only, divide the desired net by .5712 to arrive at the gross.
3. If the employee has exceeded both the SDI and FICA limits, divide the desired net by .6332 to arrive at the gross.

Example: You wish to pay Employee A a net bonus of $100.00 -

Employee A has earned $4,000.00 for 2019. He is subject to all taxes. Dividing $100.00 by .5612 (See #1 above) yields a gross of $178.19. Deductions would be: Federal income tax $44.55 (25%); Social Security $11.05 (6.2%); Medicare $2.58 (1.45%); State income tax $18.23 (10.23%); SDI $1.78 (1%).

The percentages and example shown above pertain to checks dated prior to January 1, 2020. For checks dated after December 31, 2019, you must use the 2020 withholding rates and limits.

AWARDS - As part of a meaningful presentation, employers can give employees awards for length of service or safety achievements of up to $400 per year. In order to be deductible to the employer and non-taxable to the employee, the awards must be made with noncash items. Awards of cash or items readily convertible into cash, such as gift certificates, are subject to payroll taxes, no matter the amount.  Length of Service Awards are deductible to the employer if employees have more than five years of service and have not received such an award in the last four years. Safety Achievement Awards aren't deductible if given to a manager, administrator, clerical employee, or professional, nor if given to more than 10% of the other employees. We recommend that any prizes awarded be documented by corporations in their corporate minutes, although the law doesn't require this.

GIFTS - Business gifts are still limited to $25 to any individual per year. They can be made on a discriminatory basis and can be in cash. These gifts are deductible to the business and non-taxable to the recipient.

Items clearly of an advertising nature that cost $4 or less, such as promotional items, aren’t considered gifts and therefore, aren’t included in calculating the $25 limit for an individual.

In addition, gifts that are considered “de minimis” fringe benefits aren’t restricted by the $25 per recipient limit, and are considered to be made tax-free to the employee. For a gift to be considered as a de minimis fringe benefit the value must be nominal, the accounting for such a gift would be administrative nitpicking, it’s only an occasional gift, and it’s given for the purpose of promoting the health, goodwill, contentment or efficiency of the employees. Some examples of such gifts are holiday turkeys, a Christmas luncheon or party.

There is no limit on gifts made to corporations or partnerships.

What did CA do?

Effective January 1, 2012, California has a new law, Senate Bill 459 (SB 459), which significantly increases the penalties that can be assessed against employers who willfully misclassify as independent contractors individuals who should be treated as employees. If your business utilizes independent contractors, it is extremely important that you take the time now to understand the impact of this new law to your company and to take the necessary steps to ensure appropriate compliance with this law. The highlights of the law are summarized below for your reference, although they are not meant to be all-inclusive.

SB 459 makes it unlawful for any person or employer to engage in “willful misclassification” of an individual as an independent contractor. The law also prohibits charging individuals who have been misclassified as independent contractors a fee or making deductions (e.g., for space rental, goods, equipment maintenance) from compensation if those acts would have violated the law had the individuals not been misclassified.

This new law comes on the tail of the IRS’s recent announcement regarding its new settlement initiative, the Voluntary Classification Settlement Program (VCSP), allowing employers to: 1) come forward if they are not under audit, 2) reclassify independent contractors as employees, and 3) pay a significantly reduced employment tax.

Who has authority to assess compliance and penalties?

SB 459 authorizes the Labor and Workforce Development Agency, specifically the Labor Commissioner or a court, to assess specified civil penalties on persons or employers violating the law. SB 459 also requires the agency to take other specified disciplinary actions against these individuals.

What happens if I am found to have violated the law?

The law requires employers who are found to have engaged in a misclassification “to display prominently” for one year on their websites a notice to employees and the general public announcing, among other things, that the employer “has committed a serious violation of law by engaging in willful misclassification of employees.” The notice must be signed by a corporate officer.

What are the fines and penalties?

Violation of the new statute carries exposure for a civil penalty of between $5,000 and $15,000 for each violation. If the employer is found to have engaged “in a pattern or practice of violations,” the civil penalty is increased to $10,000 and $25,000 per violation. The law does not define the term “pattern or practice.”

Is there a “Safe Harbor” position?

Yes, treating the worker as an employee will cause you to avoid any of these potential penalties for misclassification.

Where should I go for assistance and additional information if I have independent contractors?

The IRS has a very helpful website addressing this issue http://www.irs.gov/businesses/small/article/0,,id=99921,00.html Since the Employee/Independent Contractor issue is decided based upon the preponderance of evidence, look carefully at all the factors being considered by the IRS.

Because the stakes are so high on this issue, we strongly encourage you to consult with legal counsel experienced in employment practice matters to review your independent contractor relationships, to determine the appropriateness of these classifications, and to assist you if re-classifications may be required to mitigate potential legal exposures to your business. We can point you to the pertinent IRS Guidelines, but we will not be responsible for advising you with respect to independent contractor status as part of our services.

Please call us if you have questions or would like a referral to a labor law attorney to discuss this matter further.

So that the reporting for this fringe benefit is not so burdensome, the IRS allows employers to include the personal use of business-owned cars during November and December in the following year's W-2s.

The following information should serve to remind you of how to calculate the value of the personal use of business-owned cars for W-2 purposes and how to withhold taxes on it:

1. For non-office/shareholders: If commuting is the only personal use of a business-owned car allowed by an employer, then the employer would need to include $3 a day in the employee's wages to recognize the value of the commute, plus 5.5 cents/mile for the fuel provided by the employer.

2. For officers and shareholders: The personal use of a business-owned vehicle must be included in their W-2. The formula for computing the value of their personal use is as follows
    

   1. Annual lease value based on the IRS table (see attached table) prorated for the number of months the vehicle was used from November-October.
   2. Times this value by the personal use percentage determined from mileage records maintained throughout the year which list business and personal miles driven.
   3. Then add the lesser of the actual cost, or 5.5 cents/mile, for gasoline provided by employer that was used for personal travel.
   4. Next subtract any reimbursement that the employer receives from employee.
   5. The result is the value of the personal use of the business-owned vehicle to be included in employee's W-2 compensation.

                                                                                   or                                      
                                                                 (A x B) + (C - D) = E

3. It is possible to avoid income tax withholding on the value of the personal use of an employer-provided vehicle. However, early action was required in order to avoid withholding income tax for this calendar year. The employer must have notified the employee in writing by January 31st or within 30 days after receiving the vehicle during the year, in order to avoid income tax withholding on this fringe benefit. If the employee is not notified of the withholding election by the specified dates, the employer must withhold income taxes on the value included in the W-2. For the next calendar year, the employee must be notified in writing by January 31st or within 30 days of receiving the vehicle, in order to avoid withholding on this fringe benefit.

4. Even though an employer can avoid withholding income tax on the value of the personal use of a vehicle (as described in item 3 above), the Social Security tax (FICA), the Medicare tax, and State Disability Insurance (SDI) must be withheld on the value included in the W-2. However, there are some choices available on the timing of these withholdings. The employer is given the option of calculating and withholding these taxes on a pay period, quarterly, semi-annual, or annual basis. As stated previously, the annual period would run from November through October, which means that the employer could wait until the end of October to figure the taxes to be withheld. If the employee will reach the maximum Social Security wages for the year by that time, without considering the fringe benefit, only Medicare tax withholding would be necessary.

Please feel free to contact us if you need help in calculating the value of the personal usage of business-owned cars, but remember it must be done soon and included on this calendar year's W-2 forms.                                            

Click here to view the Business Car Usage

With certain key exceptions, employers must pay nonunion, non-exempt employees (who are not working an alternative workweek schedule) at least time and one-half pay for: *Hours worked in excess of eight hours in one day, *Hours worked in excess of 40 hours in one workweek, and *The first eight hours worked on the seventh day of work in a given workweek.

In addition, employers must pay employees at least double time for any hours worked in excess of 12 hours in one day and hours worked in excess of eight hours on any seventh day of a workweek.

Under the new law compensatory time off in lieu of payment for hours worked by non-exempt employees in excess of the normal workday and workweek (as described above) is no longer permissible

Exceptions

Employees, who on July 1, 1999, were voluntarily working an alternate workweek schedule (adopted without an employee election), may continue to work that schedule, of not more than 10 hours work a day, and continue to be exempt from the overtime rules if the employer approves a written request by the employee to continue to work that schedule. In addition, employees may elect, by two-thirds vote, to work an alternative workweek of up to 10-hour work days within a 40-hour workweek without being subject to the overtime rules.

Personal Time Off

Employees may make up lost time due to a personal obligation by giving a signed, written request to an employer to make up the work. Please note however that, if an employer approves an employee's written request to make up work time that is lost as a result of a personal obligation, the hours of that makeup work time, if performed in the same workweek in which the time was lost, should not be counted toward computing the total number of hours worked in a day for purposes of the overtime pay requirements. The only exception would be in the case of an employee who works more than 11 hours in one day or 40 hours in one workweek.

All businesses are required to report independent contractors, to whom they will be issuing a 1099-MISC form, to the California Employment Development Department. The information provided will be forwarded to state and local child support agencies to help in their efforts to locate parents who are delinquent in their child support obligations.

The information must be reported to the EDD, using form DE 542 ("Report of Independent Contractors"), within twenty days of either entering a contract for $600 or more, or the date during the calendar year when total payments to the independent contractor reach $600. Form DE 542 requests the independent contractors' full name, social security number, address and the contract dates and amounts. You may obtain forms by calling the Employment Development Department at (916) 657-0529, accessing the EDD web site at www.edd.ca.gov, or contacting our office.

Only individuals working as independent contractors are to be reported. Thus, you don't need to report corporations or partnerships which you pay for services provided to your business. However, you must report all independent contractors you hire for $600 or more, regardless of whether the independent contractor lives or works in California or another state. You only need to report an independent contractor one time per each calendar year that you contract or pay the contractor $600 or more.

The completed DE 542 forms can be either mailed or faxed to the Employment Development Department. The mailing address is:Employment Development Department PO Box 997350 MIC 96 Sacramento, CA 95899-7350 And the fax number is: (916) 319-4410

The EDD may assess a $24 penalty for each failure to comply with the reporting requirements within the required time frame. Also, a penalty of $490 may be assessed for the failure to report the required information due to an agreement between you and the independent contractor to disregard the filing requirements.

California's state-run college saving program, Golden State Scholarshare Trust allows parents and others to put aside tax-deferred money for college.

Plan Features

Money that participants (parents, grandparents, businesses, etc.) contribute to the Scholarshare Trust will grow while in the participant's account and be tax free for federal and California purposes upon disbursement to the beneficiary's school of choice. The funds disbursed can cover room and board, as well as tuition fees, books, supplies and equipment required for enrollment or attendance at a "qualified institution" (defined below). The participant retains ownership of his/her deposits in the trust until disbursement, at which time ownership is transferred to the beneficiary (student). Interest earnings disbursed from the trust are not included in the beneficiary's gross income (while attending college).

Qualified Institutions

Neither the beneficiary nor the participant will have to choose a college when opening a Scholarshare account. However, the type of college the beneficiary plans to attend will affect the maximum contribution allowed, i.e., community college, state university, private institution, etc. The student may use the funds to attend any qualified institution. A qualified institution is one that offers credit toward:

A bachelor's degree; An associate's degree; A graduate level or professional degree; and Another recognized post-secondary credential. Certain proprietary and post-secondary vocational schools are also eligible institutions.

At the time the beneficiary enrolls in college, the Scholarshare Program will transfer payments from the participant's Scholarshare account directly to the college to pay the beneficiary's qualified expenses.

Transferability

If the beneficiary dies or does not attend college, the contributor has the option of canceling the account or changing the beneficiary. Cancellation results in a refund equal to the then-current market value less a penalty of no less than 10 percent of the earnings. The penalty is waived in the event of the beneficiary's death.

Without cause and before the beneficiary's admission to college, the contributor may change the beneficiary designation to relatives of the original beneficiary or relatives of the beneficiary's spouse, including the contributor if the contributor is a relative of the original beneficiary or a relative of the original beneficiary's spouse.

Income Tax Issues

There are no income tax deductions to the contributor for placing funds into a Scholarshare program. Taxation is avoided on the earnings. Amounts paid for tuition will also be eligible for both the HOPE credit and Lifetime Learning credit, subject to the rules that regularly apply to each of those credits.

Gift Tax Issues

For gift tax purposes, deposits are completed gifts of present interests to the designated beneficiary and therefore qualify for the annual gift tax and generation-skipping transfer tax exclusion of $15,000 per year per donee as indexed. They do not qualify as excludable education expenses under the gift tax rules which allow education expenses to be paid in addition to the $15,000 annual exclusion. If the deposit exceeds the annual exclusion amount, the contributor may elect to take the balance into account ratably over a five-year period on their gift tax return.

On December 20, President Donald Trump signed the bipartisan, year-end government spending and tax package, just hours before federal funding was set to expire. Trump's signature on the over 2,000-page spending package avoided a government shutdown.

On December 20, President Donald Trump signed the bipartisan, year-end government spending and tax package, just hours before federal funding was set to expire. Trump's signature on the over 2,000-page spending package avoided a government shutdown.

Year-End Tax Package
The Further Consolidated Appropriations Act, 2020, (HR 1865), logs just over 700 pages and serves as only half of the government spending package for fiscal year 2020, which runs through September 30. Most notably, HR 1865 serves as the legislative vehicle for a year-end tax package, which carries a costly $426 billion price tag over a 10-year budget window, according to the nonpartisan Joint Committee on Taxation (JCT), JCX-54R-19.

Some of the tax-related provisions in the year-end package include, among other items:

• Retroactive and current renewal of over two dozen temporary tax breaks known as tax extenders, which have expired or would soon be expired, spanning from 2017 to 2019. Generally, the renewed tax breaks are extended through 2020, and the biodiesel and short-line railroad maintenance tax credits are extended until 2022;
• The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) (HR 1994), which makes sweeping changes to retirement savings and employer retirement contributions provisions;
• Certain fixes to the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
• Full repeal of three tax-related provisions of the Affordable Care Act (ACA) ( P.L. 111-148), two of which include the 2.3 percent excise tax on medical devices and the 40 percent excise "Cadillac" tax on high-dollar employer-sponsored health insurance plans.

The House approved HR 1865 on December 17 by a 297-to-120 vote. The Senate cleared the measure on December 19 by a 71-to-23 vote.

"So in the end, with more than $400 billion in tax cuts, there were lots of winners and the usual loser – the budget."

"There were numerous fits and starts, but this result is a reminder that Congressional muscle memory on extenders is very strong, so ultimately the members did what they always do – extend them," John Gimigliano, principal-in-charge of the federal legislative and regulatory services group in the Washington National Tax practice of KPMG LLP told Wolters Kluwer. "Some might be surprised to see the ACA taxes rolled back, but it has always felt like those items were on borrowed time; it was really just a question of when and how they were repealed, not whether. So in the end, with more than $400 billion in tax cuts, there were lots of winners and the usual loser – the budget."

SECURE ACT
The bipartisan SECURE Act, which cleared the House in May but remained stalled in the Senate most of the year, makes a number of major as well as administrative changes for retirement savings affecting both individuals and employers.

Some of those changes are noted as follows:

IRA Changes

• Moving the start date for requirement required minimum distributions (RMDs) to the year the owner turns 72;
• Ending the 70 1/2 age limit for contribute contributions to an IRA; and
• Shortening the distribution period for nonspouse inherited IRAs to a 10-year maximum.
  The 10-year window for distributions to a nonspouse beneficiary applies regardless of when the IRA owner dies. Thus, the change will severely limit the use of "stretch IRAs" as an effective planning tool. Limited exceptions are available.

401(k) Changes

• Requiring plans to offer participation to long-term, part-time employees;
• Encouraging auto-enrollment by increasing the cap; and
• Streamlining the safe harbor for non-elective contributions.

Employers with 401(k) plans must offer employees who work between 500 and 1000 hours year an additional means to participate in the plan. The rule change would only affect 401(k) cash or deferral arrangements, and no other qualified plans.

Retirement Plans for Small Employers

Several changes are made to encourage more small employers to offer retirement benefits to their employees, such as:

• Adding a new tax credit for small employers using auto-enrollment plans;
• Increasing the credit for small employer pension plan start-up costs; and
• Allow small employers of two or more to band together to participate in a new class of pooled multiple employer plans (MEPs).

Congress Adjourns Until 2020
After an eventful two-week sprint to the finish line, Congress adjourned for the year on December 20. Lawmakers are expected to return to Washington, D.C. during the week of January 6, 2020.

The Fifth Circuit U.S. Court of Appeals ruled that the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate is unconstitutional because it can no longer be read as a tax, and there is no other constitutional provision that justifies this exercise of congressional power. However, the central question of whether the rest of the ACA remains valid after Congress removed the penalty for not having health insurance remained unanswered. Instead, the case was sent back to the district court to reconsider how much of the ACA could survive without the individual mandate penalty.

The Fifth Circuit U.S. Court of Appeals ruled that the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate is unconstitutional because it can no longer be read as a tax, and there is no other constitutional provision that justifies this exercise of congressional power. However, the central question of whether the rest of the ACA remains valid after Congress removed the penalty for not having health insurance remained unanswered. Instead, the case was sent back to the district court to reconsider how much of the ACA could survive without the individual mandate penalty.

District Court
According to the opinion, "the rule of law demands a careful, precise explanation of whether the provisions of the ACA are affected by the unconstitutionality of the individual mandate as it exists today." Therefore, the opinion directs the district court to carefully consider whether the mandate can be legally distinct from the rest of the law. The opinion instructs the district court to answer two questions: Which parts of the ACA "are indeed inseverable" now that the mandate is no longer enforced and whether a ruling in the case should apply only to the Republican-led states that sued to overturn the law, an issue raised by Trump administration lawyers.

Dissenting Opinion
A dissenting opinion discussed that Congress made it clear that it wanted the rest of the ACA to stand and sending the case back to the lower court was criticized. The opinion also highlighted that sending the case back to the lower court merely identifies serious flaws in the district court’s analysis and remands for a do-over, which will unnecessarily prolong this litigation and the concomitant uncertainty over the future of the health care sector.

Proposed qualified opportunity zone regulations issued on October 29, 2018 ( REG-115420-18) and May 1, 2019 ( REG-120186-18) under Code Sec. 1400Z-2 have been finalized with modifications. The regulations. which were issued in a 550 page document, are comprehensive.

Proposed qualified opportunity zone regulations issued on October 29, 2018 ( REG-115420-18) and May 1, 2019 ( REG-120186-18) under Code Sec. 1400Z-2 have been finalized with modifications. The regulations. which were issued in a 550 page document, are comprehensive.

The regulations address issued related to all aspects of the gain deferral rules and also various requirements that must be met for an entity to qualify as a qualified opportunity fund (QOF) or as a qualified opportunity zone business. Duplicative rules regarding QOFs and qualified opportunity zone businesses have been combined and definitions of key terms added. The regulations detail which taxpayers are eligible to make the election, the types of capital gains eligible for deferral, and the method of making deferral elections. Revisions are made to the rules applying the statutory 180-period and other requirements with regard to the making of a qualifying investment in a QOF.

The IRS will reflect these regulations in updated forms, instructions, and other guidance in January 2020.

Benefits of QOF Investments
Taxpayers may elect to temporarily defer capital gain in income if the gain is invested within 180 days in a QOF. The gain is recognized on Dec. 31, 2026, or if earlier, upon the occurrence of an inclusion event such as the sale of the QOF investment. However, 10 percent of the deferred gain is not recognized if the investment is held five years and 15 percent is not recognized after seven years. In addition, taxpayers may exclude recognition of gain on appreciation in the investment if the investment in the qualified opportunity fund is held for at least 10 years.

Section 1231 gains
The final regulations provide that eligible gains include the gross amount of eligible section 1231 gains unreduced by section 1231 losses regardless of character. The proposed regulations took a "netting" approach. The 180-day period for an eligible taxpayer to invest an amount with respect to an eligible section 1231 gain begins on the date of the sale of the section 1231 asset rather than at the end of the tax year.

RICS and REITS
The 180-day period for RIC or REIT capital gain dividends generally begins at the close of the shareholder’s tax year in which the capital gain dividend would otherwise be recognized by the shareholder. To ensure that RIC and REIT shareholders do not have to wait until the close of their tax year to invest capital gain dividends received during the tax year, the final regulations also provide that shareholders may elect to begin the 180-day period on the day each capital gain dividend is paid. The 180-day period for undistributed capital gain dividends, however, begins on either the last day of the shareholder’s tax year in which the dividend would otherwise be recognized or the last day of the RIC or REIT’s tax year, at the shareholder’s election.

The aggregate amount of a shareholder’s eligible gain with respect to capital gain dividends received from a RIC or a REIT cannot exceed the aggregate amount of capital gain dividends that the shareholder receives as reported or designated by that RIC or that REIT for the shareholder’s tax year.

Installment Sales
The final regulations allow an eligible taxpayer to elect to choose the 180- day period to begin on either (i) the date a payment under an installment sale is received for that tax year, or (ii) the last day of the tax year the eligible gain under the installment method would be recognized. Therefore, if the taxpayer defers gain from multiple payments under an installment sale, there might be multiple 180-day periods, or a single 180-day period at the end of the taxpayer’s tax year, depending upon taxpayer’s election.

Partners, S Corporation Shareholders, and Trust Beneficiaries
The final regulations provide partners, S shareholders, and beneficiaries of decedents’ estates and non-grantor trusts with the option to treat the 180-day period as commencing upon the due date of the related entity’s tax return, not including any extensions. This rule does not apply to grantor trusts.

Gain from Disposal of Partial Interest in QOF Investment
Gain arising from an inclusion event is eligible for deferral even though the taxpayer retains a portion of its qualifying investment after the inclusion event. If an inclusion event relates only to a portion of a taxpayer’s qualifying investment in the QOF, (i) the deferred gain that otherwise would be required to be included in income (inclusion gain amount) may be invested in a different QOF, and (ii) the taxpayer may make a deferral election with respect to the inclusion gain amount, so long as the taxpayer satisfies all requirements for a deferral election on the inclusion gain amount.

Post-December 31, 2026 Gain Ineligible
Gain arising after December 31, 2026 (including gain mandatorily recognized on that date) is not eligible for deferral.

Death Related Transfers of QOF Investments
A qualifying investment received by a beneficiary in a transfer by reason of death remains a qualifying investment in the hands of the beneficiary.

Acquisition of Eligible Interest from Person Other than a QOF
A taxpayer may make a deferral election for an eligible interest acquired from a person other than a QOF. The final regulations do not require the transferor to have made a prior deferral election for the acquirer of an eligible interest to make the election.

Further, for interests in entities that existed before the enactment of the deferral provision, if such entities become QOFs, then the interests in those entities, even though not qualifying investments in the hands of a transferor, are eligible interests that may (i) be acquired by an investor and (ii) result in a qualifying investment of the acquirer if the acquirer has eligible gain and the acquisition was during the 180-day period with respect to that gain.

Built in Gains
Built-in gain of a REIT, a RIC, or an S corporation potentially subject to corporate-level tax is eligible for deferral. If the deferral election is made, the amount of gain is not included in the calculation of the entity’s net recognized built-in gain.

Identification of Disposed Interests in a QOF
The final regulations permit taxpayers to specifically identify QOF stock that is sold or otherwise disposed. If a taxpayer fails to adequately identify which QOF shares are disposed of, then the FIFO identification method applies. If, after application of the FIFO method, a taxpayer is treated as having disposed of less than all of its investment interests that the taxpayer acquired on one day and the investments vary in its characteristics, then a pro-rata method applies to the remainder.

The specific identification method does not apply to the disposition of interests in a QOF partnership.

Deferred Gain Retains Tax Attributes
The final regulations make it clear that if a taxpayer is required to include in income some or all of a previously deferred gain, the gain so included has the same attributes that the gain would have had if the recognition of gain had not been deferred. If a deferred gain cannot be clearly associated with an investment in a particular QOF, an ordering rule applies to make this determination.

Effective Date
The final regulations are generally applicable to tax years beginning after 60 days after publication in the Federal Register.

With respect to the portion of a taxpayer’s first tax year ending after December 21, 2017, that began on December 22, 2017, and for tax years beginning after December 21, 2017, and on or before 60 days after publication in the Federal Register taxpayers may rely on either the proposed regulations or the final regulations but not both.

The IRS has issued final regulations that provide guidance on transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor. Specifically, the regulations override the general nonrecognition rule under Code Sec. 721(a) unless the partnership adopts the remedial allocation method and certain other requirements are satisfied. The regulations affect U.S. partners in domestic or foreign partnerships.

The IRS has issued final regulations that provide guidance on transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor. Specifically, the regulations override the general nonrecognition rule under Code Sec. 721(a) unless the partnership adopts the remedial allocation method and certain other requirements are satisfied. The regulations affect U.S. partners in domestic or foreign partnerships.

Background
Code Sec. 721(a) generally provides that no gain or loss is recognized by either a partnership or any of its partners upon a contribution of property to the partnership in exchange for a partnership interest. In Code Sec. 721(c), the Treasury Secretary has regulatory authority to override this nonrecognition provision for gain realized on the transfer of property to a domestic or foreign partnership if the gain, when recognized, would be includible in the gross income of a person other than a U.S. person.

Under temporary regulations issued in 2017, if a U.S. person contributes certain property with built-in gain to a partnership that has foreign partners related to the transferor, then gain will be recognized unless the gain deferral method is applied with respect to the property ( Temporary Reg. §§1.721(c)-2T; 1.721(c)-3T). Under a de minimis exception, nonrecognition continues to apply if the sum of all built-in gain property contributed to the partnership during the tax year does not exceed $1 million.

The final regulations adopt the temporary regulations with certain modifications.

Related Person Definition
The final regulations modify the definition of related person in certain situations. This modification provides relief when certain foreign individual partners of a partnership would be treated as a related person with respect to a domestic corporation by reason of Code Sec. 267(c)(3).

Consistent Allocation Method
The final regulations add a new sentence in Reg. §1.721(c)-3(c)(1). Upon a variation (as described in Reg. §1.706-4(a)(1)) of a U.S. transferor’s interest in a Code Sec. 721(c) partnership, book items with respect to section 721(c) property that are allocated under the interim closing method (as described in Reg. §1.706-4) will be treated as allocated in the same percentage for applying the consistent allocation method in a single tax year, unless the variation results from a transaction undertaken with a principal purpose of avoiding the tax consequences of the gain deferral method.

Reporting Requirements
The 2017 regulations required much of the reporting to be on statements attached to returns. Since the 2017 regulations were issued, however, the IRS has updated and added new schedules to Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, to facilitate compliance with these reporting requirements. The IRS has also issued new Form 8838-P, Consent To Extend the Time To Assess Tax Pursuant to the Gain Deferral Method (Section 721(c)). The final regulations generally require taxpayers to use these forms and schedules.

The final regulations also clarify the duration for which the U.S. transferor must extend the period of limitations on the assessment of tax under Reg. §1.721(c)-6(b).

Technical Termination Rules
The Tax Cuts and Jobs Act, ( P.L. 115-97) (the "TCJA") eliminated technical terminations. However, the applicability date for these final regulations relates back to the applicability date provided in the 2017 regulations, which is before the effective date provided in the TCJA. Accordingly, the final regulations retain technical termination rules, but their application will be limited. The rules will only apply to technical terminations occurring on or after the applicability date provided in the 2017 regulations but before the effective date for the repeal of Code Sec. 708(b)(1)(B) provided in the TCJA.

Effective Date
The regulations are effective on the date of filing with the Federal Register. For dates of applicability, see Reg. §§1.197-2(l)(5)(i), 1.704-1(f), 1.704-3(g)(1), 1.721(c)-1(e), 1.721(c)-2(e), 1.721(c)-3(e), 1.721(c)-4(d), 1.721(c)-5(g), 1.721(c)-6(g), and 1.6038B-2(j)(4).

The IRS has released Publication 5382, "Internal Revenue Service Progress Update / Fiscal Year 2019—Putting Taxpayers First." This new annual report describes accomplishments across the agency, and highlights the work of IRS employees during the past year. It covers a variety of taxpayer service efforts, including development of the new Taxpayer Withholding Estimator, as well as operations support efforts on areas involving information technology modernization, human capital office initiatives, and others.

The IRS has released Publication 5382, "Internal Revenue Service Progress Update / Fiscal Year 2019—Putting Taxpayers First." This new annual report describes accomplishments across the agency, and highlights the work of IRS employees during the past year. It covers a variety of taxpayer service efforts, including development of the new Taxpayer Withholding Estimator, as well as operations support efforts on areas involving information technology modernization, human capital office initiatives, and others.

"This report is about more than what happened during the past year," IRS Commissioner Chuck Rettig wrote in the report’s opening message to taxpayers. "It’s also designed to provide insight into the people serving this country on behalf of the IRS, and provide a glimpse into the future," he added.

IRS Pub. 5382 also focuses criminal investigation results and efforts involving civil enforcement. Also discussed are ongoing compliance areas, including micro-captives, syndicated conservation easements, and virtual currency. The report further covers the IRS’s implementation of new tax laws, and the IRS’s ongoing work on the new Taxpayer First Act of 2019.

Individual Audits Down
Taxpayers are now half as likely to be audited by the IRS for their individual income tax returns as they were a decade ago. As described in IRS Pub. 5382, the IRS audited 0.45 percent of individual (1040) income tax returns during fiscal year (FY) 2019. This number is down from 1.1 percent of tax returns audited in 2010. The IRS’s ongoing loss to its total workforce is largely to blame for the consistent decline in IRS audits, according to the report.

"The IRS lost more than 29,618 full time positions between FY 2010 and FY 2019, which includes Information Technology, Operations Support, Taxpayer Service and Enforcement personnel. These losses directly correlate with a steady decline in the number of individual audits during the past nine years," the report notes.

Hill Reaction
Although individual audits have significantly decreased, Democratic lawmakers on Capitol Hill are criticizing the fact that the IRS continues to conduct more examinations on lower-income individual taxpayers than it does on higher-income taxpayers or corporations. However, the IRS has said previously that audits on higher-income individuals and businesses are significantly more complex and require more resources.

"IRS audit rates are at their lowest levels in 40 years, allowing the wealthy and well-connected to steal from taxpayers with no consequences," Senate Finance Committee ranking member Ron Wyden, D-Ore., said in a January 7 statement. "The bulk of tax avoidance and fraud comes from corporations, pass-through business and those at the top. Ensuring the wealthy and corporations pay what they owe takes the most resources and manpower, and I’m working with the IRS to get a clear picture on funding and staffing levels needed to audit top earners at 2010 levels," Wyden added.

Currently, the IRS anticipates that up to 31 percent of its workforce (nearly 19,719 full-time employees) will retire within the next five years. The IRS’s workforce decline is expected to create a "significant risk of a large knowledge and experience gap for the nation’s tax agency," according to the IRS report.

Bridget Roberts, the Acting National Taxpayer Advocate, released her 2019 Annual Report to Congress. The report discusses the key challenges facing the IRS regarding the implementation of the Taxpayer First Act, inadequate taxpayer service and limited funding of the agency. Further, Roberts released the third edition of the National Taxpayer Advocate’s "Purple Book," which presents 58 legislative recommendations designed to strengthen taxpayer rights and improve tax administration.

Bridget Roberts, the Acting National Taxpayer Advocate, released her 2019 Annual Report to Congress. The report discusses the key challenges facing the IRS regarding the implementation of the Taxpayer First Act, inadequate taxpayer service and limited funding of the agency. Further, Roberts released the third edition of the National Taxpayer Advocate’s "Purple Book," which presents 58 legislative recommendations designed to strengthen taxpayer rights and improve tax administration.

Taxpayer First Act
The report highlighted that the Taxpayer First Act ( P.L. 116-25) had made the most comprehensive revisions to IRS procedures since the IRS Restructuring and Reform Act of 1998, including some 23 provisions previously recommended by the National Taxpayer Advocate. Further, the Taxpayer First Act also required the IRS to develop four strategic plans:

• a comprehensive taxpayer service strategy (due to Congress by July 1, 2020);
• a comprehensive plan to redesign the IRS’s organizational structure (due to Congress by Sept. 30, 2020);
• a comprehensive employee training strategy that includes taxpayer rights training (due to Congress by July 1, 2020); and
• a multi-year plan to meet IRS information technology (IT) needs.

Key IRS Challenges
The biggest challenge facing the IRS is its struggle to complete its mission. The IRS aims to "provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all." The report emphasizes that the IRS is struggling to meet both of those goals, and attributes the IRS’s shortcomings mostly to budget constraints but also to a culture in which the agency focuses on its own priorities without adequately factoring in the needs of taxpayers.

The report states that the IRS is among the lowest-performing federal agencies in providing a positive customer experience. During fiscal year (FY) 2019, the report said that the IRS received approximately 100 million telephone calls, and customer service representatives answered only 29 percent. The report further states that the IRS has also struggled to enforce the law with "fairness to all". The report urges the IRS to prioritize phone service for taxpayers against whom it takes collection action.

Low Budget
Since 2010, the IRS budget has been reduced by about 20 percent after adjusting for inflation, and the number of full-time equivalent employees has declined by about 22 percent. The report points out that answering 100 million telephone calls, conducting audits, and taking enforcement actions require adequate staffing, and the IRS cannot substantially improve its performance without additional resources. The report urges Congress to increase IRS funding and particularly for taxpayer service and IT modernization, and to change the budget rules to account for the revenue additional IRS appropriations are likely to generate.

Identifying Taxpayer Needs and Preferences
Despite the IRS’s significant funding limitations, the report urges the IRS to utilize the Taxpayer First Act requirements – to develop plans to revamp its taxpayer service strategy, organizational structure, employee training strategy, and technology priorities – as a roadmap for a once-in-a-generation reassessment of its objectives and operations.

While noting that the IRS has developed strategies in a vacuum without soliciting taxpayer feedback and taking into account taxpayer needs and preferences, the report suggests a full-scale cultural shift. The report also expressed concern that the IRS has declined to include the National Taxpayer Advocate or a Taxpayer Advocate Service (TAS) representative as part of a core team created to coordinate its Taxpayer First Act implementation activities.

The report also makes numerous recommendations to improve the customer experience, including that the IRS take the following actions:

• Conduct multi-disciplined, comprehensive research into taxpayer needs and preferences.
• Require that all IRS business units, including those charged primarily with enforcement, develop a detailed customer service strategy.
• Appoint a Chief Customer Experience Officer to coordinate service initiatives across IRS business units.
• Ensure that taxpayers who cannot work with the IRS digitally, or whose issues are not resolved online, can reach and work with an IRS employee.
• Address the needs of practitioners who interact with the IRS on behalf of large numbers of taxpayers.
• For each proposal included in its customer service strategy, include cost estimates, milestones, and taxpayer-focused performance measures so the effectiveness of the strategy in improving customer service can be measured over time.

Other Matters
The report also:

• identified 10 "most serious problems";
• provided status updates on two problems identified in previous reports;
• made dozens of recommendations for administrative change;
• made 58 recommendations for legislative change;
• analyzed the 10 tax issues most frequently litigated in the federal courts; and
• presented four research studies.

The IRS has modified the applicability dates for proposed regulations under Code Sec. 382 that were issued with NPRM REG-125710-18, September 10, 2019 (2019 proposed regulations). The IRS is withdrawing the text of the proposed applicability dates, and proposing revised applicability dates. The newly issued proposed rules would also provide transition relief.

The IRS has modified the applicability dates for proposed regulations under Code Sec. 382 that were issued with NPRM REG-125710-18, September 10, 2019 (2019 proposed regulations). The IRS is withdrawing the text of the proposed applicability dates, and proposing revised applicability dates. The newly issued proposed rules would also provide transition relief.

Proposed Regulations and Notice 2003-65
The 2019 proposed regulations would provide guidance on the inclusion of items of income and deductions in the calculation of built-in gains and losses under Code Sec. 382(h). The proposed regulations would apply to ownership changes that occur after the date the proposed regulations are published as final regulations in the Federal Register.

Notice 2003-65, 2003-2 CB 747, provides interim guidance for identifying built-in gains and losses under Code Sec. 382(h). This notice permits taxpayers to rely on safe harbor approaches for applying Code Sec. 382(h) to an ownership change prior to the effective date of temporary or final regulations issued under that provision.

Delay of Applicability Date
To address concerns raised by taxpayers and practitioners, the IRS has withdrawn the text of Proposed Reg. §1.382-2(b)(4) and Proposed Reg. §1.382-7(g) contained in the 2019 proposed regulations, and replaced it with a revised proposed applicability date text. To avoid any gap between the date on which taxpayers can no longer rely on Notice 2003-65 and the date on which the final regulations are applicable, the applicability date of the final regulations would be 30 days after the date such regulations are published in the Federal Register (delayed applicability date). Exceptions exist for two situations discussed below.

Notice 2003-65 will remain applicable to ownership changes to which the final regulations do not apply.

Limiting Duplicative Application
The first exception to the delayed applicability date relates to the rule in Proposed Reg. §1.382-7(d)(5), which provides that certain carryforwards of business interest expense disallowed under Code Sec. 163(j) would not be treated as recognized built-in losses under Code Sec. 382(h)(6)(B), if such amounts were allowable as deductions during the five-year recognition period set forth in Code Sec. 382(h)(7)(A). This rule eliminates the possible duplicative application of Code Sec. 382 to certain disallowed business interest expense carryforwards.

The IRS has determined that Proposed Reg. §1.382-7(d)(5) should be finalized before the remainder of the rules in the 2019 proposed regulations, and that taxpayers should be allowed to retroactively apply this rule. To that end, the IRS expects that Proposed Reg. §1.382-7(d)(5) will be finalized as part of the Treasury decision that finalizes the proposed Code Sec. 163(j) regulations (see 83 FR 67490), and that taxpayers will be permitted to apply the rule to prior periods. The IRS continues to study the remainder of the rules in the 2019 proposed regulations.

Transition Relief
Under the proposed transition relief provisions, the final regulations would not apply to certain ownership changes that occur after the delayed applicability date. To qualify for the transition relief, the ownership change must occur immediately after an owner shift or equity structure shift that occurs pursuant to:

• a binding agreement in effect on or before the delayed applicability date and at all times thereafter;
• a specific transaction described in a public announcement made on or before the delayed applicability date;
• a specific transaction described in a filing with the Securities and Exchange Commission submitted on or before the delayed applicability date;
• a transaction described in a private letter ruling request submitted to the IRS on or before the delayed applicability date; or
• a court order (or a plan confirmed, or a sale approved, by court order) in a title 11 or similar case, provided that the taxpayer was a debtor in a case before such court on or before the delayed applicability date.

The relevant owner shift or equity structure shift must be a specific, identifiable transaction.

Taxpayers may continue to rely on Notice 2003-65 for to any ownership change qualifying for transition relief, even though the notice will be obsoleted on the delayed applicability date. However, a taxpayer may choose to apply the final regulations to such an ownership change.

The Treasury and IRS have issued final regulations on the due diligence and reporting rules for persons making certain U.S. source payments to foreign persons. Guidance is also provided on reporting by foreign financial institutions on U.S. accounts. The regulations are effective on the date the regulations are published in the Federal Register.

The Treasury and IRS have issued final regulations on the due diligence and reporting rules for persons making certain U.S. source payments to foreign persons. Guidance is also provided on reporting by foreign financial institutions on U.S. accounts. The regulations are effective on the date the regulations are published in the Federal Register.

Obtaining a Foreign TIN and Date of Birth
Temporary regulations provided that beginning January 1, 2017, a beneficial withholding certificate provided to document an account maintained at a U.S. branch or office of a financial institution was required to include a foreign taxpayer identification number (TIN) and the date of birth for an individual, in order to treat the certificate as valid. In response to comments regarding the difficulty of the requirements, the Treasury and IRS issued Notice 2017-46.

The notice provided a one-year delay in the implementation of the requirements for payments made on or after January 1, 2018, and a transitional rules to phase in the foreign TIN requirement for certificates provided before January 1, 2018. The transitional rules allow an otherwise valid certificate to remain valid until January 1, 2020. For payments made after January 1, 2020, a withholding agent may treat a pre-2018 as valid if the foreign TIN is obtained on a written statement or is in the withholding agent’s files. In Notice 2018-20, the IRS stated that it intended to expand its list of jurisdictions that do not issue foreign TINs to their residents to include jurisdictions that requested to be on the list, even if they issue foreign TINs.

The final regulations incorporate the temporary regulations and Notices with minor changes, by:

• providing, with respect to withholding certificates signed on or after January 1, 2018, that a separate written statement is an acceptable way to collect a foreign TIN, if the written statement contains an acknowledgment that the statement is part of the withholding certificate;
• clarifying the exception to the foreign TIN requirement for an account holder that is a government, international organization, foreign central bank or resident of a U.S. territory; and
• clarifying that a withholding agent may rely on the date of birth on a withholding certificate, unless it knows or has reason to know that the date of birth is incorrect.

Nonqualified Intermediaries
A nonqualified intermediary is generally required to provide a withholding agent a Form W-8IMY, a withholding statement, and documentation for each payee for which the intermediary receives a payment. The final regulations clarify that the general standards of knowledge that apply to withholding agents apply to a nonqualified intermediary for reliance on payee documentation, for making the representation that the information on the certificate is not inconsistent with other account information that the nonqualified intermediary has.

A nonqualified intermediary may provide a withholding statement that does not include a chapter 4 recipient code for one or more payees if the withholding agent can determine the appropriate code based on other information included on or associated with the withholding statement, or contained in the withholding agent’s records.

Electronic Signatures
A withholding agent can accept an electronically signed withholding certificate if the certificate reasonably demonstrates to the withholding agent that it has been electronically signed by the recipient identified on the form or authorized by the recipient to sign the form.

The final regulations allow the withholding agent to also consider documentation or other information that the withholding agent has that supports that the withholding certificate was electronically signed, absent actual knowledge that the information or documentation is incorrect.

Additional Changes
The final regulations also make clarifications with respect to withholding certificates and statements furnished through a third party repository.

Regarding the claim of a reduced rate of withholding under a treaty, the final regulations modify the general standard of knowledge by providing that:

• the withholding agent has reason to know that a claim of reduced rate under a treaty is unreliable or incorrect when it can check a list on the IRS website regarding the existence of the treaty, and
• a withholding agent can rely on a beneficial owner’s claim regarding a limitation of benefits (LOB) provision, absent actual knowledge that the claim is unreliable or incorrect.

The final regulation also extend the time for withholding agents to obtain treaty statements, with respect to specific LOB provisions for preexisting accounts, to January 1, 2020.

Taxpayers have been provided with additional guidance for complying with the Code Sec. 871(m) regulations on dividend equivalent payments for 2021, 2022, and 2023. The Treasury Department and the IRS intend to amend the regulations to delay the effective/applicability date of certain rules. Further, the phase-in period provided in Notice 2018-762, I.R.B. 2018-40, 522, has been extended.

Taxpayers have been provided with additional guidance for complying with the Code Sec. 871(m) regulations on dividend equivalent payments for 2021, 2022, and 2023. The Treasury Department and the IRS intend to amend the regulations to delay the effective/applicability date of certain rules. Further, the phase-in period provided in Notice 2018-762, I.R.B. 2018-40, 522, has been extended.

Dividend Equivalent Payments
A dividend equivalent amount is essentially an amount directly or indirectly determined by reference to a U.S. dividend. Code Sec. 871(m) treats dividend equivalent payments as U.S. source dividends. These payments are subject to 30-percent withholding (or a lower treaty rate) if received by a nonresident alien or foreign corporation.

The Code Sec. 871(m) regulations include final and temporary regulations under Code Secs. 871(m), 1441, 1461, and 1473.

Phase-in Year Extended
The effective/applicability date for the specified notional principal contract (NPC) rules under Reg. §1.871-15(d)(2) and the specified equity-linked instrument (ELI) rules under Reg. §1.871-15(e) will be revised. These rules will not apply to any payment made with respect to any non-delta-one transaction issued before January 1, 2023.

The IRS will take into account the extent to which the taxpayer or withholding agent made a good faith effort to comply with the Code Sec. 871(m) regulations in enforcing those regulations—

• for any delta-one transaction in 2017 through 2022; and
• for any non-delta-one transaction that is a Code Sec. 871(m) transaction under Reg. §1.871-15(d)(2) or Reg. §1.871-15(e) in 2023.

Further, the period when the IRS will take into account the extent to which a qualified derivatives dealer made a good faith effort to comply with the Code Sec. 871(m) regulations and the relevant provisions of the 2017 Qualified Intermediary (QI) Agreement is extended through 2022.

The 2017 QI Agreement will be revised so that a QDD will be treated as satisfying the obligations that specifically apply to a QDD under that agreement for 2017 through 2022.

Simplified Standard Extended
The period when the simplified standard applies for withholding agents to determine whether transactions entered into were combined transactions is extended to include 2021 and 2022. Transactions entered into in 2017 through 2022 that are combined under the simplified standard will continue to be treated as combined for future years. They will not stop being combined transactions by applying Reg. §1.871-15(n) (the combined transactions rule in the regulations), or by disposing of less than all of the potential Code Sec. 871(m) transactions that are combined under this rule.

Transactions entered into in 2017 through 2022 that are not combined under the simplified standard will not become combined transactions by applying Reg. §1.871-15(n) to them in future years, unless a reissuance or other event causes the transactions to be retested to determine whether they are Code Sec. 871(m) transactions.

Phase-In Relief for Qualified Derivatives Dealers Extended
Regarding qualified derivatives dealers (QDDs), Reg. §1.871-15(q)(1), Reg. §1.871-15(r)(3), and Reg. §1.1441-1(b)(4)(xxii)(C) will be amended so that a QDD will not be subject to tax on dividends and dividend equivalents received in 2021 and 2022 in its equity derivatives dealer capacity or withholding on those dividends (including deemed dividends). A QDD will have to compute its Code Sec. 871(m) amount using the net delta approach beginning in 2023.

A QDD will remain liable under Code Sec. 881(a)(1) for tax on dividends and dividend equivalents that it receives in any other capacity, and on any other U.S. source FDAP payments that it receives (whether or not in its equity derivatives dealer capacity). A QDD is also responsible for withholding on dividend equivalents it pays to a foreign person on a Code Sec. 871(m) transaction.

Transition Rules Extended
Withholding agents may apply the qualified securities lender (QSL) transition rules described in Notice 2010-46, I.R.B. 2010-24, 757, for payments made in calendar years 2021 and 2022.

Anti-Abuse Rule
The anti-abuse rule in Reg. §1.871-15(o) will continue to apply during the phase-in years. This means that a transaction that would not otherwise be treated as a Code Sec. 871(m) transaction (including as a result of the new guidance) might still be a Code Sec. 871(m) transaction under the anti-abuse rule.

Taxpayer Reliance
Taxpayers and withholding agents can rely on the new guidance before the Treasury and IRS amend the Code Sec. 871(m) regulations and the 2017 QI Agreement.

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. The new Pension Protection Act cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Good used or better condition

The new law does not define good or better condition. For guidance, you can look to the standards that many charities already have in place. Many charities will not accept your donations of clothing or household items unless they are in good or better condition.

Clothing cannot be torn, soiled or stained. It must be clean and wearable. Many charities will reject a shirt with a torn collar or a jacket with a large tear in a sleeve. As one charity spokesperson summed it up, "Don't donate anything you wouldn't want to wear yourself." 

Household items include furniture, furnishings, electronics, appliances, and linens, and similar items.  Food, paintings, antiques, art, jewelry and collectibles are not household items. Household items must be in working condition. For example, a DVD player that does not work is not in good used or better condition. You can still donate it (if the charity will accept it) but you cannot claim a tax deduction. Household items, particularly furnishings and linens, must be clean and useable. 

The new law authorizes the IRS to deny a deduction for the contribution of a clothing or household item that has minimal monetary value. At the top of this list you can expect to find socks and undergarments, which have had inflated values for years.

Fair market value

You generally can deduct the fair market value of your donation. Unless your donation is new - for example, a blouse that has never been worn - its fair market value is not what you paid for it. Just like when you drive a new car off the dealer's lot, a new item loses value once you wear or use it.  Therefore, its value is less than what you paid for it.  

If you're not sure about an item's value, a reputable charity can help you determine its fair market value. Our office can also help you value your donations of used clothing and household items.

Get a receipt

Generally, you must obtain a receipt for your gift. If obtaining a receipt is impracticable, for example, you drop off clothing at a self-service donation center, you must maintain reliable written information about the contribution, such as the type and value of the property.

Charitable contributions of property of $250 or more must be substantiated by obtaining a contemporaneous written acknowledgement from the charity including an estimate of the value of the items. If your deduction for noncash contributions is greater than $500, you must attach Form 8283 to your tax return. Special rules apply if you are claiming a deduction of more than $5,000.

Exception

In some cases, the new rules about good used or better condition do not apply. The restrictions do not apply if a deduction of more than $500 is claimed for the single clothing or household item and the taxpayer includes an appraisal with his or her return.

If you have any questions about the new charitable contribution rules for donations of clothing and household items, give our office a call. The new rules apply to contributions made after August 17, 2006.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Nearly one-third of all new vehicles (and up to 75% of all new luxury cars) are leased rather than purchased. But the decision to lease or buy must ultimately be made on an individual level, taking into consideration each person's facts and circumstances.

Buying

Advantages.

• You own the car at the end of the loan term.
• Lower insurance premiums.
• No mileage limitations.

Disadvantages.

• Higher upfront costs.
• Higher monthly payments.
• Buyer bears risk of future value decrease.

Leasing

Advantages.

• Lower upfront costs.
• Lower monthly payments.
• Lessor assumes risk of future value decrease.
• Greater purchasing power.
• Potential additional income tax benefits.
• Ease of disposition.

Disadvantages.

• You do not own the car at the end of the lease term, although you may have the option to purchase at that time.
• Higher insurance premiums.
• Potential early lease termination charges.
• Possible additional costs for abnormal wear & tear (determined by lessor).
• Extra charges for mileage in excess of mileage specified in your lease contract.

Before you make the decision whether to lease or buy your next vehicle, it makes sense to ask yourself the following questions:

How long do I plan to keep the vehicle? If you want to keep the car or truck longer than the term of the lease, you may be better off purchasing the vehicle as purchase contracts usually result in a lower overall cost of ownership.

How much am I going to drive the vehicle? If you are an outside salesperson and you drive 30,000 miles per year, any benefits you may have gained upfront by leasing will surely be lost in the end to excess mileage charges. Most lease contracts include mileage of between 12,000-15,000 per year - any miles driven in excess of the limit are subject to some pretty hefty charges.

How expensive of a vehicle do I want? If you can really only afford monthly payments on a Honda Civic but you've got your eye on a Lexus, you may want to consider leasing. Leasing usually results in lower upfront fees in the form of lower down payments and deferred sales tax, in addition to lower monthly payments. This combination can make it easier for you to get into the car of your dreams.

If you have any questions about the tax ramifications regarding buying vs. leasing an automobile or would like some additional information when making your decision, please contact the office.