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The IRS has provided transition relief for third party settlement organizations (TPSOs) for reportable transactions under Code Sec. 6050W during calendar years 2024 and 2025. These calendar years will be the final transition period for IRS enforcement and administration of amendments made to the minimum threshold amount for TPSO reporting under Code Sec. 6050W(e).

The IRS has provided transition relief for third party settlement organizations (TPSOs) for reportable transactions under Code Sec. 6050W during calendar years 2024 and 2025. These calendar years will be the final transition period for IRS enforcement and administration of amendments made to the minimum threshold amount for TPSO reporting under Code Sec. 6050W(e).

Background

Code Sec. 6050W requires payment settlement entities to file Form 1099-K, Payment Card and Third Party Network Transactions, for each calendar year for payments made in settlement of certain reportable payment transactions. Among other information, the return must report the gross amount of the reportable payment transactions regarding a participating payee to whom payments were made in the calendar year. As originally enacted, Code Sec. 6050W(e) provided that TPSOs are not required to report third party network transactions with respect to a participating payee unless the gross amount that would otherwise be reported is more than $20,000 and the number of such transactions with that payee is more than 200.

The American Rescue Plan Act of 2021 (P.L. 117-2) amended Code Sec. 6050W(e) so that, for calendar years beginning after 2021, a TPSO must report third party network transaction settlement payments that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of transactions. The IRS has delayed implementing the amended TPSO reporting threshold for calendar years beginning before January 1, 2023, and for calendar year 2023 (Notice 2023-10; Notice 2023-74).

For backup withholding purposes, a reportable payment includes payments made by a TPSO that must be reported on Form 1099-K, without regard to the thresholds in Code Sec. 6050W. The IRS has provided interim guidance on backup withholding for reportable payments made in settlement of third party network transactions (Notice 2011-42).

Reporting Relief

Under the new transition relief, a TPSO will not be required to report payments in settlement of third party network transactions with respect to a participating payee unless the amount of total payments for those transactions is more than:

• $5,000 for calendar year 2024;
• $2,500 for calendar year 2025.

This relief does not apply to payment card transactions.

For those transition years, the IRS will not assert information reporting penalties under Code Sec. 6721 or Code Sec. 6722 against a TPSO for failing to file or furnish Forms 1099-K unless the gross amount of aggregate payments to be reported exceeds the specific threshold amount for the year, regardless of the number of transactions.

In calendar year 2026 and after, TPSOs will be required to report transactions on Form 1099-K when the amount of total payments for those transactions is more than $600, regardless of the number of transactions.

Backup Withholding Relief

For calendar year 2024 only, the IRS will not assert civil penalties under Code Sec. 6651 or Code Sec. 6656 for a TPSO’s failure to withhold and pay backup withholding tax during the calendar year. However, TPSOs that have performed backup withholding for a payee during 2024 must file Form 945, Annual Return of Withheld Federal Income Tax, and Form 1099-K with the IRS, and must furnish a copy of Form 1099-K to the payee.

For calendar year 2025 and after, the IRS will assert those penalties for a TPSO’s failure to withhold and pay backup withholding tax.

Effect on Other Documents

Notice 2011-42 is obsoleted.

Notice 2024-85

IR-2024-299

The Treasury Department and IRS have issued final regulations amending regulations under Code Sec. 752 regarding a partner’s share of recourse partnership liabilities and the rules for related persons.

The Treasury Department and IRS have issued final regulations amending regulations under Code Sec. 752 regarding a partner’s share of recourse partnership liabilities and the rules for related persons.

Background

Code Sec. 752(a) treats an increase in a partner’s share of partnership liabilities, as well as an increase in the partner’s individual liabilities when the partner assumes partnership liabilities, as a contribution of money by the partner to the partnership. Code Sec. 752(b) treats a decrease in a partner’s share of partnership liabilities, or a decrease in the partner’s own liabilities on the partnership’s assumption of those liabilities, as a distribution of money by the partnership to the partner.

The regulations under Code Sec. 752(a), i.e., Reg. §§1.752-1 through 1.752-6, treat a partnership liability as recourse to the extent the partner or related person bears the economic risk of loss and nonrecourse to the extent that no partner or related person bears the economic risk of loss.

According to the existing regulations, a partner bears the economic risk of loss for a partnership liability if the partner or a related person has a payment obligation under Reg. §1.752-2(b), is a lender to the partnership under Reg. §1.752-2(c), guarantees payment of interest on a partnership nonrecourse liability as provided in Reg. §1.752-2(e), or pledges property as security for a partnership liability as described in Reg. §1.752-2(h).

Proposed regulations were published in December 2013 (REG-136984-12). These final regulations adopt the proposed regulations with modifications.

The Final Regulations

The amendments to the regulations under Reg. §1.752-2(a) provide a proportionality rule for determining how partners share a partnership liability when multiple partners bear the economic risk of loss for the same liability. Specifically, the economic risk of loss that a partner bears is the amount of the partnership liability or portion thereof multiplied by a fraction that is obtained by dividing the economic risk of loss borne by that partner by the sum of the economic risk of loss borne by all the partners with respect to that liability.

The final regulations also provide guidance on how a lower-tier partnership allocates a liability when a partner in an upper-tier partnership is also a partner in the lower-tier partnership and bears the economic risk of loss for the lower-tier partnership’s liability. The lower-tier partnership in this situation must allocate the liability directly to the partner that bears the economic risk of loss with respect to the lower-tier partnership’s liability. The final regulations clarify how this rule applies when there are overlapping economic risks of loss among unrelated partners, and the amendments add an example illustrating application of the proportionality rule to tiered partnerships. They also add a sentence to Reg. §1.704-2(k)(5) clarifying that an upper-tier partnership bears the economic risk of loss for a lower-tier partnership’s liability that is treated as the upper-tier partnership’s liability under Reg. §1.752-4(a), with the result that partner nonrecourse deduction attributable to the lower-tier partnership’s liability are allocated to the upper-tier partnership under Reg. §1.704-2(i).

In addition, the final regulations list in one section all the situations under Reg. §1.752-2 in which a person directly bears the economic risk of loss, including situations in which the de minimis exceptions in Reg. §1.752-2(d) are taken into account. The amendments state that a person directly bears the economic risk of loss if that person—and not a related person—meets all the requirements of the listed situations.

For purposes of rules on related parties under Reg. §1.752-4(b)(1), the final regulations disregard: (1) Code Sec. 267(c)(1) in determining if an upper-tier partnership’s interest in a lower-tier partnership is owned proportionately by or for the upper-tier partnership’s partners when a lower-tier partnership bears the economic risk of loss for a liability of the upper-tier partnership; and (2) Code Sec. 1563(e)(2) in determining if a corporate partner in a partnership and a corporation owned by the partnership are members of the same controlled group when the corporation directly bears the economic risk of loss for a liability of the owner partnership. The regulations state that in both these situations a partner should not be treated as bearing the economic risk of loss when the partner’s risk is limited to the partner’s equity investment in the partnership.

Under the final regulations, if a person owning an interest in a partnership is a lender or has a payment obligation with respect to a partnership liability, then other persons owning interests in that partnership are not treated as related to that person for purposes of determining the economic risk of loss that they bear for the partnership liability.

The final regulations also provide that if a person is a lender or has a payment obligation with respect to a partnership liability and is related to more than one partner, then the partners related to that person share the liability equally. The related partners are treated as bearing the economic risk of loss for a partnership liability in proportion to each related partner’s interest in partnership profits.

The final regulations contain an ordering rule in which the first step in Reg. §1.762-4(e) is to determine whether any partner directly bears the economic risk of loss for the partnership liability and apply the related-partner exception in Reg. §1.752-4(b)(2). The next step is to determine the amount of economic risk of loss each partner is considered to bear under Reg. §1.752-4(b)(3) when multiple partners are related to a person directly bearing the economic risk of loss for a partnership liability. The final step is to apply the proportionality rule to determine the economic risk of loss that each partner bears when the amount of the economic risk of loss that multiple partners bear exceeds the amount of partnership liability.

The IRS and Treasury indicate that they are continuing to study whether additional guidance is needed on the situation in which an upper-tier partnership bears the economic risk of loss for a lower-tier partnership’s liability and distributes, in a liquidating distribution, its interest in the lower-tier partnership to one of its partners when the transferee partner does not bear the economic risk of loss.

Applicability Dates

The final regulations under T.D. 10014 apply to any liability incurred or assumed by a partnership on or after December 2, 2024. Taxpayers may apply the final regulations to all liabilities incurred or assumed by a partnership, including those incurred or assumed before December 2, 2024, with respect to all returns (including amended returns) filed after that date; but in that case a partnership must apply the final regulations consistently to all its partnership liabilities.

T.D. 10014

Final regulations defining “energy property” for purposes of the energy investment credit generally apply with respect to property placed in service during a tax year beginning after they are published in the Federal Register, which is scheduled for December 12.

Final regulations defining “energy property” for purposes of the energy investment credit generally apply with respect to property placed in service during a tax year beginning after they are published in the Federal Register, which is scheduled for December 12.

The final regs generally adopt proposed regs issued on November 22, 2023 (NPRM REG-132569-17) with some minor modifications.

Hydrogen Energy Storage P property

he Proposed Regulations required that hydrogen energy storage property store hydrogen solely used for the production of energy and not for other purposes such as for the production of end products like fertilizer. However, the IRS recognize that the statute does not include that requirement. Accordingly, the final regulations do not adopt the requirement that hydrogen energy storage property store hydrogen that is solely used for the production of energy and not for other purposes.

The final regulations also provide that property that is an integral part of hydrogen energy storage property includes, but is not limited to, hydrogen liquefaction equipment and gathering and distribution lines within a hydrogen energy storage property. However, the IRS declined to adopt comments requesting that the final regulations provide that chemical storage, that is, equipment used to store hydrogen carriers (such as ammonia and methanol), is hydrogen energy storage property.

Thermal Energy Storage Property

To clarify the proposed definition of “thermal energy storage property,” the final regs provide that such property does not include property that transforms other forms of energy into heat in the first instance. The final regulations also clarify the requirements for property that removes heat from, or adds heat to, a storage medium for subsequent use. Under a safe harbor, thermal energy storage property satisfies this requirement if it can store energy that is sufficient to provide heating or cooling of the interior of a residential or commercial building for at least one hour. The final regs also include additional storage methods and clarify rules for property that includes a heat pump system.

Biogas P property

The final regulations modify several elements of the rules governing biogas property. Gas upgrading equipment is included in cleaning and conditioning property. The final regs clarify that property that is an integral part of qualified biogas property includes but is not limited to a waste feedstock collection system, landfill gas collection system, and mixing and pumping equipment. While a qualified biogas property generally may not capture biogas for disposal via combustion, combustion in the form of flaring will not disqualify a biogas property if the primary purpose of the property is sale or productive use of biogas and any flaring complies with all relevant laws and regulations. The methane content requirement is measured at the point at which the biogas exits the qualified biogas property.

Unit of Energy P property

To clarify how the definition of a unit of energy property is applied to solar energy property, the final regs update an example illustrate that the unit of energy property is all the solar panels that are connected to a common inverter, which would be considered an integral part of the energy property, or connected to a common electrical load, if a common inverter does not exist. Accordingly, a large, ground-mounted solar energy property may comprise one or more units of energy property depending upon the number of inverters. For rooftop solar energy property, all components of property that are installed on a single rooftop are considered a single unit of energy property.

Energy Projects

The final regs modify the definition of an energy project to provide more flexibility. However, the IRS declined to adopt a simple facts-and-circumstances analysis so an energy project must still satisfy particular and specific factors.

T.D. 10015

The IRS has provided relief from the failure to furnish a payee statement penalty under Code Sec. 6722 to certain partnerships with unrealized receivables or inventory items described in Code Sec. 751(a) (Section 751 property) that fail to furnish, by the due date specified in Reg. §1.6050K-1(c)(1), Part IV of Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, to the transferor and transferee in a Section 751(a) exchange that occurred in calendar year 2024.

The IRS has provided relief from the failure to furnish a payee statement penalty under Code Sec. 6722 to certain partnerships with unrealized receivables or inventory items described in Code Sec. 751(a) (Section 751 property) that fail to furnish, by the due date specified in Reg. §1.6050K-1(c)(1), Part IV of Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, to the transferor and transferee in a Section 751(a) exchange that occurred in calendar year 2024.

Background

A partnership with Section 751 property must provide information to each transferor and transferee that are parties to a sale or exchange of an interest in the partnership in which any money or other property received by a transferor in exchange for all or part of the transferor’s interest in the partnership is attributable to Section 751 property. The partnership must file Form 8308 as an attachment to its Form 1065 for the partnership's tax year that includes the last day of the calendar year in which the Section 751(a) exchange took place. The partnership must also furnish a statement to the transferor and transferee by the later of January 31 of the year following the calendar year in which the Section 751(a) exchange occurred, or 30 days after the partnership has received notice of the exchange as specified under Code Sec. 6050K and Reg. §1.6050K-1. The partnership must use a copy of the completed Form 8308 as the required statement, or provide or a statement that includes the same information.

In 2020, Reg. §1.6050K-1(c)(2) was amended to require a partnership to furnish to a transferor partner the information necessary for the transferor to make the transferor partner’s required statement in Reg. §1.751-1(a)(3). Among other items, a transferor partner in a Section 751(a) exchange is required to submit with the partner’s income tax return a statement providing the amount of gain or loss attributable to Section 751 property. In October 2023, the IRS added new Part IV to Form 8308, which requires a partnership to report, among other items, the partnership’s and the transferor partner’s share of Section 751 gain and loss, collectibles gain under Code Sec. 1(h)(5), and unrecaptured Section 1250 gain under Code Sec. 1(h)(6).

In January 2024, the IRS provided relief due to concerns that many partnerships would not be able to furnish the information required in Part IV of the 2023 Form 8308 to transferors and transferees by the January 31, 2024 due date, because, in many cases, partnerships would not have all of the required information by that date (Notice 2024-19, I.R.B. 2024-5, 627).

The relief below has been provided due to similar concerns for furnishing information for Section 751(a) exchanges occurring in calendar year 2024.

Penalty Relief

For Section 751(a) exchanges during calendar year 2024, the IRS will not impose the failure to furnish a correct payee statement penalty on a partnership solely for failure to furnish Form 8308 with a completed Part IV by the due date specified in Reg. §1.6050K-1(c)(1), only if the partnership:

• timely and correctly furnishes to the transferor and transferee a copy of Parts I, II, and III of Form 8308, or a statement that includes the same information, by the later of January 31, 2025, or 30 days after the partnership is notified of the Section 751(a) exchange, and
• furnishes to the transferor and transferee a copy of the complete Form 8308, including Part IV, or a statement that includes the same information and any additional information required under Reg. §1.6050K-1(c), by the later of the due date of the partnership’s Form 1065 (including extensions), or 30 days after the partnership is notified of the Section 751(a) exchange.

This notice does not provide relief with respect to a transferor partner’s failure to furnish the notification to the partnership required by Reg. §1.6050K-1(d). This notice also does not provide relief with respect to filing Form 8308 as an attachment to a partnership’s Form 1065, and so does not provide relief from failure to file correct information return penalties under Code Sec. 6721.

Notice 2025-2

The American Institute of CPAs is encouraging business owners to continue to collect required beneficial ownership information as required by the Corporate Transparency Act even though the regulations have been halted for the moment.

The American Institute of CPAs is encouraging business owners to continue to collect required beneficial ownership information as required by the Corporate Transparency Act even though the regulations have been halted for the moment.

AICPA noted that the while there a preliminary injunction has been put in place nationwide by a U.S. district court, the Financial Crimes Enforcement Network has already filed its appeal and the rules could be still be reinstated.

"While we do not know how the Fifth Circuit court will respond, the AIPCA continues to advise members that, at a minimum, those assisting clients with BOI report filings continue to gather the required information from their clients and [be] prepared to file the BOI report if the inunction is lifted," AICPA Vice President of Tax Policy & Advocacy Melanie Lauridsen said in a statement.

She continued: "The AICPA realizes that there is a lot of confusion and anxiety that business owners have struggled with regarding BOI reporting requirements and we, together with our partners at the State CPA societies, have continued to advocate for a delay in the implementation of this requirement."

The United States District Court for the Eastern District of Texas granted on December 3, 2024, a motion for preliminary injunction requested in a lawsuit filed by Texas Top Cop Shop Inc., et al, against the federal government to halt the implementation of BOI regulations.

In his order granting the motion for preliminary injunction, United States District Judge Amos Mazzant wrote that its "most rudimentary level, the CTA regulates companies that are registered to do business under a State’s laws and requires those companies to report their ownership, including detailed, personal information about their owners, to the Federal Government on pain of severe penalties."

He noted that this request represents a "drastic" departure from history:

First, it represents a Federal attempt to monitor companies created under state law – a matter our federalist system has left almost exclusively to the several States; and

Second, the CTA ends a feature of corporate formations as designed by various States – anonymity.

"For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government," he continued. "As a result, the Plantiffs contend that the CTA violates the promises our Constitution makes to the People and the States. Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power."

By Gregory Twachtman, Washington News Editor

The IRS has launched a new enforcement campaign targeting taxpayers engaged in deferred legal fee arrangements and improper use of Form 8275, Disclosure Statement. The IRS addressed tax deferral schemes used by attorneys or law firms to delay recognizing contingency fees as taxable income.

The IRS has launched a new enforcement campaign targeting taxpayers engaged in deferred legal fee arrangements and improper use of Form 8275, Disclosure Statement. The IRS addressed tax deferral schemes used by attorneys or law firms to delay recognizing contingency fees as taxable income.

The IRS highlighted that plaintiff’s attorneys or law firms representing clients in lawsuits on a contingency fee basis may receive as much as 40 percent of the settlement amount that they then defer by entering an arrangement with a third party unrelated to the litigation, who then may distribute to the taxpayer in the future. Generally, this happens 20 years or more from the date of the settlement. Subsequently, the taxpayer fails to report the deferred contingency fees as income at the time the case is settled or when the funds are transferred to the third party. Instead, the taxpayer defers recognition of the income until the third party distributes the fees under the arrangement. The goal of this newly launched campaign is to ensure taxpayer compliance and consistent treatment of similarly situated taxpayers which requires the contingency fees be included in taxable income in the year the funds are transferred to the third party.

Additionally, the IRS stated that the Service's efforts continue to uncover unreported financial accounts and structures through data analytics and whistleblower tips. In fiscal year 2024, whistleblowers contributed to the collection of $475 million, with $123 million awarded to informants. The IRS has now recovered $4.7 billion from new initiatives underway. This includes more than $1.3 billion from high-income, high-wealth individuals who have not paid overdue tax debt or filed tax returns, $2.9 billion related to IRS Criminal Investigation work into tax and financial crimes, including drug trafficking, cybercrime and terrorist financing, and $475 million in proceeds from criminal and civil cases attributable to whistleblower information.

Proper Use of Form 8275

The IRS stressed upon the proper use of Form 8275 by taxpayers in order to avoid portions of the accuracy-related penalty due to disregard of rules, or penalty for substantial understatement of income tax for non-tax shelter items. Taxpayers should be aware that Form 8275 disclosures that lack a reasonable basis do not provide penalty protection. Taxpayers in this posture should consult a tax professional or advisor to determine how to come into compliance. In its review of Form 8275 filings, the IRS identified multiple filings that do not qualify as adequate disclosures that would justify avoidance of penalties. Finally, the IRS reminded taxpayers that Form 8275 is not intended as a free pass on penalties for positions that are false.

FS-2024-32

IR-2024-310

The IRS has informed taxpayers that the agency issues most refunds in less than 21 days for taxpayers who filed electronically and chose direct deposit. However, some refunds may take longer. The IRS listed several factors that can affect the timing of a refund after the agency receives a return.

The IRS has informed taxpayers that the agency issues most refunds in less than 21 days for taxpayers who filed electronically and chose direct deposit. However, some refunds may take longer. The IRS listed several factors that can affect the timing of a refund after the agency receives a return. A manual review may be necessary when a return has errors, is incomplete or is affected by identity theft or fraud. Other returns can also take longer to process, including when a return needs a correction to the Child Tax Credit amount or includes a Form 8379, Injured Spouse Allocation, which could take up to 14 weeks to process. The fastest way to get a tax refund is by filing electronically and choosing direct deposit. Taxpayers who don’t have a bank account can find out more on how to open an account at an FDIC-Insured bank or the National Credit Union Locator Tool.

Further, the IRS cautioned taxpayers not to rely on receiving a refund by a certain date, especially when making major purchases or paying bills. Taxpayers should also take into consideration the time it takes for a financial institution to post the refund to an account or to receive it by mail. Before filing, taxpayers should make IRS.gov their first stop to find online tools to help get the information they need to file. To check the status of a refund, taxpayers should use the Where’s My Refund? tool on IRS.gov. The IRS will contact taxpayers by mail when more information is needed to process a return. IRS representatives can only research the status of a refund if it has been: 21 days or more since it was filed electronically; six weeks or more since a return was mailed; or when the Where's My Refund? tool tells the taxpayer to contact the IRS.

Additionally, taxpayers whose tax returns from 2020 have not yet been processed should still file their 2021 tax returns by the April due date or request an extension to file. Those filing electronically in this group need their Adjusted Gross Income (AGI) from their most recent tax return. Those waiting on their 2020 tax return to be processed should enter zero dollars for last year's AGI on the 2021 tax return. When self-preparing a tax return and filing electronically, taxpayers must sign and validate the electronic tax return by entering their prior-year AGI or prior-year Self-Select PIN (SSP). Those who electronically filed last year may have created a five-digit SSP. Generally, tax software automatically enters the information for returning customers. Taxpayers who are using a software product for the first time may have to enter this information.

The IRS has reminded taxpayers that the fastest and easiest way to check on tax refunds is by using the "Where's My Refund?" tool (the tool) on IRS.gov or through the IRS2Go mobile app. The IRS encouraged individuals to file a return this year to get child-related tax credits that were expanded by the American Rescue Plan. These include the Child Tax Credit and the Child and Dependent Care Credit. The IRS reminded taxpayers that filing electronically and using direct deposit is the fastest way to file an accurate return and receive a tax refund.

The IRS has reminded taxpayers that the fastest and easiest way to check on tax refunds is by using the "Where's My Refund?" tool (the tool) on IRS.gov or through the IRS2Go mobile app. The IRS encouraged individuals to file a return this year to get child-related tax credits that were expanded by the American Rescue Plan. These include the Child Tax Credit and the Child and Dependent Care Credit. The IRS reminded taxpayers that filing electronically and using direct deposit is the fastest way to file an accurate return and receive a tax refund. Taxpayers can use the tool to check their refund status within 24 hours after an e-filed return is received or four weeks after the taxpayer mails a paper return. The tool’s tracker displays progress through three phases:

• Return Received
• Refund Approved
• Refund Sent

Most tax refunds are issued within 21 days. However, the IRS provided a list of reasons why some tax refunds may take longer. The IRS will contact taxpayers by mail if more information is needed to process a return. Further, the IRS informed taxpayers that the agency cannot issue Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) refunds before mid-February. This is due to the changes to the tax law made by the Protecting Americans from Tax Hikes Act. The tool and the IRS2Go app are updated for most early EITC or ACTC filers with an estimated deposit date by February 19, if they file their taxes early. If a filer claimed the EITC or the ACTC, they could expect to get their refund by March 1 if:

• They file their return online
• They choose direct deposit to get their refund
• No issues are found with their return

The IRS informed taxpayers that ordering a tax transcript will not help them get their refund faster or find out when they will get their refund. Further, the information available on the tool is the same information available to IRS telephone assistors. Taxpayers can find answers to questions, forms and instructions and other easy-to-use tools at IRS.gov.

The IRS released the optional standard mileage rates for 2022. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,

• medical, and

• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

The IRS released the optional standard mileage rates for 2022. Most taxpayers may use these rates to compute deductible costs of operating vehicles for:

• business,

• medical, and

• charitable purposes

Some members of the military may also use these rates to compute their moving expense deductions.

2022 Standard Mileage Rates

The standard mileage rates for 2022 are:

• 58.5 cents per mile for business uses;

• 18 cents per mile for medical uses; and

• 14 cents per mile for charitable uses.

Taxpayers may use these rates, instead of their actual expenses, to calculate their deductions for business, medical or charitable use of their own vehicles.

FAVR Allowance for 2022

For purposes of the fixed and variable rate (FAVR) allowance, the maximum standard automobile cost for vehicles places in service after 2021 is:

• $56,100 for passenger automobiles, and

• $56,100 for trucks and vans.

Employers can use a FAVR allowance to reimburse employees who use their own vehicles for the employer’s business.

2022 Mileage Rate for Moving Expenses

The standard mileage rate for the moving expense deduction is 18 cents per mile. To claim this deduction, the taxpayer must be:

• a member of the Armed Forces of the United States,

• on active military duty, and

• moving under a military order and incident to a permanent change of station

The Tax Cuts and Jobs Act of 2017 suspended the moving expense deduction for all other taxpayers until 2026.

Unreimbursed Employee Travel Expenses

For most taxpayers, the Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee travel expenses. However, certain taxpayers may still claim an above-the-line deduction for these expenses. These taxpayers include:

• members of a reserve component of the U.S. Armed Forces,

• state or local government officials paid on a fee basis, and

• performing artists with relatively low incomes.

Notice 2021-2, I.R.B. 2021-2, 478, is superseded.

The Internal Revenue Service is now allowing taxpayers who have had an offer in compromise accepted by the agency to keep their tax refunds instead of the previous policy of having those refunds applied to their outstanding tax debt.

An offer in compromise (OIC) happens when the IRS and the taxpayer settle past due taxes for an amount that is less than the full amount owed. This typically happens when the agency agrees with the taxpayer that the payment in full will create a financial burden.

"For taxpayers facing an economic hardship, the anticipation of a refund may be the safety pin holding together a family’s ability to meet basic living expenses, especially for taxpayers relying on the Earned Income Tax Credit or the Additional Child Tax Credit that Congress intended for subsistence of low-income taxpayers," National Taxpayer Advocate Erin Collins said in a recent blog post discussing the changes, which went into effect in November. She added that it will also help those who are struggling financially because of the COVID-19 pandemic.

The blog notes that the filing of an amended return could cause the refund to be applied to an existing debt rather than being sent to the taxpayer.

Additionally, the agency announced that certain taxpayers will be able to seek an offset bypass refund while OIC decisions are pending, although taxpayers need to be proactive in contacting the IRS if they want an offset bypass refund, as there is no formal form to request it.

The bipartisan infrastructure bill passed the House of Representatives in a late night vote on November 5 by a 228-206 vote with 13 Republicans crossing the aisle to get the bill across the finish line after 6 Democrats voted the bill down.

The bipartisan infrastructure bill passed the House of Representatives in a late night vote on November 5 by a 228-206 vote with 13 Republicans crossing the aisle to get the bill across the finish line after 6 Democrats voted the bill down. President Biden signed the infrastructure bill into law on November 15 after Congress came back from a week-long recess.

The $1.2 trillion Infrastructure Investment and Jobs Act ( P.L. No. 117-58), includes a few tax provisions mixed in with the spending on to repair and rebuild the nation’s bridges, climate issues and other items. It passed the Senate with a 69-30 vote in August.

Cryptocurrency Reporting And Other Tax Provisions
Among the tax provisions in the bill is an expansion of the reporting requirements available to cryptocurrency, which is one of the revenue generators to help offset the new spending in the bill. It is believed that a significant amount of cryptocurrency gains escape taxation due to underreporting.

The bill also includes a few other tax changes meant to spur private infrastructure investment, raise revenue, and expand the scope and applicability of disaster declarations, in addition to typical extension of highway funding provisions. These other changes include

• An extension of highway taxes to 2028 and highway trust fund expenditure authority to 2026;
• Inclusion of qualified broadband projects and carbon dioxide capture facilities among the other types of projects for which private activity bonds can be issued;
• A return of the exception for water and sewage disposal utilities from the rule requiring a corporation to recognize contributions in aid of construction (removed by the Tax Cuts and Jobs Act of 2017);
• A return of Superfund excise taxes on certain chemicals, last effective in the mid-1990s;
• Termination of the employee retention credit for employers closed due to COVID-19 after September 30, 2021; and
• Changes to the extension of tax deadlines due to declared disasters and service in a combat area, as well as expansion of extension authority to taxpayers impacted by wildfires.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS.

The 2022 cost-of-living adjustments (COLAs) that affect pension plan dollar limitations and other retirement-related provisions have been released by the IRS. In general, many of the pension plan limitations will change for 2022 because the increase in the cost-of-living index due to inflation met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.

The 2022 cost-of-living adjustments (COLAs) were released for:

• pension plan dollar limitations, and
• other retirement-related provisions.

Highlights of Changes for 2022
The contribution limit has increased from $19,500 to $20,500 for employees who take part in:

• 401(k),
• 403(b),
• most 457 plans, and
• the federal government’s Thrift Savings Plan.

The catch-up contribution limit for employees aged 50 and over in the plans above remains $6,500.

The annual limit on contributions to an IRA remains unchanged at $6,000. The $1,000 IRA catch-up contribution amount is not subject to inflation adjustments.

The income ranges increased for determining eligibility to make deductible contributions to:

• IRAs,
• Roth IRAs, and
• to claim the Saver's Credit.

Phase-Out Ranges
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction phases out if the taxpayer or their spouse takes part in a retirement plan at work. The phase out depends on the taxpayer's filing status and income.

• Single taxpayers covered by a workplace retirement plan, the phase-out range is $68,000 and $78,000, increased from between $66,000 and $76,000.
• Joint filers, when the spouse making the contribution takes part in a workplace retirement plan, the phase-out range is $109,000 and $129,000, increased from between $105,000 and $125,000.
• An IRA contributor, who is not covered by a workplace retirement plan but their spouse is, the phase out is between $204,000 and $214,000, increased from between $198,000 and $208,000.
• For a married individual filing a separate return who is covered by a workplace plan, the phase-out range remains $0 to $10,000.
• The phase-out ranges for Roth IRA contributions are:
• $129,000 to $144,000, for singles and heads of household,
• $204,000 to $214,000, for joint filers, and
• $0 to $10,000 for married separate filers.

Finally, the income limit for the Saver' Credit is:

• $68,000 for joint filers,
• $51,000 for heads of household, and
• $34,000 for singles and married filing separately.

The IRS has reminded taxpayers that the last quarter of 2021 is a good time to check withholding.

The IRS has reminded taxpayers that the last quarter of 2021 is a good time to check withholding. The IRS’s convenient Tax Withholding Estimator (https://www.irs.gov/individuals/tax-withholding-estimator), will help taxpayers determine if they have too much withheld and how to make an adjustment to put more cash into their own pocket now. About 70 percent of taxpayers over withhold their taxes every year, which typically results in a refund. Alternatively, it will help taxpayers see that they should withhold more or make an estimated tax payment to avoid a tax bill when they file their tax return next year.

The following things need to be considered when adjusting withholding for 2021:

• Coronavirus tax relief - Tax help for taxpayers, businesses, tax-exempt organizations, and others, including health plans, affected by coronavirus (COVID-19).
• Disasters such as wildfires and hurricanes – Special tax law provisions may help taxpayers and businesses recover financially from the impact of a disaster, especially when the federal government declares their location to be a major disaster area.
• Job loss – 4128, Tax Impact of Job Loss, explained how this unfortunate circumstance can create new tax issues.
• Workers moving into the gig economy due to the pandemic – The IRS advised people earning income in the gig economy to consider estimated tax payments to avoid a balance or penalties when they file.
• Life changes such as marriage or childbirth – Getting married or having a child are just a couple of life events that can affect your refund or how much you owe.

Taxes are generally paid throughout the year whether from salary withholding, quarterly estimated tax payments, or a combination of both. Taxpayers can pay online, by phone, or from the IRS2Go app. Finally, taxpayers can schedule payments for future dates, which can be useful during filing season, for payment plan payments or for estimated tax payments.

The IRS has issued guidance for employers claiming the employee retention credit under Code Sec. 3134, enacted by section 9651 of the American Rescue Plan Act of 2021 (ARP), P.L. 117-2, which provides a credit for wages paid after June 30, 2021, and before January 1, 2022. The guidance amplifies previous notices which addressed the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P.L. 116-136, as amended by sections 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, P.L. 116-260.

The IRS has issued guidance for employers claiming the employee retention credit under Code Sec. 3134, enacted by section 9651 of the American Rescue Plan Act of 2021 (ARP), P.L. 117-2, which provides a credit for wages paid after June 30, 2021, and before January 1, 2022. The guidance amplifies previous notices which addressed the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P.L. 116-136, as amended by sections 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, P.L. 116-260.

In general, eligible employers can claim a refundable employee retention credit against the employer share of Social Security tax equal to 70 percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021. Under Code Secs. 3134(a) and (b)(1)(A), these limits continue to apply in the third and fourth calendar quarters in 2021.

The guidance explains changes made to the employee retention credit for the third and fourth calendar quarters of 2021, including:

• making the credit available to eligible employers that pay qualified wages after June 30, 2021, and before January 1, 2022;
• expanding the definition of eligible employer to include "recovery startup businesses";
• modifying the definition of qualified wages for "severely financially distressed employers"; and
• providing that the credit does not apply to qualified wages taken into account as payroll costs in connection with a shuttered venue grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or a restaurant revitalization grant under section 5003 of the ARP.

The guidance also provides guidance on several miscellaneous issues with respect to the employee retention credit for both 2020 and 2021, including:

• the definition of full-time employee and whether that definition includes full-time equivalents;
• the treatment of tips as qualified wages and the interaction with the Code Sec. 45B credit;
• the timing of the qualified wages deduction disallowance and whether taxpayers that already filed an income tax return must amend that return after claiming the credit on an adjusted employment tax return; and
• whether wages paid to majority owners and their spouses may be treated as qualified wages.

Highlights of some of the items addressed in the guidance are summarized below.

Recovery Startup Businesses
A separate credit limit under Code Sec. 3134(b)(1)(B) applies to "recovery startup businesses." A "recovery startup business" is an employer (i) that began carrying on any trade or business after February 15, 2020; (ii) for which the average annual gross receipts of the employer for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined does not exceed $1,000,000; and (iii) that is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts. For an eligible employer that is a recovery startup business, the amount of the credit allowed under Code Sec. 3134(a) (after application of the limit under Code Sec. 3134(b)(1)(A)) for each of the third and fourth calendar quarters of 2021 cannot exceed $50,000.

The determination of when a recovery startup business "began carrying on a trade or business" is made in the same manner as for purposes of Code Sec. 162. It is appropriate for the term "qualified wages" to include wages paid by a recovery startup business. In the third and fourth calendar quarters of 2021, a recovery startup business that is a small eligible employer may treat all wages paid with respect to an employee during the quarter as qualified wages. Whether an employer is a recovery startup business is determined separately for each calendar quarter.

Qualified Wages
The rules in Notice 2021-20 for determining the average number of full-time employees continue to apply in the third and fourth calendar quarters of 2021. However, Code Sec. 3134(c)(3)(C) provides a different rule for qualified wages paid by "severely financially distressed employers." For the third and fourth calendar quarters of 2021, an eligible employer with gross receipts that are less than 10 percent of the gross receipts for the same calendar quarter in calendar year 2019 (or 2020, if the employer was not in existence in 2019) is a severely financially distressed employer.

Further, the rules for determining whether an employer is an eligible employer based on a decline in gross receipts also apply, in the third and fourth calendar quarters of 2021, for determining whether an eligible employer is a severely financially distressed employer based on the 10 percent threshold. For the third and fourth calendar quarters of 2021, a severely financially distressed employer that is a large eligible employer may treat all wages paid to its employees during the quarter in which the employer is considered severely financially distressed as qualified wages.

Claiming the Credit
Notice 2021-20 and Notice 2021-23 set forth the rules for claiming the employee retention credit in 2020 and the first and second calendar quarters in 2021, respectively. These rules, including the rules pertaining to claiming an advance and relevant limitations, continue to apply for the third and fourth quarters in 2021.

Reporting
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns (Form 941) for the applicable period. If a reduction in the employer's employment tax deposits is not sufficient to cover the credit, certain employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Effect on Other Documents
Notice 2021-20, I.R.B. 2021-11, 922 and Notice 2021-23, I.R.B. 2021-16, 1113, are amplified.

The IRS has announced the launch of two new online tools to help families verify, manage and monitor monthly payments of child tax credits under the American Rescue Plan Act (ARP) ( P.L. 117-2). These are in addition to the Non-filer Sign-up tool announced last week, which helps families register for child tax credits. The tools are both available through the Update Portal at https://www.irs.gov/credits-deductions/child-tax-credit-update-portal.

The IRS has announced the launch of two new online tools to help families verify, manage and monitor monthly payments of child tax credits under the American Rescue Plan Act (ARP) (P.L. 117-2). These are in addition to the Non-filer Sign-up tool announced last week, which helps families register for child tax credits. The tools are both available through the Update Portal at https://www.irs.gov/credits-deductions/child-tax-credit-update-portal.

The Treasury and IRS have urged taxpayers to use a special online tool to determine eligibility for the Child Tax Credit (CTC) and the special monthly advance payments beginning on July 15. The new CTC Eligibility Assistant is interactive and easy to use. It is particularly useful to those who do not normally file a federal tax return and have not yet filed either a 2019 or 2020 return.

"This new tool provides an important first step to help people understand if they qualify for the CTC, which is especially important for those who don’t normally file a tax return," said IRS Commissioner Chuck Rettig. "The eligibility assistant works in concert with other features on IRS.gov to help people receive this important credit. The IRS is working hard to deliver the expanded Child Tax Credit, and we will be rolling out additional help for taxpayers in the near future. Where possible, please help us help others by distributing CTC information in your communities," he added.

The CTC Eligibility Assistant does not request any personally-identifiable information for any family member. The tool can be found at https://www.irs.gov/credits-deductions/advance-child-tax-credit-eligibility-assistant.

In addition to verification of their eligibility, the Update Portal allows a taxpayer to unenroll from receiving monthly payments, in order to receive a lump sum. The tool can be found at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021. The unenroll feature is helpful to families that no longer qualify for the child tax credit or believe they will not qualify when they file their 2021 return. This could happen if:

• their income in 2021 is too high to qualify for the credit;
• someone else (an ex-spouse or another family member, for example) qualifies to claim their child or children as dependents in 2021; or
• their main home was outside of the United States for more than half of 2021.

Further, future versions and new features of the tool are planned for the summer and fall. These updates will allow taxpayers to view their payment history, adjust bank account information or mailing addresses. In general, these payments will go to families who:

• filed either a 2019 or 2020 federal income tax return;
• used the Non-Filers tool register for an Economic Impact Payment; or
• registered for the advance child tax credit using the new Non-filer Sign-up tool.

Next, eligible families will receive advance payments, either by direct deposit or check. Each payment will be up to $300 per month for each child under age six and up to $250 per month for each child ages six through 17. Filing soon will ensure that the IRS has taxpayers’ most current bank account information and key details about qualifying family members. This includes individuals who do not normally file tax returns, including families experiencing homelessness and individuals in undeserved groups.

The IRS also announced pertinent child tax credit changes. The ARP raised the maximum child tax credit to $3,600 for children under the age of six and to $3,000 per child for children ages six through 17. Finally, the IRS urged community groups, non-profits, associations, education organizations and taxpayers with connections to individuals with children to share this critical information about the child tax credit as well as other important benefits.

The IRS has issued guidance for employers claiming the employee retention credit under Act Sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), as modified by Act Secs. 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for the first and second calendar quarters in 2021. The guidance amplifies previous guidance which addressed amendments made by section 206 of the Relief Act for calendar quarters in 2020.

The IRS has issued guidance for employers claiming the employee retention credit under Act Sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), as modified by Act Secs. 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for the first and second calendar quarters in 2021. The guidance amplifies previous guidance which addressed amendments made by section 206 of the Relief Act for calendar quarters in 2020.

In general, eligible employers can claim a refundable employee retention credit against the employer share of Social Security tax equal to 70 percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021.

For calendar quarters beginning after 2020, an employer is generally eligible for the credit if it was carrying on a trade or business during the calendar quarter for which the credit is determined, and either (1) had operations that were fully or partially suspended during the calendar quarter due to governmental orders limiting commerce, travel, or group meetings due to COVID-19, or (2) experienced a decline in gross receipts for the calendar quarter when compared to the same quarter in 2019.

The guidance explains changes made to the employee retention credit for the first two calendar quarters of 2021, including:

• the increase in the maximum credit amount,
• the expansion of the types of employers that may be eligible to claim the credit,
• modifications to the gross receipts test,
• revisions to the definition of qualified wages, and
• new restrictions on the ability of eligible employers to request an advance payment of the credit.

The guidance does not address the employee retention credit provided by Code Sec. 3134, enacted by the American Rescue Plan Act of 2021 ( P.L. 117-2), for wages paid after June 30, 2021, and before January 1, 2022. The IRS will address Code Sec. 3134 in future guidance.

Highlights of some of the items addressed in the guidance are summarized below.

Eligible Employers
While the employee retention credit is not available to most governmental employers, it is available to tax-exempt organizations described in Code Sec. 501(c)(1), and to any governmental entity that is a college or university or whose principal purpose is providing medical or hospital care. For this purpose, a college or university means an educational organization as defined in Code Sec. 170(b)(1)(A)(ii) and Reg. §1.170A-9(c)(1). An entity that has the principal purpose or function of providing medical or hospital care means an entity that has the principal purpose or function of providing medical or hospital care within the meaning of Code Sec. 170(b)(1)(A)(iii) and Reg. §1.170A-9(d)(1).

Decline in Gross Receipts
One way an employer can be eligible for the credit is if it experienced a decline in gross receipts. Whether an employer is an eligible employer based on a decline in gross receipts is determined separately for each calendar quarter, and is based on an 80 percent threshold compared to the same calendar quarter in 2019.

If an employer did not exist as of the beginning of the first calendar quarter of 2019, the employer generally determines whether the decline in gross receipts test is met in the first calendar quarter of 2021 by comparing its gross receipts in that quarter of 2021 to its gross receipts in the first calendar quarter of 2020. If an employer did not exist as of the beginning of the second calendar quarter of 2019, the employer generally determines whether the test is met in the second calendar quarter of 2021 by comparing its gross receipts in that quarter of 2021 to its gross receipts in the second calendar quarter of 2020. An employer may also elect to use an alternative quarter to calculate gross receipts.

Eligible employers must maintain documentation to support the determination of the decline in gross receipts, including which calendar quarter an eligible employer elects to use in measuring the decline.

Qualified Wages
Whether wage payments by an eligible employer will be considered qualified wages depend, in part, on the average number of full-time employees an eligible employer employed during 2019. For the first and second calendar quarters of 2021, large eligible employers are those whose average number of full-time employees during 2019 was greater than 500. For these employers, qualified wages are wages paid to an employee for time that the employee is not working for the reasons the credit is allowed.

Small eligible employers are those whose average number of full-time employees during 2019 was 500 or less. For these employers, qualified wages are the wages paid an employee whether the employee is working or not working for the reasons the credit is allowed.

An employer may not claim a credit under Code Secs. 41, 45A, 45P, 45S, 51, or 1396 with qualified wages for which it claims the employee retention credit, but it may be able to take a credit under these provisions for wages for which it did not claim an employee retention credit if the particular credit’s requirements are met.

Claiming the Credit
Eligible employers may continue to access the employee retention credit for the first and second calendar quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits in anticipation of the credit. However, advance payment of the employee retention credit is available only to small eligible employers, who can may elect to receive an advance payment of not more than 70 percent of the average quarterly wages paid in calendar year 2019.

For this purpose, average quarterly wages generally means the average of wages or compensation determined without regard to the social security wage base, paid in each calendar quarter in 2019. The guidance provides details for calculating average quarterly wages. Small eligible employers that come into existence in 2021 are ineligible to receive advance payment.

Effect on Other Documents
Notice 2021-20, I.R.B. 2021-11, 922, is amplified.

The IRS is urging employers to take advantage of the newly-extended employee retention credit (ERC), which makes it easier for businesses that have chosen to keep their employees on the payroll despite challenges posed by COVID-19. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which was enacted December 27, 2020, made a number of changes to the ERC previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), including modifying and extending the ERC, for six months through June 30, 2021.

The IRS is urging employers to take advantage of the newly-extended employee retention credit (ERC), which makes it easier for businesses that have chosen to keep their employees on the payroll despite challenges posed by COVID-19. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of P.L. 116-260), which was enacted December 27, 2020, made a number of changes to the ERC previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136), including modifying and extending the ERC, for six months through June 30, 2021.

Eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70-percent of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.

Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:

• a full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19; or
• a decline in gross receipts in a calendar quarter in 2021 where the gross receipts for that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50-percent of those in the same 2019 calendar quarter).

In addition, effective January 1, 2021, the definition of "qualified wages" for the ERC has been changed:

• For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
• For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts, regardless of whether the employees are providing services.

The IRS points out that, retroactive to the enactment of the CARES Act on March 27, 2020, the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.

PPP Loan Forgiveness

In a recent posting on its webpage (see "Didn’t Get Requested PPP Loan Forgiveness? You Can Claim the Employee Retention Credit for 2020 on the 4th Quarter Form 941"), the IRS has clarified that, under section 206(c) of the 2020 Taxpayer Certainty Act, an employer that is eligible for the ERC can claim the credit even if the employer received a Small Business Interruption Loan under the PPP. Accordingly, eligible employers can claim ERS on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Note, however, that any wages that could count toward eligibility for ERC or PPP loan forgiveness can be applied to either program, but not to both programs.

If an employer received a PPP loan and included wages paid in the 2nd and/or 3rd quarter of 2020 as payroll costs in support of an application to obtain forgiveness of the loan (rather than claiming ERC for those wages), and the employer's request for forgiveness was denied, the employer an claim the ERC related to those qualified wages on its 4th quarter 2020 Form 941, Employer's Quarterly Federal Tax Return. An employer can could report on its 4th quarter Form 941 any ERC attributable to health expenses that are qualified wages that it did not include in its 2nd and/or 3rd quarter Form 941.

Employers that choose to use this limited 4th quarter procedure must:

• Add the ERC attributable to these 2nd and/or 3rd quarter qualified wages and health expenses on line 11c or line 13d (as relevant) of their original 4th quarter Form 941 (along with any other ERC for qualified wages paid in the 4th quarter).
• Include the amount of these qualified wages paid during the 2nd and/or 3rd quarter (excluding health plan expenses) on line 21 of its original 4th quarter Form 941 (along with any qualified wages paid in the 4th quarter).
• Enter the same amount on Worksheet 1, Step 3, line 3a (in the 941 Instructions).
• Include the amount of these health plan expenses from the 2nd and/or 3rd quarter on line 22 of the 4th quarter Form 941 (along with any health expenses for the 4th quarter).
• Enter the same amount on Worksheet 1, Step 3, line 3b.

The IRS recognized that it might be difficult to implement these special procedures so late in the timeframe to file 4th quarter returns. Therefore, employers can instead choose the regular process of filing an adjusted return or claim for refund for the appropriate quarter to which the additional ERC relates using Form 941-X.

More Information

For more information on the employee retention credit, the IRS urges taxpayers to visit its "COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs" webpage (at https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs).

To encourage businesses that have experienced an economic hardship due to COVID-19 to keep employees on their payroll, the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) has provided several new credits for employers, including a new employee retention credit. The IRS has issued a fact sheet summarizing a few key points about the new credit.

To encourage businesses that have experienced an economic hardship due to COVID-19 to keep employees on their payroll, the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) has provided several new credits for employers, including a new employee retention credit. The IRS has issued a fact sheet summarizing a few key points about the new credit.

Certain employers can claim the credit for wages paid after March 12, 2020, and before January 1, 2021. This includes tax-exempt organizations, employers with suspended operations due to a government order related to COVID-19, and those that have experienced a significant decline in gross receipts. The credit amount is 50 percent of up to $10,000 in qualified wages paid to an employee. This means that an employer’s maximum credit for qualified wages paid to any employee is $5,000.

Qualified wages include the cost of employer-provided health care, but not the amount of qualified sick leave wages or family leave wages for which the employer received tax credits under the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127). Qualified wages vary based on the average number of the employer’s full-time employees in 2019:

• If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not.
• If the employer had more than 100 employees on average in 2019, the credit is allowed only for wages paid to employees for time they did not work.

In each case, the wages that qualify are those paid for a calendar quarter in which the employer experiences an economic hardship.

To claim the credit, employers must report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return, beginning with the second quarter of 2020. If an employer does not have enough federal employment taxes to cover the amount of the credit (after they have deferred deposits of employer Social Security taxes), it may request an advance payment of the credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19, to the IRS.

The IRS has more information on the credit at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act and https://www.irs.gov/coronavirus-tax-relief-and-economic-impact-payments.

Lawmakers are continuing talks on a "phase four" economic relief package in response to the COVID-19 global pandemic. To that end, the House’s "CARES 2" package is currently in the works and could see a floor vote as early as this month.

Lawmakers are continuing talks on a "phase four" economic relief package in response to the COVID-19 global pandemic. To that end, the House’s "CARES 2" package is currently in the works and could see a floor vote as early as this month.

"CARES 2"
President Trump signed into law the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-127) on March 27. The CARES Act is known on Capitol Hill as the third phase of legislation aimed to address the national emergency. However, House Speaker Nancy Pelosi, D-Calif., has said that a House floor vote on a "CARES 2" package could happen later in April.

"The acceleration of the coronavirus crisis demands that we continue to legislate," Pelosi said in a "Dear Colleagues" letter sent out to members during the week of April 6. "We must double down on the down-payment we made in the CARES Act by passing a CARES 2 package, which will extend and expand this bipartisan legislation to meet the needs of the American people," she added. According to Pelosi, the CARES 2 package would (1) go further in assisting small businesses (including farmers), (2) extend and strengthen unemployment benefits, and (3) distribute additional direct payments.

"Our communities cannot afford to wait, and we must move quickly," Pelosi wrote. "It is my hope that we will craft this legislation and bring it to the Floor later this month."

Paycheck Protection Program
Meanwhile, the Trump administration is seeking an increase in funding for the CARES Act’s Paycheck Protection Program. Accordingly, several bipartisan lawmakers have called for congressional action to provide the necessary funding needed for small businesses. The administration is reportedly asking for an additional $250 billion for the largely overrun loan program.

"Through this tax break, workers can get back on payrolls and stay there. By working with their bank, small businesses can get eight weeks of cash-flow assistance through 100 percent federally guaranteed loans," House Ways and Means ranking member Kevin Brady, R-Tex., said on April 7. "If the business [including churches] uses the money to maintain payroll, the portion of the loans used for covered payroll costs, interest on mortgage obligations, rent, and utilities would be forgiven."

Likewise, Senate Majority Leader Mitch McConnell, R-Ky., called for swift action on the matter. "Congress needs to act with speed and total focus to provide more money for this uncontroversial bipartisan program," McConnell said on April 7. "I will work with [Treasury] Secretary Steven Mnuchin and [Senate Minority Leader Chuck] Schumer and hope to approve further funding for the Paycheck Protection Program by unanimous consent or voice vote during the next scheduled Senate session on Thursday."

The Treasury Department and IRS have provided a notice with additional relief for taxpayers, postponing until July 15, 2020, a variety of tax form filings and payment obligations that are due between April 1, 2020 and July 15, 2020. Associated interest, additions to tax, and penalties for late filing or late payment will be suspended until July 15, 2020. Additional time to perform certain time-sensitive actions during this period is also provided. The notice also postpones due dates with respect to certain government acts and postpones the application date to participate in the Annual Filing Season Program. This notice expands upon the relief provided in Notice 2020-18, I.R.B. 2020-15, 590, and Notice 2020-20, I.R.B. 2020-16, 660.

The Treasury Department and IRS have provided a notice with additional relief for taxpayers, postponing until July 15, 2020, a variety of tax form filings and payment obligations that are due between April 1, 2020 and July 15, 2020. Associated interest, additions to tax, and penalties for late filing or late payment will be suspended until July 15, 2020. Additional time to perform certain time-sensitive actions during this period is also provided. The notice also postpones due dates with respect to certain government acts and postpones the application date to participate in the Annual Filing Season Program. This notice expands upon the relief provided in Notice 2020-18, I.R.B. 2020-15, 590, and Notice 2020-20, I.R.B. 2020-16, 660.

NOTE: The relief is limited to the relief explicitly provided in Notice 2020-18, Notice 2020-20, and Notice 2020-23, and does not apply for any other type of federal tax, any other type of federal tax return, or any other time-sensitive act.

Relief Measures

• Taxpayers Affected by COVID-19 Emergency. Any person (as defined in Code Sec. 7701(a)(1)) with a federal tax payment obligation specified in the notice, or a federal tax return or other form filing obligation specified in the notice, which is due to be performed (originally or pursuant to a valid extension) on or after April 1, 2020, and before July 15, 2020, is affected by the COVID-19 emergency for purposes of the relief.
• Postponement of Due Dates. For an affected taxpayer, the due date for filing specified forms and making specified payments is automatically postponed to July 15, 2020. This relief is automatic: affected taxpayers do not have to call the IRS or file any extension forms, or send letters or other documents to receive this relief. However, affected taxpayers who need additional time to file may choose to file the appropriate extension form by July 15, 2020, to obtain an extension to file their return, but the extension date may not go beyond the original statutory or regulatory extension date.
• Specified Time-Sensitive Actions. Affected taxpayers also have until July 15, 2020, to perform all specified time-sensitive actions listed in either Reg. §301.7508A-1(c)(1)(iv) - (vi) or Rev. Proc. 2018-58, I.R.B. 2018-50, 990, that are due to be performed on or after April 1, 2020, and before July 15, 2020. This includes the time for filing all petitions with the Tax Court, or for review of a decision rendered by the Tax Court, filing a claim for credit or refund of any tax, and bringing suit upon a claim for credit or refund of any tax.
• Certain Government Acts. The notice also provides the IRS with additional time to perform the time-sensitive actions described in Reg. §301.7508A-1(c)(2). Due to the COVID-19 emergency, IRS employees, taxpayers, and other persons may be unable to access documents, systems, or other resources necessary to perform certain time-sensitive actions due to office closures or state and local government executive orders restricting activities.
• Annual Filing Season Program. Under Rev. Proc. 2014-42, I.R.B. 2014-29, 192, applications to participate in the Annual Filing Season Program for the 2020 calendar year must be received by April 15, 2020. The relief postpones the 2020 calendar year application deadline to July 15, 2020.

Specified Forms and Payments
The filing and payment obligations covered by the relief are the following:

• Individual income tax payments and return filings on Form 1040, Form 1040-SR, Form 1040-NR, Form 1040-NR-EZ, Form 1040-PR, and Form 1040-SS.
• Calendar year or fiscal year corporate income tax payments and return filings on Form 1120, Form 1120-C, Form 1120-F, Form 1120-FSC, Form 1120-H, Form 1120-L, Form 1120-ND, Form 1120-PC, Form 1120-POL, Form 1120-REIT, Form 1120-RIC, Form 1120-S, and Form 1120-SF.
• Calendar year or fiscal year partnership return filings on Form 1065 and Form 1066.
• Estate and trust income tax payments and return filings on Form 1041, Form 1041-N, and Form 1041-QFT.
• Estate and generation-skipping transfer tax payments and return filings on Form 706, Form 706-NA, Form 706-A, Form 706-QDT, Form 706-GS(T), Form 706-GS(D), Form 706-GS(D-1), and Form 8971.
• Gift and generation-skipping transfer tax payments and return filings on Form 709 that are due on the date an estate is required to file Form 706 or Form 706-NA.
• Estate tax payments of principal or interest due as a result of an election made under Code Secs. 6166, 6161, or 6163 and annual recertification requirements under Code Sec. 6166.
• Exempt organization business income tax and other payments and return filings on Form 990-T.
• Excise tax payments on investment income and return filings on Form 990-PF and return filings on Form 4720.
• Quarterly estimated income tax payments calculated on or submitted with Form 990-W, Form 1040-ES, Form 1040-ES (NR), Form 1040-ES (PR), Form 1041-ES, and Form 1120-W.
  Notice 2020-18, I.R.B. 2020-15, 590, and Notice 2020-20, I.R.B. 2020-16 are amplified. Rev. Proc. 2014-42, I.R.B. 2014-29, 192, is modified, applicable for calendar year 2020.

synopsisThe Treasury Department and the IRS have released the "Get My Payment" tool to assist Americans in receiving their “economic impact payments” issued under the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The free tool went live on April 15, and is located at https://www.irs.gov/coronavirus/get-my-payment.

The Treasury Department and the IRS have released the "Get My Payment" tool to assist Americans in receiving their “economic impact payments” issued under the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136). The free tool went live on April 15, and is located at https://www.irs.gov/coronavirus/get-my-payment.

Get My Payment
The "Get My Payment" tool generally allows consumers to check the status of their payments, and to enter their direct deposit information if the IRS does not already have it.

"Thanks to hard work and long hours by dedicated IRS employees, these payments are going out on schedule, as planned, without delay, to the nation," the IRS said in an April 15 statement emailed to Wolters Kluwer. "The IRS employees are delivering these payments in record time compared to previous stimulus efforts."

Treasury had earlier announced that millions of Americans were already starting to see their economic impact payments. "These payments are being automatically issued to eligible 2019 or 2018 federal tax return filers who received a refund using direct deposit," Treasury said in an April 13 press release.

Non-Filers Option
Americans who did not file a tax return in 2018 or 2019 can use the "Non-Filers: Enter Payment Info Here" option ( https://www.irs.gov/coronavirus/non-filers-enter-payment-info-here) to submit basic personal information to receive their payments.

For those who filed 2018 or 2019 tax returns with direct deposit information or receive Social Security, however, no additional action on their part is needed. These individuals are expected to automatically receive the payment in their bank accounts.

"We are pleased that more than 80 million Americans have already received their Economic Impact Payments by direct deposit in record time," Treasury Secretary Steven Mnuchin said in an April 15 press release. "The free ‘Get My Payment App’ will allow Americans who do not have their direct deposit information on file with the IRS to input it, track the status, and get their money fast."

Status Not Available
Many individuals began voicing complaints on April 15 that the Get My Payment tool was not functional. In response, the IRS on the same day stated: "The Get My Payment site is operating smoothly and effectively. As of mid-day today, more than 6.2 million taxpayers have successfully received their payment status and almost 1.1 million taxpayers have successfully provided banking information, ensuring a direct deposit will be quickly sent. IRS is actively monitoring site volume; if site volume gets too high, users are sent to an online ‘waiting room’ for a brief wait until space becomes available, much like private sector online sites. Media reports saying the tool ‘crashed’ are inaccurate."

The IRS also provided consumers with the following information regarding certain situations in which payment status is deemed unavailable. The IRS listed the following reasons why users may receive the "Status Not Available" notice while using the online tool:

• If you are not eligible for a payment (see IRS.gov on who is eligible and who is not eligible).
• If you are required to file a tax return and have not filed in tax year 2018 or 2019. If you recently filed your return or provided information through Non-Filers: Enter Your Payment Info on IRS.gov. Your payment status will be updated when processing is completed.
• If you are a SSA or RRB Form 1099 recipient, SSI or VA benefit recipient– the IRS is working with your agency to issue your payment; your information is not available in this app yet.

"You can check the app again to see whether there has been an update to your information," the IRS said. "The IRS reminds taxpayers that Get My Payment data is updated once per day, so there’s no need to check back more frequently."

The IRS has issued guidance providing administrative relief under the Coronavirus Aid, Relief and Economic Security (CARES) Act ( P.L. 116-136) for taxpayers with net operating losses (NOLs).

The IRS has issued guidance providing administrative relief under the Coronavirus Aid, Relief and Economic Security (CARES) Act ( P.L. 116-136) for taxpayers with net operating losses (NOLs).

The CARES Act provides a five-year carryback for NOLs arising in tax years beginning in 2018, 2019, and 2020. The Tax Cuts and Jobs Act ( P.L. 115-97) had eliminated carryback periods effective for tax years ending after 2017. Some taxpayers have filed 2018 and 2019 returns without using five-year carryback period.

The relief:

• provides procedures for waiving the carryback period in the case of an NOL arising in a tax year beginning after December 31, 2017, and before January 1, 2020; and
• describes how taxpayers with NOLs arising in tax years 2018, 2019, or 2020 can elect to either waive the carryback period for those losses entirely or to exclude from the carryback period for those losses any years in which the taxpayer has an inclusion in income as a result of the Code Sec. 965(a) transition tax.

Six Month Extension for Filing Refund Claims
Taxpayers are granted an extension of time to file refund applications on Form 1045 (individuals, estates, and trusts) or Form 1139 (corporations) with respect to the carryback of an NOL that arose in any tax year that began during calendar year 2018 and that ended on or before June 30, 2019.

2017/2018 Fiscal-Year Taxpayers
Relief is also provided for 2017/2018 fiscal year taxpayer who failed to claim an NOL carryback due to a drafting error in the Tax Cuts and Jobs Act that provided the termination of two-year NOL carryback period applied to NOLs arising in tax years ending after 2017. The CARES Act corrects the effective date error by providing that the termination applies to tax years beginning after 2017. This makes these taxpayers eligible to claim an NOL carryback. The CARES Act allows these taxpayer to file a late application for a tentative refund. An application for a tentative refund is considered timely if filed by July 25, 2020.

The guidance also explains how 2017/2018 fiscal year taxpayer may waive the carryback period, reduce the carryback period (if it is longer than the standard two-year carryback), or revoke an election to waive a carryback period for a tax year that began before January 1, 2018, and ended after December 31, 2017.

Partnerships with NOLs
See the story "BBA Partnerships Can Amend Returns for CARES Benefits" on Rev. Proc. 2020-23, below.

The Treasury Department and IRS have extended the due date for the payment of federal income taxes otherwise due on April 15, 2020, until July 15, 2020, as a result of the ongoing coronavirus (COVID-19) emergency. The extension is available to all taxpayers, and is automatic. Taxpayers do not need to file any additional forms or contact the IRS to qualify for the extension. The relief only applies to the payment of federal income taxes. Penalties and interest on any remaining unpaid balance will begin to accrue on July 16, 2020.

The Treasury Department and IRS have extended the due date for the payment of federal income taxes otherwise due on April 15, 2020, until July 15, 2020, as a result of the ongoing coronavirus (COVID-19) emergency. The extension is available to all taxpayers, and is automatic. Taxpayers do not need to file any additional forms or contact the IRS to qualify for the extension. The relief only applies to the payment of federal income taxes. Penalties and interest on any remaining unpaid balance will begin to accrue on July 16, 2020.

Dollar Limits
The due date for making federal income tax payments otherwise due on April 15, 2020, for any taxpayer is automatically extended until July 15, 2020. The extension is limited to a maximum amount:

• up to $1 million for individuals, regardless of filing status, and other unincorporated entities such as trust and estates; and
• up to $10 million for each C corporation that does not join in filing a consolidated return or for each consolidated group.

Federal Income Tax Payments Only
The relief is available for federal income tax payments, including payments of tax on self-employment income, otherwise due on April 15, 2020. Thus, it applies to the payment of federal income taxes for the 2019 tax year, as well estimated income tax payments for the 2020 tax year that are due on April 15, 2020. The extension is not available for the payment or deposit of any other type of federal tax.

Taxpayers are urged to check with their state tax agencies for details on any delays in filing and payment state taxes.

Penalties and Interest
Any interest, penalty, or addition to tax for failure to pay federal income taxes postponed will not begin to accrue until July 16, 2020. The period from April 15, 2020, to July 15, 2020, will be disregarded but only for interest, penalties, or additions to tax up to maximum dollar amounts ($1 million or $10 million as applicable).

Interest, penalties, and additions to tax will continue to accrue from April 15, 2020, on the amount of any federal income tax in excess of the maximum dollar amounts. Taxpayers subject to penalties or additions to tax that are not suspended may seek reasonable cause under Code Sec. 6651 for failure to pay tax.

Individuals and certain trusts and estates may also seek a waiver to a penalty under Code Sec. 6654 for failure to pay estimated income taxes. Similar relief is not available for estimated tax payments by corporations or tax-exempt organizations for the penalty under Code Sec. 6655.

The IRS has provided emergency relief for health savings accounts (HSAs) and COVID-19 health plans costs. Under this relief, health plans that otherwise qualify as high-deductible health plans (HDHPs) will not lose that status merely because they cover the cost of testing for or treatment of COVID-19 before plan deductibles have been met. In addition, any vaccination costs will count as preventive care and can be paid for by an HDHP.

The IRS has provided emergency relief for health savings accounts (HSAs) and COVID-19 health plans costs. Under this relief, health plans that otherwise qualify as high-deductible health plans (HDHPs) will not lose that status merely because they cover the cost of testing for or treatment of COVID-19 before plan deductibles have been met. In addition, any vaccination costs will count as preventive care and can be paid for by an HDHP.

HSAs and HDHPs
Eligible individuals can deduct contributions to HSAs. One requirement to qualify as an individual is to be covered under an HDHP and have no disqualifying health coverage. An HDHP is a health plan that satisfies certain requirements, including requirements with respect to minimum deductibles and maximum out-of-pocket expenses.

COVID-19 Relief
A health plan that otherwise satisfies the HDHP requirements will not fail to be an HDHP merely because it provides medical care services and items purchased related to testing for and treatment of COVID-19 prior to satisfaction of the applicable minimum deductible. As a result, the individuals covered by such a plan will not fail to be eligible individuals merely because of the provision of health benefits for testing and treatment of COVID-19.

This relief provides flexibility to HDHPs to provide health benefits for COVID-19 testing and treatment without application of a deductible or cost sharing. Individuals participating in HDHPs or any other type of health plan should consult their particular health plan regarding health benefits for COVID-19 testing and treatment provided by the plan, including the potential application of any deductible or cost sharing.

Caution. The IRS states that this relief applies only to HSA-eligible HDHPs. Employees and other taxpayers in any other type of health plan should contact their plan with specific questions about what their plan covers.

The IRS has released final regulations that present guidance on how certain organizations that provide employee benefits must calculate unrelated business taxable income (UBTI) under Code Sec. 512(a).

The IRS has released final regulations that present guidance on how certain organizations that provide employee benefits must calculate unrelated business taxable income (UBTI) under Code Sec. 512(a).

Background

Organizations that are otherwise exempt from tax under Code Sec. 501(a) are subject to tax on their unrelated business taxable income (UBTI) under Code Sec. 511(a). Code Sec. 512(a) defines UBTI of exempt organizations and provides special rules for calculating UBTI for organizations described in Code Sec. 501(c)(7) (social and recreational clubs), voluntary employees’ beneficiary associations (VEBAs) described in Code Sec. 501(c)(9) and supplemental unemployment benefit trusts (SUBs) described in Code Sec. 501(c)(17).

Covered Entity

"Covered entity" describes VEBAs and SUBs subject to the UBTI computation rules under Code Sec. 512(a)(3). A corporation is treated as having exempt function income for a taxable year only if it files a consolidated return with the organization described in Code Sec. 501(c)(7), (9), or (17). These final regulations add a clause to clarify that the term "covered entity" includes a corporation described in Code Sec. 501(c)(2) to the extent provided in Code Sec. 512(a)(3)(C).

Nonrecognition of Gain

If a property used directly in the performance of the exempt function of a covered entity is sold by that covered entity, and other property is subsequently purchased and used by the covered entity directly in the performance of its exempt function—at any point within a four-year period beginning one year before the date of the sale and ending three years after the date of sale—gain, if any, from the sale is recognized only to the extent that the sales price of the old property exceeds the covered entity’s cost of purchasing the other property.

Limitation on Amounts Set Aside for Exempt Purposes

The total amount of investment income earned during the year should be considered when calculating whether an excess exists at the end of the year. Any investment income a covered entity earns during the taxable year is subject to unrelated business income tax (UBIT) to the extent the covered entity’s year-end assets exceed the account limit.

Effective Date

The final regulations apply to tax years beginning on or after December 10, 2019.

The IRS has issued a revenue procedure with a safe harbor that allows certain interests in rental real estate to be treated as a trade or business for purposes of the Code Sec. 199A qualified business income (QBI) deduction. The safe harbor is intended to lessen taxpayer uncertainty on whether a rental real estate interest qualifies as a trade or business for the QBI deduction, including the application of the aggregation rules in Reg. §1.199A-4.

The IRS has issued a revenue procedure with a safe harbor that allows certain interests in rental real estate to be treated as a trade or business for purposes of the Code Sec. 199A qualified business income (QBI) deduction. The safe harbor is intended to lessen taxpayer uncertainty on whether a rental real estate interest qualifies as a trade or business for the QBI deduction, including the application of the aggregation rules in Reg. §1.199A-4.

QBI Deduction and Rental Real Estate
Under Code Sec. 199A, certain noncorporate taxpayers can deduct up to 20 percent of the taxpayer’s QBI from each of the taxpayer's qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship. Certain relevant passthrough entities (RPEs) (partnerships, S corporations, trust funds) calculate the deduction and pass it along to their owners or beneficiaries. A qualified trade or business is generally any trade or business under Code Sec. 162, but not a specified service trade or business (SSTB) or a trade or business of performing services as an employee.

Rental or licensing of tangible or intangible property (i.e., rental activity) that is not a Code Sec. 162 trade or business is still treated as a trade or business for the QBI deduction if the property is rented or licensed to a trade or business conducted by the individual or a RPE which is commonly controlled under Reg. §1.199A-4 ( Reg. §1.199A-1(b)(14)).

Earlier this year, the IRS released a proposed revenue procedure with a safe harbor for treating a rental real estate enterprise as a trade or business under Code Sec. 199A ( Notice 2019-7, I.R.B. 2019-9, 740). The IRS has issued the new revenue procedure after considering public comments on Notice 2019-7.

Rental Real Estate Enterprise
The new safe harbor applies to a "rental real estate enterprise." This is an interest in real property held for the production of rents, and may consist of an interest in a single property or interests in multiple properties. The taxpayer or RPE must hold each interest directly or through a disregarded entity, and may either:

• treat each interest in similar property held for the production of rents as a separate rental real estate enterprise; or
• treat interests in all similar properties held for the production of rents as a single rental real estate enterprise.

Properties are similar if they are part of the same rental real estate category: either residential or commercial. Commercial real estate held for the production of rents can only be part of the same enterprise with other commercial real estate. Residential properties can only be part of the same enterprise with other residential properties.

A taxpayer or RPE that treats interests in similar properties as a single rental real estate enterprise must continue to treat interests in all similar properties, including newly acquired properties, as a single rental real estate enterprise if it continues to rely on the safe harbor. However, a taxpayer or RPE that chooses to treat its interest in each residential or commercial property as a separate rental real estate enterprise can choose to treat its interests in all similar commercial or all similar residential properties as a single rental real estate enterprise in a future year.

An interest in mixed-use property—a single building that combines residential and commercial units—can be treated as a single rental real estate enterprise, or bifurcated into separate residential and commercial interests. A mixed-use property interest that is treated as a single rental real estate enterprise cannot be treated as part of the same enterprise as other residential, commercial, or mixed-use property.

Safe Harbor Requirements
The safe harbor determination must be made annually. For a rental real estate enterprise to qualify for the safe harbor, all of the following requirements must be met during the tax year:

• Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise. If an enterprise has more than one property, the requirement can be met if income and expense information statements for each property are maintained and then consolidated.
• For rental real estate enterprises in existence for less than four years, 250 or more hours of rental services are performed per year. For rental real estate enterprises in existence for at least four years, 250 or more hours of rental services are performed per year in any three of the five consecutive tax years that end with the tax year.
• The taxpayer maintains contemporaneous records (including time reports, logs, or similar documents) on the hours of all services performed, a description of all services performed, the dates when the services were performed, and who performed the services. For services performed by employees or independent contractors, the taxpayer may provide a description of the rental services, the amount of time generally spent performing the services, and the time, wage, or payment records for the employee or independent contractor. Records must be made available for inspection at the IRS's request. (The contemporaneous records requirement does not apply to tax years that begin before January 1, 2020.)
• For each tax year for which it relies on the safe harbor, the taxpayer or RPE must attach a statement to a timely filed original return (or an amended return for the 2018 tax year only) that includes: (i) a description (including the address and rental category) of all rental real estate properties in each rental real estate enterprise; (ii) a description (including the address and rental category) of rental real estate properties acquired and disposed of during the tax year; and (iii) a representation that the requirements of Rev. Proc. 2019-38 have been satisfied.

"Rental services" include, but are not limited to:

• advertising to rent or lease the real estate;
• negotiating and executing leases;
• verifying information contained in prospective tenant applications;
• collecting rent;
• daily operation, maintenance, and repair of the property, including purchasing materials and
• supplies;
• managing the real estate; and
• supervising employees and independent contractors.

Rental services does not include:

• financial or investment management activities, such as arranging financing;
• procuring property;
• studying and reviewing financial statements or reports on operations;
• improving property under Reg. §1.263(a)-3(d); or
• time spent traveling to and from the real estate.

If an enterprise fails to satisfy the safe harbor requirements, it can still be treated as a trade or business for the QBI deduction if it otherwise meets the trade or business definition in Reg. §1.199A-1(b)(14).

Property Excluded From Safe Harbor
The safe harbor does not apply to:

• real estate used by the taxpayer (including an owner or beneficiary of an RPE) as a residence under Code Sec. 280A(d);
• real estate rented or leased under a triple net lease, which includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to pay for maintenance activities for a property in addition to rent and utilities;
• real estate rented to a trade or business conducted by a taxpayer or an RPE that is commonly controlled under Reg. §1.199A-4(b)(1)(i); or
• the entire rental real estate interest, if any portion of it is treated as an SSTB under Reg. §1.199A-5(c)(2).

Effective Date
The safe harbor applies to tax years ending after December 31, 2017. However, taxpayers and RPEs can rely on the prior safe harbor in Notice 2019-7 for the 2018 tax year.

Final regulations dealing with the 100 percent bonus depreciation allowance for qualified property acquired and placed in service after September 27, 2017, allow property which is constructed under a pre-September 28, 2017 binding contract to qualify for the 100 percent rate. The final regulations adopt proposed regulations ( REG-104397-18) with certain modifications, including a revised constructed property rule. In addition, the IRS has issued a new set of proposed regulations dealing with issues it is not ready to finalize.

Final regulations dealing with the 100 percent bonus depreciation allowance for qualified property acquired and placed in service after September 27, 2017, allow property which is constructed under a pre-September 28, 2017 binding contract to qualify for the 100 percent rate. The final regulations adopt proposed regulations ( REG-104397-18) with certain modifications, including a revised constructed property rule. In addition, the IRS has issued a new set of proposed regulations dealing with issues it is not ready to finalize.

FINAL REGULATIONS: Written Binding Contract Rules
Constructed property. The proposed regulations provided that property manufactured, constructed, or produced for the taxpayer by another person under a written binding contract entered into prior to the manufacture, etc., of the property is acquired pursuant to a written binding contract. Thus, if the contract was entered into before September 28, 2017, the 100 bonus rate did not apply.

That rule was scrapped in response to negative feedback. Instead the final regulations provide that such property is treated as self-constructed property, and the contract is ignored for purposes of determining when the property is deemed acquired. The acquisition date is now the date that the taxpayer begins manufacturing, constructing, or producing the property as determined under rules similar to those that apply to 50 percent bonus property.

Acquisition date. The final regulations provide that the acquisition date of property acquired pursuant to a written binding contract is the later of:

• the date on which the contract is entered into;
• the date on which the contract is enforceable under state law;
• if the contract has one or more cancellation periods, the date on which all cancellation periods end; or
• if the contract has one or more contingency clauses, the date on which all conditions subject to such clauses are satisfied.

Liquidated damage clause. When a contract has multiple damage provisions, the final regulations clarify that only the provision with the highest damages is taken into account in determining whether the contract limits damages.

Qualified Improvement Property
The IRS once again declined to make qualified improvement property placed in service after 2017 eligible for bonus depreciation. A legislative change is required to give this property its intended 15-year recovery period. With a 15-year recovery period, qualified improvement property will qualify for bonus depreciation under the general rule that allows bonus depreciation on property with an MACRS recovery period of 20 years or less.

Used Property
Predecessor defined. Property previously used by the taxpayer or a predecessor of a taxpayer does not qualify for bonus depreciation if the taxpayer or predecessor had a depreciable interest in the property. The final regulations define "predecessor" as:

• a transferor of an asset to a transferee in a transaction to which Code Sec. 381(a) applies;
• a transferor of an asset to a transferee in a transaction in which the transferee’s basis in the asset is determined, in whole or in part, by reference to the basis of the asset in the transferor’s hands;
• a partnership that is considered as continuing under Code Sec. 708(b)(2);
• the decedent in the case of an asset acquired by an estate; or
• a transferor of an asset to a trust.

Depreciable interest look back rule. The final regulations do not define a "depreciable interest" because this is a facts and circumstances issue. However, a five-year look back period is provided for determining whether a taxpayer or predecessor held a depreciable interest in property.

Substantially renovated property. If a taxpayer places substantially renovated property in service and the taxpayer or a predecessor previously had a depreciable interest in the property before it was substantially renovated, the taxpayer’s or predecessor’s prior depreciable interest does not prevent the taxpayer from claiming bonus depreciation. Property is substantially renovated if the cost of the used parts is not more than 20 percent of the total cost of the substantially renovated property, whether acquired or self-constructed.

Syndication transactions. A lessor who reacquires property in a syndication transaction is not treated as having a prior depreciable interest in the property.

Partnerships
The final regulations permit a partnership to claim bonus depreciation on the portion of a Code Sec. 743(b) basis increase that is attributable to built-in gain under Code Sec. 704(c), even if the partnership is using the remedial allocation method. An exception is provided for publicly traded partnerships that need to maintain fungibility for publicly traded partnership units.

If a partnership interest is acquired and disposed of during the same tax year, the bonus deduction is not allowed for any Code Sec. 743(b) adjustment arising from the initial acquisition. However, if a partnership interest is purchased and disposed of in a "step-in-the shoes" Code Sec. 168(i)(7) transaction in the same tax year, bonus on the section 743(b) adjustment is allowed. The section 743(b) adjustment is apportioned between the purchaser/transferor and the transferee.

The final regulations also clarify the treatment of qualified property transferred in a Code Sec. 721(a) transaction to a partnership in the same tax year that the qualified property is acquired by the transferor if the partnership has another partner who previously had a depreciable interest in the qualified property. In this situation, the qualified property is deemed placed in service by the transferor during that tax year, and the bonus deduction is allocated entirely to the transferor and not to the partnership. Thus, the contributing partner has contributed property with a zero basis to the partnership, and the contributed property is Code Sec. 704(c) property in the hands of the partnership.

Film, Television, and Theatrical Productions
The final regulations clarify that a used qualified film, television, or live theatrical production does not qualify for bonus depreciation. Also, the basis of a qualified film, television, or live theatrical production is reduced by the deduction claimed under Code Sec. 181 before computing the bonus deduction.

Using ADS
Using the alternative depreciation system (ADS) to determine the adjusted basis of a taxpayer’s qualified business investment (under Code Sec. 250(b)(2)(B) or Code Sec. 951A(d)(3)) or the adjusted basis of a taxpayer’s tangible assets for allocating business interests expense between excepted and non-excepted trades or businesses (under Code Sec. 163(j)) does not cause a taxpayer’s tangible property to be ineligible for bonus depreciation.

Public Utility Property
An example is added to clarify that the 100 percent bonus rate does not apply to self-constructed property of a regulated public utility if construction begins after September 27, 2017, and the property is placed in service in a tax year beginning after 2017.

Effective Date
The final regulations apply to qualified property placed in service during or after the tax year that includes the date of publication in the Federal Register. However, a taxpayer may choose to apply the final regulations in their entirety to qualified property acquired and placed in service after September 27, 2017, provided the taxpayer consistently applies all rules in the final regulations. Additionally, a taxpayer may rely on the proposed regulations issued on August 8, 2018, to qualified property acquired and placed in service after September 27, 2017, in tax years ending before the date of publication of the final regulations.

PROPOSED REGULATIONS: Acquired and Self-Constructed Components
A taxpayer may elect to treat components of a larger self-constructed property that are acquired or self constructed after September 27, 2017, as eligible for the 100 percent bonus rate, even though manufacture, construction, or production of the larger self-constructed began before September 28, 2017. The larger property must be eligible for bonus depreciation at the 50 percent rate.

Businesses With Floor Plan Financing
Property used in a trade or business that has had floor plan financing indebtedness does not qualify for bonus depreciation if the floor plan financing interest related to the indebtedness is taken into account under Code Sec. 163(j)(1)(C) in determining the allowable business interest deduction.

The proposals provide rules for determining whether interest in floor plan financing indebtedness has been taken into account during a tax year. In general, floor plan interest is not considered taken into account for a tax year if the sum of interest business income for the tax year and 30 percent of the adjusted taxable income for the tax year equals or exceeds business interest as defined in Code Sec. 163(j)(5). The proposals clarify that the determination of whether a trade or business that has had floor plan financing indebtedness has taken floor plan financing interest into account is made annually.

Leased Property
The proposals clarify that taxpayers leasing property to a trade or business with floor plan financing indebtedness or a rate-regulated utility may claim bonus depreciation. The taxpayer, however, may not be a trade or business with floor plan financing indebtedness that prevents it from claiming bonus depreciation or a rate-regulated utility.

Used Property
Five-year lookback. A safe harbor provides that a taxpayer who disposes of property within 90 days after placing it in service did not hold a prior depreciable interest in the property. Consequently, the property is eligible for bonus depreciation if subsequently reacquired.

Partnerships. A taxpayer has a prior depreciable interest in a portion of property if the taxpayer was a partner in a partnership at any time the partnership owned the property. The amount of the prior depreciable interest is based on the partner’s total share of depreciation deductions with respect to the property.

Series of related transactions. Special rules in the original proposed regulations governing the treatment of a series of related transactions for purposes of the used property acquisition requirements are modified and expanded.

Consolidated groups. Significant clarifications to the rules governing the used property acquisition requirements for consolidated groups are also made.

Written Binding Contract Rules
Property not acquired pursuant to a contract. The acquisition date of property that is not acquired pursuant to a written binding contract is the date on which the taxpayer paid or incurred more than 10 percent of the total cost of the property. The cost of land and preliminary activities are excluded from cost for this purpose.

Purchase of entities. Binding contract rules that apply to the purchase of an entity are proposed. The current binding contract rules only deal with purchases of assets.

A contract to acquire all or substantially all of the assets of a trade or business, or to acquire an entity such as a corporation, a partnership, or a limited liability company, is binding if it is enforceable under state law against the parties to the contract. The presence of a condition outside the parties’ control (including, for example, regulatory agency approval) will not prevent the contract from being a binding contract. Further, the fact that insubstantial terms remain to be negotiated by the parties to the contract, or that customary conditions remain to be satisfied, does not prevent the contract from being a binding contract. This proposed rule also applies to a contract for the sale of the stock of a corporation that is treated as an asset sale as a result of a deemed asset acquisition election under Code Sec. 338.

Long Production Property
The proposals provide rules for determining qualifying basis attributable to the manufacture, construction, or production of long production property and certain aircraft eligible for an extended placed in service deadline.

Mid-Quarter Convention
The mid-quarter convention applies to property placed in service during the tax year if 40 percent or more of the basis of the property was placed in service in the last three months of the tax year. The proposals clarify that the basis of property is not reduced by the 100 percent bonus allowance. This rule has always applied to 50 percent bonus property.

Effective Date of Proposals
In general, the proposed regulations apply to qualified property placed in service during or after the tax year that includes the date the proposals are finalized. A taxpayer may rely on the proposals in their entirety to qualified property acquired and placed in service after September 27, 2017.