If you’re selling your principal residence, some or all of the profit may be tax free. It depends on your home sale profit and your income. Here are the basic rules.

Many homeowners across the country have seen their home values increase recently. According to the National Association of Realtors, the median price of homes sold in July of 2021 rose 17.8% over July of 2020. The median home price was $411,200 in the Northeast, $275,300 in the Midwest, $305,200 in the South and $508,300 in the West.

Be aware of the tax implications if you’re selling your home or you sold one in 2021. You may owe capital gains tax and net investment income tax (NIIT).

Gain exclusion

If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.

To qualify for the exclusion, you must meet these tests:

• You must have owned the property for at least two years during the five-year period ending on the sale date.
• You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

Gain above the exclusion amount 

What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss.

The NIIT

How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.

However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.

The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.

Two other tax considerations

1. Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use.
2. You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.

As you can see, depending on your home sale profit and your income, some or all of the gain may be tax free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales.

If you have a parent entering a nursing home, you may not be thinking about taxes. But there are a number of possible tax implications. Here are five.

1. Long-term medical care

The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income (AGI).

Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual that is provided under care administered by a licensed healthcare practitioner.

To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify an individual as unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity or severe cognitive impairment.

2. Long-term care insurance

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limitations explained below) to the extent they, along with other medical expenses, exceed the percentage-of-AGI threshold. A qualified long-term care insurance contract covers only qualified long-term care services, doesn’t pay costs covered by Medicare, is guaranteed renewable and doesn’t have a cash surrender value.

Qualified long-term care premiums are includible as medical expenses up to certain amounts. For individuals over 60 but not over 70 years old, the 2021 limit on deductible long-term care insurance premiums is $4,520, and for those over 70, the 2021 limit is $5,640.

3. Nursing home payments

Amounts paid to a nursing home are deductible as a medical expense if a person is staying at the facility principally for medical, rather than custodial care. If a person isn’t in the nursing home principally to receive medical care, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense. But if the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.

If your parent qualifies as your dependent, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction.

4. Head-of-household filing status 

If you aren’t married and you meet certain dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption doesn’t live with you.

5. The sale of your parent’s home. 

If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. In order to qualify for the $250,000 exclusion, the seller must generally have owned the home for at least two years out of the five years before the sale, and used the home as a principal residence for at least two years out of the five years before the sale. However, there’s an exception to the two-out-of-five-year use test if the seller becomes physically or mentally unable to care for him or herself during the five-year period.

These are only some of the tax issues you may deal with when your parent moves into a nursing home. Contact us if you need more information or assistance.

Business owners: Have you paused to consider how well your company initially responded to the COVID-19 pandemic? Update your disaster plan before the details fade.

It’s been a year like no other. The sudden impact of the COVID-19 pandemic in March forced every business owner — ready or not — to execute his or her disaster response plan.

So, how did yours do? Although it may still be a little early to do a complete assessment of what went right and wrong during the crisis, you can take a quick look back right now while the experience is still fresh in your mind.

Get specific

When devising a disaster response plan, brainstorm as many scenarios as possible that could affect your company. What weather-related, environmental and socio-political threats do you face? Obviously, you can now add “pandemic” to the list.

The operative word, however, is “your.” Every company faces distinctive threats related to its industry, size, location(s), and products or services. Identify these as specifically as possible, based on what you’ve learned.

There are some constants for nearly every plan. Seek out alternative suppliers who could fill in for your current ones if necessary. Fortify your IT assets and functionality with enhanced recovery and security capabilities.

Communicate optimally

Another critical factor during and after a crisis is communication, both internal and external. Review whether and how your business was able to communicate in the initial months of the pandemic.

You and most of your management team probably needed to concentrate on maintaining or restoring operations. Who communicated with employees and other stakeholders to keep them abreast of your response and recovery progress? Typically, these parties include:

• Staff members and their families,
• Customers,
• Suppliers,
• Banks and other financial stakeholders, and
• Local authorities, first responders and community leaders (as appropriate).

Look into the communication channels that were used — such as voicemail, text messaging, email, website postings and social media. Which were most and least effective? Would some type of new technology enable your business to communicate better?

Revisit and update

If the events of this past spring illustrate anything, it’s that companies can’t create a disaster response plan and toss it on a shelf. Revisit the plan at least annually, looking for adjustments and new risk factors.

You’ll also want to keep the plan clear in the minds of your employees. Be sure that everyone — including new hires — knows exactly what to do by spelling out the communication channels, contacts and procedures you’ll use in the event of a disaster. Everyone should sign a written confirmation that they’ve read the plan’s details, either when hired or when the plan is substantially updated.

In addition, go over disaster response measures during company meetings once or twice a year. You might even want to hold live drills to give staff members a chance to practice their roles and responsibilities.

Heed the lessons

For years, advisors urged business owners to prepare for disasters or else. This year we got the “or else.” Despite the hardships and continuing challenges, however, the lessons being learned are invaluable. Please contact us to discuss ways to manage costs and maintain profitability during these difficult times.

If you invest in mutual funds, be aware of some potential pitfalls involved in buying and selling shares.

Surprise sales 

You may already have made taxable “sales” of part of your mutual fund investment without knowing it.

One way this can happen is if your mutual fund allows you to write checks against your fund investment. Every time you write a check against your mutual fund account, you’ve made a partial sale of your interest in the fund. Thus, except for funds such as money market funds, for which share value remains constant, you may have taxable gain (or a deductible loss) when you write a check. And each such sale is a separate transaction that must be reported on your tax return.

Here’s another way you may unexpectedly make a taxable sale. If your mutual fund sponsor allows you to make changes in the way your money is invested — for instance, lets you switch from one fund to another fund — making that switch is treated as a taxable sale of your shares in the first fund.

Recordkeeping 

Carefully save all the statements that the fund sends you — not only official tax statements, such as Forms 1099-DIV, but the confirmations the fund sends you when you buy or sell shares or when dividends are reinvested in new shares. Unless you keep these records, it may be difficult to prove how much you paid for the shares, and thus, you won’t be able to establish the amount of gain that’s subject to tax (or the amount of loss you can deduct) when you sell.

You also need to keep these records to prove how long you’ve held your shares if you want to take advantage of favorable long-term capital gain tax rates. (If you get a year-end statement that lists all your transactions for the year, you can just keep that and discard quarterly or other interim statements. But save anything that specifically says it contains tax information.)

Recordkeeping is simplified by rules that require funds to report the customer’s basis in shares sold and whether any gain or loss is short-term or long-term. This is mandatory for mutual fund shares acquired after 2011, and some funds will provide this to shareholders for shares they acquired earlier, if the fund has the information.

Timing purchases and sales

If you’re planning to invest in a mutual fund, there are some important tax consequences to take into account in timing the investment. For instance, an investment shortly before payment of a dividend is something you should generally try to avoid. Your receipt of the dividend (even if reinvested in additional shares) will be treated as income and increase your tax liability. If you’re planning a sale of any of your mutual fund shares near year-end, you should weigh the tax and the non-tax consequences in the current year versus a sale in the next year.

Identify shares you sell 

If you sell fewer than all of the shares that you hold in the same mutual fund, there are complicated rules for identifying which shares you’ve sold. The proper application of these rules can reduce the amount of your taxable gain or qualify the gain for favorable long-term capital gain treatment.

Contact us if you’d like to find out more about tax planning for buying and selling mutual fund shares.

A new law signed by President Trump on March 27 provides a variety of tax and financial relief measures to help Americans during the coronavirus (COVID-19) pandemic. This article explains some of the tax relief for individuals in the Coronavirus Aid, Relief, and Economic Security (CARES) Act

Individual cash payments

Under the new law, an eligible individual will receive a cash payment equal to the sum of: $1,200 ($2,400 for eligible married couples filing jointly) plus $500 for each qualifying child. Eligibility is based on adjusted gross income (AGI).

Individuals who have no income, as well as those whose income comes entirely from Social Security benefits, are also eligible for the payment.

The AGI thresholds will be based on 2019 tax returns, or 2018 returns if you haven’t yet filed your 2019 returns. For those who don’t qualify on their most recently filed tax returns, there may be another option to receive some money. An individual who isn’t an eligible individual for 2019 may be eligible for 2020. The IRS won’t send cash payments to him or her. Instead, the individual will be able to claim the credit when filing a 2020 return.

The income thresholds

The amount of the payment is reduced by 5% of AGI in excess of:

• $150,000 for a joint return,
• $112,500 for a head of household, and
• $75,000 for all other taxpayers.

But there is a ceiling that leaves some taxpayers ineligible for a payment. Under the rules, the payment is completely phased-out for a single filer with AGI exceeding $99,000 and for joint filers with no children with AGI exceeding $198,000. For a head of household with one child, the payment is completely phased out when AGI exceeds $146,500.

Most eligible individuals won’t have to take any action to receive a cash payment from the IRS. The payment may be made into a bank account if a taxpayer filed electronically and provided bank account information. Otherwise, the IRS will mail the payment to the last known address.

Other tax provisions

There are several other tax-related provisions in the CARES Act. For example, a distribution from a qualified retirement plan won’t be subject to the 10% additional tax if you’re under age 59 ½ — as long as the distribution is related to COVID-19. And the new law allows charitable deductions, beginning in 2020, for up $300 even if a taxpayer doesn’t itemize deductions.

Stay tuned

These are only a few of the tax breaks in the CARES Act. We’ll cover additional topics in coming weeks. In the meantime, please contact us if you have any questions about your situation.

In the last issue of the Funeral Business Advisor, we talked about stuff. Specifically, we acknowledged that as the owner of a funeral home, you’re constantly buying stuff for various reasons and among your considerations in choosing what stuff to buy are the tax implications. Will buying this stuff lower my taxes? The answer was (surprise!) “It depends”. In our previous article, we dealt with the small stuff; i.e. inventory, supplies, furniture, equipment and vehicles. In this issue, we’re going to focus on the big stuff: real estate.

Buying real estate will be one of the largest investments you’ll make as a business owner. Even with bank financing, you’ll likely need to make a substantial down payment to acquire a desired property. You would think that, having drained your bank account to make that big investment, there has to be some large tax write-off that goes with it, right? “WRONG!” Despite the big investment required to buy real estate, the annual write-off you get from real estate under the tax code is small in comparison. It all has to do with depreciation. Let me explain.

Generally under the tax code, property that you use over a number of years is not expensed immediately when it is purchased. Rather, you deduct the property’s cost over its depreciable life. The property’s depreciable life is determined under the tax code, and the annual deduction is called depreciation expense. For example, if you purchase a hearse (which has a depreciable life of 5 years) for $60,000, the annual deductible depreciation expense is $12,000 ($60,000 ÷ 5 years). As explained in our previous article, there are provisions in the tax code that allow you to immediately expense personal property rather than having to depreciate it over several years, but those exceptions rarely apply to real estate. As you’ve probably guessed by now, your depreciation deduction depends heavily on the depreciable life of the asset and therein lies the problem. Under the tax code, the depreciable life of a funeral home building is 39 years! Furthermore, if you make substantial capital improvements to your property, those improvements also need to be depreciated over 39 years. Considering you probably have a 15 or 20 year mortgage, you can see that your building will be paid off long before you will have completely written it off for your taxes. So what can you do to accelerate the deductible cost of your property? Here are some options.

Consider a Cost Segregation Study
One of the key strategies in maximizing and accelerating the depreciation deduction for your property is in the allocation of its cost. The cost of a property must first be allocated between land and building. Allocation here is important because land cannot be depreciated, so you will receive no tax benefit from the land cost until later when the property is sold. So it’s important to be aggressively reasonable when allocating a portion of your purchase price to land.

Once you’ve carved out the cost of the land, what remains is the building which, as previously mentioned, must be depreciated over 39 years. However, the tax regulations allow you to break out your property into various components which can be depreciated over shorter lives, thereby increasing and accelerating your depreciation deduction. To do this, you need to have a cost segregation study (CSS) performed on your property. The CSS is performed by engineers who will examine your property and provide you with a report which breaks out the cost of your property into several “asset classes” of varying depreciable lives. The result is that rather than having to depreciate the cost of your entire building over 39 years, portions of it will be depreciated over 5, 7 or 15 years thereby increasing and accelerating your depreciation deductions in the earlier years of ownership. By way of example, a client of mine purchased a property for $2.5M. By having a CSS performed on the property, my client was able to claim additional depreciation expense of approximately $330,000 over the first five years the property was owned thereby significantly reducing his tax liability during that time.

Although performing a CSS on your property sounds like a great idea, there are a few considerations to keep in mind. First, a properly done CSS will set you back $5,000 to $7,000 depending on the property. As such, it doesn’t make economic sense to do a CSS if the cost allocated to your building is less than $800,000. Second, a CSS only allows you to depreciate portions of your building faster. Once your building has reached the end of its depreciable life, the total depreciation you will have taken on that property will be no different regardless of how it was written off. If you paid $750,000 for your building, that’s all you’ll get to depreciate. The CSS just allows you to write off that $750,000 at a faster rate, and because a deduction today is worth more than a deduction five years from now, the CSS could be worth doing. Third, work closely with your tax advisor to ensure the accelerated depreciation will provide you the intended tax benefits. There are various other provisions within our complicated tax code that can lessen the tax benefits coming out of a CSS, so best to know those before you spend the money on a CSS.

Repairs vs Capital Improvements
So you are now the proud owner of a beautiful funeral home. For obvious reasons, funeral home owners are well known for meticulously maintaining their stuff, especially their properties. But that gets expensive. Whether all those costs are tax deductible depends on what you’re doing to the property and as you would expect, the IRS doesn’t make that easy. There are hundreds of pages of regulations which deal with this (known as “the repair regs”), but we’ll stick to the basics.

First, a repair is deductible immediately while a capital improvement needs to be depreciated. That makes a repair more tax advantageous than a capital improvement. So what’s the difference between a repair and a capital improvement? It really depends on nature of the “improvement” and here’s how it works.

The tax regulations require you to look at your building as a structure with a collection of “systems.” Examples of these systems are HVAC, electrical, plumbing, elevator, etc. If you restore or improve a substantial portion of the building structure or any of these systems, that will be a capital improvement which will need to be depreciated. If it’s not a substantial improvement, then it’s a repair that can be expensed immediately. I know what you’re asking; what does “substantial” mean? The IRS provides no clear definition of what substantial means, but the rule of thumb appears to be 30% of the repaired property. For example, your funeral home has thirty windows. You replace four windows. Since four windows comprise less than 30% of all your windows, you would treat the window replacement as a repair. But suppose you replace 20 windows. You’ve now replaced 66% of your windows, so the replacement cost would be a capital improvement which would need to be depreciated over 39 years.

What do we learn from this? For one thing, proper planning and timing of your building repairs can significantly affect your ability to expense the repair, so plan ahead. Spread projects out over time so you fall below the 30% repair threshold. Secondly, talk to your tax advisor when contemplating large repair or improvement projects. They can work with you to maximize possible write-offs associated with such projects. Finally, ensure your contractor will provide you detailed billing statements for your repair project so as to maximize possible write-offs.

Partial Asset Dispositions
So you’ve concluded that your project is indeed a capital improvement and you are now stuck depreciating it over the next 39 years. However, all hope may not be lost. There is another opportunity to possibly get a substantial write-off associated with a large improvement project. However, it applies only to a refurbishment or improvement of a currently existing property; it does not apply to a building addition or expansion. In tax jargon it’s called a “partial asset disposition” and it’s a relatively new option under the tax code. Here’s how it works.

Suppose you decide to renovate the inside of your funeral home to expand viewing rooms, add bathrooms, etc. You are not expanding your facility, you are simply renovating the current structure. Obviously, such a large project is a capital improvement that must be depreciated. However, what about the structures and systems that you have removed from the building? When you purchased the building, you paid for all those former walls, flooring, electrical systems and other portions of the building. Granted you were depreciating them along with the rest of your building, but they no longer exist. Seems unfair that you would be forced to continue depreciating something that no longer exists, doesn’t it? Furthermore, you should be able to write off the remaining undepreciated portion of the building that has been replaced by the renovation. That’s exactly what you can do through a partial asset disposition (PAD).

A PAD allows you to write off the undepreciated portion of property that has been replaced through a renovation or refurbishment. The amount of the write off will depend on the age and cost of your property. It is unlikely that the write-off will equal the cost of the renovation, but it could be substantial nonetheless and is certainly worth investigating. Finally, demolition costs can be expensed immediately, so be sure your contractor bills you separately for demolition.

Section 179 Election
In our previous article on the tax treatment of stuff (see July/August edition of Funeral Business Advisor) we talked about the Section 179 election. This provision of the tax code allows you to immediately expense the entire cost of property that would otherwise need to be depreciated. It normally doesn’t apply to real estate. However, the recent tax law changes expanded Sec 179 to allow the immediate write-off of certain real estate improvements such as roofs, HVAC property, security systems, etc. It’s important to remember that Sec 179 cannot be used for rental activities. So if you own your building in a separate entity and rent it to your funeral home business, you may not be able to claim an immediate write-off using Sec 179. It’s worth discussing this with your tax advisor.

Of all the stuff you will ever buy, it’s likely that real estate will be your biggest investment. How profitable it may be depends on many factors including the tax benefits or ramifications of owning real estate. As with all investment decisions, knowledge is power so be smart and always speak with your tax advisor before you invest in real estate. FBA

This article is meant to provide general information and should not be construed as legal or tax advice or opinion and is not a substitute advice of counsel, CPAs or other professionals.

A company’s strategic plan can look good on paper but never really work out in real life. Here’s how to ensure your business accomplishes its goals.

In the broadest sense, strategic planning comprises two primary tasks: establishing goals and achieving them. Many business owners would probably say the first part, coming up with objectives, is relatively easy. It’s that second part — accomplishing those goals — that can really challenge a company. The key to turning your strategic objectives into a reality is a solid implementation plan.

Start with people

After clearly identifying short- and long-range goals under a viable strategic planning process, you need to establish a formal plan for carrying it out. The most important aspect of this plan is getting the right people involved.

First, appoint an implementation leader and give him or her the authority, responsibility and accountability to communicate and champion your stated objectives. (If yours is a smaller business, you could oversee implementation yourself.)

Next, establish teams of carefully selected employees with specific duties and timelines under which to complete goal-related projects. Choose employees with the experience, will and energy to implement the plan. These teams should deliver regular progress reports to you and the implementation leader.

Watch out for roadblocks

On the surface, these steps may seem logical and foolproof. But let’s delve into what could go wrong with such a clearly defined process.

One typical problem arises when an implementation team is composed of employees wholly or largely from one department. Often, they’ll (inadvertently or intentionally) execute an objective in such a way that mostly benefits their department but ultimately hinders the company from meeting the intended goal.

To avoid this, create teams with a diversity of employees from across various departments. For example, an objective related to expanding your company’s customer base will naturally need to include members of the sales and marketing departments. But also invite administrative, production and IT staff to ensure the team’s actions are operationally practical and sustainable.

Another common roadblock is running into money problems. Ensure your implementation plan is feasible based on your company’s budget, revenue projections, and local and national economic forecasts. Ask teams to include expense reports and financial projections in their regular reports. If you determine that you can’t (or shouldn’t) implement the plan as written, don’t hesitate to revise or eliminate some goals.

Succeed at the important part

Strategic planning may seem to be “all about the ideas,” but implementing the specific goals related to your strategic plan is really the most important part of the process. Of course, it’s also the most difficult and most affected by outside forces. We can help you assess the financial feasibility of your objectives and design an implementation plan with the highest odds of success.

Did you make large gifts to your heirs in 2018? If so, it’s important to determine whether you’re required to file a gift tax return by April 15 (Oct. 15 if you file for an extension). Generally, you’ll need to file one if you made 2018 gifts that exceeded the $15,000-per-recipient gift tax annual exclusion (unless to your U.S. citizen spouse) and in certain other situations. But sometimes it’s desirable to file a gift tax return even if you aren’t required to. If you’re not sure whether you must (or should) file a 2018 gift tax return, contact us.

Did you make large gifts to your children, grandchildren or other heirs last year? If so, it’s important to determine whether you’re required to file a 2018 gift tax return — or whether filing one would be beneficial even if it isn’t required.

Filing requirements

Generally, you must file a gift tax return for 2018 if, during the tax year, you made gifts:

• That exceeded the $15,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
• That you wish to split with your spouse to take advantage of your combined $30,000 annual exclusion,
• That exceeded the $152,000 annual exclusion for gifts to a noncitizen spouse,
• To a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($75,000) into 2018,
• Of future interests — such as remainder interests in a trust — regardless of the amount, or
• Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent an exclusion doesn’t apply and you’ve used up your lifetime gift and estate tax exemption ($11.18 million for 2018). As you can see, some transfers require a return even if you don’t owe tax.

No return required

No gift tax return is required if your gifts for the year consist solely of gifts that are tax-free because they qualify as:

• Annual exclusion gifts,
• Present interest gifts to a U.S. citizen spouse,
• Educational or medical expenses paid directly to a school or health care provider, or
• Political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Be ready for April 15

The gift tax return deadline is the same as the income tax filing deadline. For 2018 returns, it’s April 15, 2019 — or October 15, 2019, if you file for an extension. But keep in mind that, if you owe gift tax, the payment deadline is April 15, regardless of whether you file for an extension. If you’re not sure whether you must (or should) file a 2018 gift tax return, contact us.

As we approach the end of 2018, it’s a good idea to review the mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid surprise capital gains

Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, find out how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer beware

Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution. So you’ll owe taxes on the gain without actually making a profit.

Seller beware

If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2019 — unless you expect to be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods, thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think beyond just taxes

Investment decisions shouldn’t be driven by tax considerations alone. For example, you need to keep in mind your overall financial goals and your risk tolerance.

But taxes are still an important factor to consider. Contact us to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.

With the April 17 individual income tax filing deadline behind you (or with your 2017 tax return on the back burner if you filed for an extension), you may be hoping to not think about taxes for the next several months. But for maximum tax savings, now is the time to start tax planning for 2018. It’s especially critical to get an early start this year because the Tax Cuts and Jobs Act (TCJA) has substantially changed the tax environment.

With the April 17 individual income tax filing deadline behind you (or with your 2017 tax return on the back burner if you filed for an extension), you may be hoping to not think about taxes for the next several months. But for maximum tax savings, now is the time to start tax planning for 2018. It’s especially critical to get an early start this year because the Tax Cuts and Jobs Act (TCJA) has substantially changed the tax environment.

Many variables

A tremendous number of variables affect your overall tax liability for the year. Looking at these variables early in the year can give you more opportunities to reduce your 2018 tax bill.

For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.

In other words, tax planning shouldn’t be just a year-end activity.

Certainty vs. uncertainty

Last year, planning early was a challenge because it was uncertain whether tax reform legislation would be signed into law, when it would go into effect and what it would include. This year, the TCJA tax reform legislation is in place, with most of the provisions affecting individuals in effect for 2018–2025. And additional major tax law changes aren’t expected in 2018. So there’s no need to hold off on tax planning.

But while there’s more certainty about the tax law that will be in effect this year and next, there’s still much uncertainty on exactly what the impact of the TCJA changes will be on each taxpayer. The new law generally reduces individual tax rates, and it expands some tax breaks. However, it reduces or eliminates many other breaks.

The total impact of these changes is what will ultimately determine which tax strategies will make sense for you this year, such as the best way to time income and expenses. You may need to deviate from strategies that worked for you in previous years and implement some new strategies.

Getting started sooner will help ensure you don’t take actions that you think will save taxes but that actually will be costly under the new tax regime. It will also allow you to take full advantage of new tax-saving opportunities.

Now and throughout the year

To get started on your 2018 tax planning, contact us. We can help you determine how the TCJA affects you and what strategies you should implement now and throughout the year to minimize your tax liability.

While April 15 (April 17 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that you also need to be aware of. To help you make sure you don’t miss any important 2018 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

While April 15 (April 17 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that you also need to be aware of. To help you make sure you don’t miss any important 2018 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.

June 15

• File a 2017 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States.
• Pay the second installment of 2018 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

September 17

• Pay the third installment of 2018 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

October 1

• If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2017 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed.

October 15

• File a 2017 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
• Make contributions for 2017 to certain retirement plans or establish a SEP for 2017, if an automatic six-month extension was filed.
• File a 2017 gift tax return (Form 709) and pay any tax, interest and penalties due, if an automatic six-month extension was filed.

December 31

• Make 2018 contributions to certain employer-sponsored retirement plans.
• Make 2018 annual exclusion gifts (up to $15,000 per recipient).
• Incur various expenses that potentially can be claimed as itemized deductions on your 2018 tax return. Examples include charitable donations, medical expenses and property tax payments.

But remember that some types of expenses that were deductible on 2017 returns won’t be deductible on 2018 returns under the Tax Cuts and Jobs Act, such as unreimbursed work-related expenses, certain professional fees, and investment expenses. In addition, some deductions will be subject to new limits. Finally, with the nearly doubled standard deduction, you may no longer benefit from itemizing deductions.

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2021 and the lease inclusion amounts for business vehicles first leased in 2021.

The IRS has issued the luxury car depreciation limits for business vehicles placed in service in 2021 and the lease inclusion amounts for business vehicles first leased in 2021.

Luxury Passenger Car Depreciation Caps
The luxury car depreciation caps for a passenger car placed in service in 2021 limit annual depreciation deductions to:

• $10,200 for the first year without bonus depreciation
• $18,200 for the first year with bonus depreciation
• $16,400 for the second year
• $9,800 for the third year
• $5,860 for the fourth through sixth year

Depreciation Caps for SUVs, Trucks and Vans
The luxury car depreciation caps for a sport utility vehicle, truck, or van placed in service in 2021 are:

• $10,200 for the first year without bonus depreciation
• $18,200 for the first year with bonus depreciation
• $16,400 for the second year
• $9,800 for the third year
• $5,860 for the fourth through sixth year

Excess Depreciation on Luxury Vehicles
If depreciation exceeds the annual cap, the excess depreciation is deducted beginning in the year after the vehicle’s regular depreciation period ends.

The annual cap for this excess depreciation is:

• $5,860 for passenger cars and
• $5,860 for SUVS, trucks, and vans.

Lease Inclusion Amounts for Cars, SUVs, Trucks and Vans
If a vehicle is first leased in 2021, a taxpayer must add a lease inclusion amount to gross income in each year of the lease if its fair market value at the time of the lease is more than:

• $51,000 for a passenger car, or
• $51,000 for an SUV, truck or van.

The 2021 lease inclusion tables provide the lease inclusion amounts for each year of the lease.

The lease inclusion amount results in a permanent reduction in the taxpayer’s deduction for the lease payments.

Vehicles Exempt from Depreciation Caps and Lease Inclusion Amounts
The depreciation caps and lease inclusion amounts do not apply to:

• cars with an unloaded gross vehicle weight of more than 6,000 pounds; or
• SUVs, trucks and vans with a gross vehicle weight rating (GVWR) of more than 6,000 pounds.

So taxpayers who want to avoid these limits should "think big."

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 Treasury and IRS have provided an optional safe harbor allowing employers to exclude the following amounts from their gross receipts solely for determining eligibility for the employee retention credit.

The Treasury and IRS have provided an optional safe harbor allowing employers to exclude the following amounts from their gross receipts solely for determining eligibility for the employee retention credit:

• the amount of the forgiveness of a Paycheck Protection Program (PPP) Loan;
• the amount of any Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act; and
• the amount of any Restaurant Revitalization Grants under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2).

Certain employers may be eligible for an employee retention credit against applicable federal employment taxes if their gross receipts for a calendar quarter decline by a certain percentage as compared to a prior calendar quarter. For most employers, gross receipts are defined by Code Sec. 448(c). For tax-exempt employers, gross receipts are defined by Code Sec. 6033.

Applying Safe Harbor Consistently
Employers must apply the safe harbor consistently in order to exclude these amounts from gross receipts for determining employee retention credit eligibility. An employer consistently applies the safe harbor by:

• excluding these amounts from its gross receipts for each calendar quarter in which gross receipts are relevant to determining eligibility to claim the employee retention credit; and
• applying the safe harbor to all employers treated as a single employer under the aggregation rules.

An employer must also retain in its records substantiating support for the credit claimed, including the use of the safe harbor.

If an employer revokes its safe harbor election, it must adjust all employment tax returns affected by the revocation.

Claiming the Employee Retention Credit
Employers claim the employee retention credit on their employment tax return, generally Form 941, Employers Quarterly Federal Tax Return, or on an adjusted employment tax return, generally Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. An employer is not required to apply the safe harbor.

The safe harbor does not permit the exclusion of these amounts from gross receipts for any other federal tax purpose.

Effect on Other Documents
This guidance updates and amplifies Notice 2021-20, I.R.B. 2021-11, 922, Notice 2021-23, I.R.B. 2021-16, 1113, and Notice 2021-49, I.R.B. 2021-34.

The IRS issued transition relief for certain employers claiming the Work Opportunity Tax Credit (WOTC) under Code Sec. 51. This would apply for certain employees beginning work after December 31, 2020, in response to legislation permitting the designation of an Empowerment Zone under Code Sec. 1393(b) to be extended from December 31, 2020, through December 31, 2025. Specifically, section IV of this notice provides transition relief by extending the 28-day deadline for employers to request certification from a designated local agency that an individual who begins work on or after January 1, 2021, and before October 9, 2021, is a member of the Designated Community Resident targeted group or the Qualified Summer Youth Employee targeted group.

The IRS issued transition relief for certain employers claiming the Work Opportunity Tax Credit (WOTC) under Code Sec. 51. This would apply for certain employees beginning work after December 31, 2020, in response to legislation permitting the designation of an Empowerment Zone under Code Sec. 1393(b) to be extended from December 31, 2020, through December 31, 2025. Specifically, section IV of this notice provides transition relief by extending the 28-day deadline for employers to request certification from a designated local agency that an individual who begins work on or after January 1, 2021, and before October 9, 2021, is a member of the Designated Community Resident targeted group or the Qualified Summer Youth Employee targeted group.

Additional Time to Submit Form 8850
The IRS stated that employers may need additional time to comply with the certification requirements of Code Sec. 51(d)(13)(A)(ii). Because the termination dates designated in Empowerment Zone nominations are not automatically extended until after the deadline in Rev. Proc. 2021-18, I.R.B. 2021-15 for submitting a written declination has passed, employers that hired an individual who is a Designated Community Resident or a Qualified Summer Youth Employee and who began work for that employer on or after January 1, 2021, may not have submitted Form 8850 to the designated local agency within 28 days of the individual beginning work. To be eligible for the relief provided by this notice, an employer that did not submit Form 8850 to the DLA within 28 days of an individual beginning work must submit the completed Form 8850 to the DLA.

An employer that hires an individual who is a Designated Community Resident or a Qualified Summer Youth Employee and who begins work for the employer on or after October 9, 2021, is not eligible for the transition relief described in this notice with respect to that new employee.

Effective Date
The effective date of this notice is August 10, 2021

The U.S. Small Business Administration ( SBA) is launching a streamlined application portal to allow certain borrowers to apply for Paycheck Protection Program (PPP) Loan forgiveness directly through the SBA. The SBA also is explaining why it discontinued use of Loan Necessity Questionnaires for PPP borrowers.

The U.S. Small Business Administration ( SBA) is launching a streamlined application portal to allow certain borrowers to apply for Paycheck Protection Program (PPP) Loan forgiveness directly through the SBA. The SBA also is explaining why it discontinued use of Loan Necessity Questionnaires for PPP borrowers.

PPP Direct Forgiveness Portal
The SBA announced that it is launching a streamlined application portal to allow borrowers with PPP loans $150,000 or less through participating lenders to apply for forgiveness directly through the SBA. The new forgiveness platform will begin accepting applications from borrowers on August 4th, 2021.

In addition to the technology platform, the SBA is setting up a PPP customer service team to answer questions and directly assist borrowers with their forgiveness applications. Borrowers that need assistance or have questions should call (877) 552-2692, Monday to Friday, 8 a.m.-8 p.m. EST. More information on the PPP direct forgiveness portal is available at https://www.sba.gov/article/2021/jul/28/sba-announces-opening-paycheck-protection-program-direct-forgiveness-portal.

Loan Necessity Questionnaires
In updated FAQs, the SBA has explained why it discontinued use of the Loan Necessity Questionnaire. According to Treasury, based on the results of loan reviews that it has completed thus far, the SBA believes audit resources will be more efficiently deployed across all loans if the loan necessity questionnaire is discontinued. The loan necessity reviews, including the review of the borrower’s completed Loan Necessity Questionnaire, are lengthy and have caused delays beyond the 90-day statutory timeline for forgiveness, thus negatively impacting those borrowers that made their loan necessity certification in good faith. For these reasons, SBA is discontinuing any reliance on the Loan Necessity Questionnaires.

The Loan Necessity Questionnaires (SBA Forms 3509 and 3510) were used to facilitate the collection of supplemental information that would be used by SBA loan reviewers to evaluate the good faith certification made by PPP borrowers on their loan application that economic uncertainty made the loan request necessary to support ongoing operations. Each borrower, that together with its affiliates, received PPP loans with an original principal amount of $2 million or greater was required to complete the form. In July, the SBA said it would no longer request either version of the Loan Necessity Questionnaire. In addition, Loan Necessity Questionnaires previously requested by the SBA are no longer required to be submitted.

The IRS stated that families should use the Child Tax Credit (CTC) Update Portal to confirm their eligibility for the payments. If eligible, the tool also indicates whether taxpayers are enrolled to receive their payments by direct deposit. More information can be found at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.

The IRS stated that families should use the Child Tax Credit (CTC) Update Portal to confirm their eligibility for the payments. If eligible, the tool also indicates whether taxpayers are enrolled to receive their payments by direct deposit. More information can be found at https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021.

Direct Deposit
For taxpayers currently using direct deposit, the tool will list the full bank routing number and the last four digits of their account number. This account is where the IRS sent their payments so far and will continue to do so. If necessary, the account can now be changed starting with the September 15 payment.

Monthly Payments
Eligible families for monthly payments include those who (1) filed either a 2019 or 2020 federal income tax return; (2) used the Non-Filers tool on IRS.gov in 2020 to register for an Economic Impact Payment; and (3) registered for the advance CTC this year using the new Non-Filer Sign-Up Tool on IRS.gov. The new maximum credit is available to taxpayers with a modified adjusted gross income (AGI) of (1) $75,000 or less for singles; (2) $112,500 or less for heads of household; and (3) $150,000 or less for married couples filing a joint return and qualified widows and widowers.

The American Rescue Plan (ARP) ( P.L. 117-2) raised the maximum Child Tax Credit in 2021 to $3,600 for children under the age of 6 and to $3,000 per child for children ages 6 through 17. Before 2021, the credit was worth up to $2,000 per eligible child.

The IRS provided additional guidance on the application of the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2) relating to temporary premium assistance for Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage. This notice supplements Notice 2021-31, I.R.B. 2021-23, and addresses additional issues.

The IRS provided additional guidance on the application of the American Rescue Plan Act of 2021 (ARP) (P.L. 117-2) relating to temporary premium assistance for Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage. This notice supplements Notice 2021-31, I.R.B. 2021-23, and addresses additional issues.

Eligibility
The IRS noted that if the original qualifying event was a reduction in hours or an involuntary termination of employment, COBRA premium assistance is available to an individual entitled to elect COBRA continuation coverage for an extended period due to a disability determination, second qualifying event, or an extension under State mini-COBRA. This should fall under the extended period of coverage between April 1, 2021 and September 30, 2021, even if the taxpayer had not notified the plan or insurer of the intent to elect extended COBRA continuation coverage before the start of that period.

Next, the eligibility ends when the taxpayer becomes eligible for coverage under any other disqualifying group health plan or Medicare. This includes the other coverage not including all of the benefits provided by the previously elected COBRA continuation coverage.

Finally, if a plan (other than a multiemployer plan) subject to Federal COBRA covers employees of two or more members of a controlled group, each common law employer that is a member of the controlled group is the premium payee entitled to claim the COBRA premium assistance credit with respect to its employees or former employees.

The foreign tax credit did not apply against the net investment income tax (NIIT). The structure of the Internal Revenue Code made the credit inapplicable to the NIIT, and tax treaties did not override that fact.

The foreign tax credit did not apply against the net investment income tax (NIIT). The structure of the Internal Revenue Code made the credit inapplicable to the NIIT, and tax treaties did not override that fact.

Under Code, Foreign Tax Credit Did Not Apply to NIIT
The foreign tax credit is in chapter 1, subtitle A of the Code, and it expressly applies only against taxes imposed by chapter 1. However, the NIIT is in chapter 2A. Thus, the credit does not apply against the NIIT. Although Reg. §1.1411-1(a) provides that all Code provisions that apply to the determination of taxable income under chapter 1 also apply to the NIIT, tax credits are not taken into account in determining taxable income. In fact, Reg. §1.1411-1(e) explicitly provides that credits against the tax imposed by chapter 1, including the foreign tax credit, are not allowed against the NIIT unless specifically provided by the Code.

Tax Treaties Did Not Override Code
Provisions in the U.S.-France and U.S.-Italy tax treaties that provided a foreign tax credit against U.S. income tax also did not provide an independent foreign tax credit against the NIIT. Although the treaties were intended to limit double taxation, they were expressly subject to the provisions and limitations of the Code. Thus, any allowable foreign tax credit had to be determined in accordance with the Code, and was limited by the Code’s provision of a credit. Although the taxpayer claimed that the Code was silent as to whether there was a foreign tax credit against the NIIT, the placement of the NIIT in chapter 2A made the foreign tax credit inapplicable. The creation of a new chapter for the NIIT was not happenstance or a mere clerical choice; rather, it was a deliberate decision by Congress and part of the Code’s fundamental structure.

No Summary Judgment on Penalty
Finally, issues of material fact precluded summary judgement as to the taxpayer’s liability for the penalty for failing to pay tax shown due on a return. She reported zero tax due on her Form 1040, though she did show the correct amount of the NIIT on her attached Form 8060, Net Investment Income Tax. Even if her Form 8960 constituted a return, the taxpayer argued that she had reasonable cause for her failure to pay because when she filed her return, she included a disclosure that she was claiming the foreign tax credit against the NIIT.

A missing or unknown federal gift tax return could constitute reasonable cause for the late filing of an estate tax return.

A missing or unknown federal gift tax return could constitute reasonable cause for the late filing of an estate tax return.

To understand the appropriate steps to take after the decedent’s death, the executor was in contact with the decedent’s tax preparer, a family office service, and an attorney. Several months after the decedent’s death, the attorney advised that no estate tax return needed to be filed because the gross estate was below the basic exclusion amount for the year of death. Nearly two years after the decedent’s death, the decedent’s son, who had not been involved in the estate preparation and administration, indicated that various trusts might have been created. The attorney asked the tax preparer about the trusts and the tax preparer provided a gift tax return reporting gifts to the trusts. The amount of the gifts put the estate over the threshold amount for an estate tax return.

Complaint Established Reasonable Cause
Calling the government’s argument circular, the court concluded that it would not dismiss the complaint based on the position that the attorney’s advice on whether to file an estate tax return was objectively unreasonable. If the court sided with the government on this point, missing information could never constitute reasonable cause because the advice would never be based on all pertinent facts and circumstances. Relying on the complaint alone, the court could not decide whether the attorney’s investigation constituted reasonable due diligence.

The executor is ultimately responsible for providing all of the information available to prepare a tax return. In this case, the question of whether the executor acted reasonably was dependent on the availability of the missing gift tax return. Absent more information from the tax preparer about the gift tax return, the complaint could not be dismissed.

Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.

Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.

Health expenses

Health FSAs are designed to reimburse participants for certain health care expenditures, typically expenses that qualify for the medical and dental expense deduction. Medical supplies, such as eye glasses and bandages, are usually treated as qualified expenses. However, nonprescription medicines (other than insulin) are not considered qualified medical expenses.

Health FSAs are often funded through voluntary salary reduction agreements with the participant's employer under a cafeteria plan. In that case, they are very taxpayer-friendly because no federal employment or federal income taxes are deducted from the employee's contribution. The employer may also contribute to a health FSA. However, there are special rules which govern employer contributions.

Typically, participants designate at the beginning of the year the amount they want to contribute to their health FSA and these amounts are deducted from their pay. For 2014, an employee's salary reduction contributions cannot exceed $2,500. The $2,500 cap is very important because cafeteria plans that do not limit health FSA contributions to $2,500 are not treated as cafeteria plans, and all benefits offered under the plan are included in the participants' gross income.

Use-or-lose rule

As mentioned, the use-or-lose rule is a drawback to health FSAs. Unused amounts remaining in the health FSA at year-end are forfeited. Employers are not allowed to refund any unused funds in a health FSA. Critics of the use-or-lose rule argue that it has discouraged participation in health FSAs because many employees do not want to risk forfeiting unused funds. Often, participants have to scramble at year-end to use their health FSA dollars

Grace period option

A few years ago, the IRS modified the use-or-lose rule. The IRS allowed cafeteria plans to adopt a grace period. Participants can use amounts remaining in a health FSA at year-end for up to an additional two months and 15 days. This grace period is optional. Employers are not required to offer the grace period, although many do.

Carryover option

At its option, an employer may now amend its cafeteria plan to provide for the carryover to the immediately following year of up to $500 of any amount remaining unused as of the end of the year in a health FSA. The carryover of up to $500 may be used to pay or reimburse qualified expenses under the health FSA incurred during the entire plan year to which it is carried over. Additionally, the carryover does not count against or otherwise affect the salary reduction limit ($2,500 for 2014) for health FSAs. However, the new rules do not allow participants to cash out unused health FSA amounts or convert them to other types of benefits.

The maximum carryover amount is $500. An employer can choose to offer a $0 carryover, a $500 carryover or any amount in between. As we discussed, the carryover is optional. Employers can choose not to offer any carryover.

Employers cannot offer both the grace period and the carryover. It is a choice of either the grace period or the carryover....or neither. The employer and not the participant decides. In regulations, the IRS described how employers can amend their cafeteria plans to provide for the carryover and how they can, if they choose, replace the grace period with the carryover.

Let's take a look at an example: Jacob participates in a health FSA under his employer's cafeteria plan. At year-end, Jacob has $255 remaining in his health FSA. Jacob's employer never offered a grace period but opted to allow participants to carry over up to $300 of unused health FSA dollars. Jacob can carry over all of his $255 in unused health FSA dollars.

If you have any questions about the new carryover option or health FSAs, please contact our office.

Notice 2013-71

The IRS has made several changes to its examination (aka, "audit") functions that are designed to expedite the process and relieve some burden on business taxpayers. These include the expansion of the Fast Track Settlement (FTS) program for small business, self-employed (SB/SE) taxpayers and a new process for issuing information document requests (IDRs) in large case audits.

The IRS has made several changes to its examination (aka, "audit") functions that are designed to expedite the process and relieve some burden on business taxpayers. These include the expansion of the Fast Track Settlement (FTS) program for small business, self-employed (SB/SE) taxpayers and a new process for issuing information document requests (IDRs) in large case audits.

Fast Track Settlement

The IRS launched the FTS program in 2005 to help small business taxpayers expedite case resolution. Small business FTS is modeled on a similar program for taxpayers in the IRS Large Business and International (LB&I) Division.

The goal of small business FTS is to complete cases within 60 days of their acceptance into the program. Under FTS, taxpayers under examination with issues in dispute work directly with IRS representatives from SB/SE's Examination Division and Appeals to resolve those issues. An Appeals Officer, trained in mediation, serves as a neutral party and employs dispute resolution techniques to facilitate settlement between the parties.

Application. To request to participate in small business FTS, the taxpayer and the SB/SE Group Manager submit Form 14017, Application for Fast Track Settlement. The taxpayer or the IRS examination representative may initiate Fast Track for eligible cases, usually before a 30-day letter is issued.

If the case is accepted and an agreement is reached, the IRS will use established issue or case closing procedures and applicable agreement forms, including preparation of a Form 906 specific matters closing agreement, if appropriate. If the case is not accepted the IRS explained that SB/SE or Appeals will inform the taxpayer of the basis for this decision and discuss other dispute resolution opportunities.

Qualifying issues. Small business FTS is generally available if:

• Issues are fully developed;
• The taxpayer has stated a position in writing or filed a small case request for cases in which the total amount for any tax period is less than $25,000; and
• There are a limited number of unagreed issues.

Small business FTS is unavailable for Collection Appeals Program, Collection Due Process, Offer-In-Compromise and Trust Fund Recovery cases, except as provided in any guidance issued by the IRS; correspondence examination cases worked solely in a Campus/Service Center site; and cases in which the taxpayer has failed to respond to IRS communications.

Information Document Requests

The IRS Large Business & International (LB&I) Division has issued a new directive (LB&I-04-1113-009) that expands on an earlier directive from in June (LB&I-04-0613-004) by itemizing the requirements for IRS agents preparing information document requests (IDRs). The new directive also outlines the mandatory three-part enforcement process for taxpayers that do not timely respond to an IDR. While IDRs are common for large business taxpayers, the IRS also uses them in auditing certain small business issues.

June directive. The original June 2013 directive set forth general principles and several mandatory actions that examiners must take while issuing IDRs. These principles are reiterated in the November directive.

The June directive also provided that IDRs issued after June 30, 2013 must comply with these principles. In particular, the IRS reported that the mandatory training emphasized that employees must focus their IDRs on specific issues relevant to the exam. IRS employees are required to discuss the IDRs and issues with the taxpayer, as well as what would be an appropriate deadline for the response to the request. The deadline must fall within a "reasonable timeframe" and be "mutually agreed upon." If the examiner does not receive a response by this date, and the IDR otherwise met the requirements listed under the directive, the case will proceed into the enforcement process outlined in the new directive from November 2013.

November directive. If a taxpayer does not respond to the IRS by the date indicated in the IDR, the case must proceed to the graduated, three-step enforcement process outlined in Attachment 2 of the November directive. This process, assuming the taxpayer could not respond to the IDRs by the dates specified at each step, would involve first a delinquency notice, then a pre-summons letter, and finally a summons.

The IRS has recently promoted the revised IDR enforcement process as a "win-win" for both the IRS and taxpayers. However, some practitioners have expressed concerns that the rigid deadlines in the new enforcement process will have the opposite effect and result in more summonses being issued. Practitioners recommend that taxpayers proactively involve themselves in the initial IDR process to ensure that the IDR, once issued, provides them with enough time to supply the requested information.

If you have questions relating to the IRS's new FTS or IDR programs, please contact our offices.