2020 Year-End Tax Planning

Dear Tax Constituent:

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Year-end planning for 2020 takes place against the backdrop of the continued release of guidance on the landmark Tax Cuts and Jobs Act (TCJA) as well as the Families First Coronavirus Response Act and the Coronavirus Aide, Relief and Economic Security (CARES) Act, enacted in response to the COVID-19 pandemic, which changed some of the TCJA provisions for 2020.

For individuals, the TCJA changes include lower income tax rates, a boosted standard deduction, severely limited itemized deductions, no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT).

For businesses, the corporate tax rate has been reduced to 21%, there is no corporate AMT, there are limits on business interest deductions, and there are very generous expensing and depreciation rules. And non-corporate taxpayers with qualified business income from pass-through entities may be entitled to a special 20% deduction.

The CARES Act made changes for both individual and business taxpayers, including:

• Creating a $300 partial above-the-line charitable contribution for individuals taking the standard deduction and expands the limit on charitable contributions for itemizers.

• Waiving the 10% early-withdrawal penalty on retirement account distributions for individuals facing virus-related challenges.

• Excluding from an employee's taxable income certain employer payments of student loans on behalf of employees.

• Allowing businesses a five-year carryback of net operating losses (NOLs) earned in 2018, 2019, or 2020 . The NOL limit of 80% percent of taxable income is also suspended, so businesses may use NOLs they have to fully offset their taxable income in carryover years.

• Increasing the net interest deduction limitation, which limited businesses ability to deduct interest paid on their tax returns to 30% of earnings before interest, tax, depreciation and amortization (EBITDA), to 50% of EBITDA for 2020.

The best year-end tax planning strategy for many taxpayers may still be to follow the time-honored approach of deferring income and accelerating deductions to minimize 2020 taxes. Deferring income also may help you minimize or avoid adjusted gross income (AGI)-based phaseouts of various tax breaks that apply for 2020. As always, however, year-end tax planning doesn't occur in a vacuum. It must take account of each taxpayer's specific situation and planning goals, with the aim of minimizing taxes to the greatest extent possible.

While most taxpayers will come out ahead by following the traditional approach, others with special circumstances may do better by accelerating income and deferring deductions. In some situations, total combined taxes for 2020 and 2021 will be reduced if income is accelerated from 2021 into 2020 and certain expenses are deferred to 2021 where they may give a greater tax benefit in that year.

Businesses should keep in mind that even if COVID-19 has negatively impacted your income for 2020, if you received a Paycheck Protection Program (PPP) loan and were granted forgiveness, the related expenses you used PPP funds for will be treated as non-deductible under current guidance. This could make your 2020 taxable income higher than expected.

In addition to shifting income and expenses, there are several other actions taxpayers can take before the end of the year to reduce their 2020 tax bills:

• Maximizing the 20% deduction for qualified business income when constrained by limits related to W-2 wages paid by the business or basis in business assets;

• Utilizing expanded Code Sec. 179 expensing and 100% first-year bonus depreciation;

• Year-end moves to reduce or eliminate the 3.8% surtax on net investment income;

• Making the best tax use of capital gains and losses;

• Converting traditional IRAs to Roth IRAs;

• Planning moves for beneficiaries of IRAs and qualified retirement plans;

• Year-end strategies for qualified charitable distributions;

• Increasing withholding on salaries and wages to avoid the estimated tax underpayment penalty;

• Making year-end gifts of appreciated property to shift taxable gain to lower-bracket family members while taking advantage of the annual gift tax exclusion; and

• Disposing of passive activities to free up suspended passive losses.

These are just some of the year-end steps that can be taken to save taxes.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

CARES Act of 2020

Dear Tax Constituent:

The latest round of Congressional action to combat the outbreak of novel Coronavirus (COVID-19) and the economic fallout from our collective response to it comes in the form of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by the President on March 27, 2020. This $2.2 trillion dollar aid package is summarized below.

Recovery rebates for individuals. To help individuals stay afloat during this time of economic uncertainty, the government will send up to $1,200 payments to eligible taxpayers and $2,400 for married couples filing joints returns. An additional $500 additional payment will be sent to taxpayers for each qualifying child dependent under age 17 (using the qualification rules under the Child Tax Credit).

Rebates are gradually phased out, at a rate of 5% of the individual’s adjusted gross income over $75,000 (singles or marrieds filing separately), $122,500 (head of household), and $150,000 (joint). There is no income floor or ‘‘phase-in’’—all recipients who are under the phaseout threshold will receive the same amounts. Tax filers must have provided, on the relevant tax returns or other documents (see below), Social Security Numbers (SSNs) for each family member for whom a rebate is claimed. Adoption taxpayer identification numbers will be accepted for adopted children. SSNs are not required for spouses of active military members. The rebates are not available to nonresident aliens, to estates and trusts, or to individuals who themselves could be claimed as dependents.

The rebates will be paid out in the form of checks or direct deposits. Most individuals won’t have to take any action to receive a rebate. IRS will compute the rebate based on a taxpayer’s tax year 2019 return (or tax year 2018, if no 2019 return has yet been filed). If no 2018 return has been filed, IRS will use information for 2019 provided in Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Social Security Equivalent Benefit Statement.

Rebates are payable whether or not tax is owed. Thus, individuals who had little or no income, such as those who filed returns simply to claim the refundable earned income credit or child tax credit, qualify for a rebate.

Waiver of 10% early distribution penalty. The additional 10% tax on early distributions from IRAs and defined contribution plans (such as 401(k) plans) is waived for distributions made between January 1 and December 31, 2020 by a person who (or whose family) is infected with the Coronavirus or who is economically harmed by the Coronavirus (a qualified individual). Penalty-free distributions are limited to $100,000, and may, subject to guidelines, be re-contributed to the plan or IRA. Income arising from the distributions is spread out over three years unless the employee elects to turn down the spread out. Employers may amend defined contribution plans to provide for these distributions. Additionally, defined contribution plans are permitted additional flexibility in the amount and repayment terms of loans to employees who are qualified individuals.

Waiver of required distribution rules. Required minimum distributions that otherwise would have to be made in 2020 from defined contribution plans (such as 401(k) plans) and IRAs are waived. This includes distributions that would have been required by April 1, 2020, due to the account owner’s having turned age 70 1/2 in 2019.

Charitable deduction liberalizations. The CARES Act makes four significant liberalizations to the rules governing charitable deductions:

1. Individuals will be able to claim a $300 above-the-line deduction for cash contributions made, generally, to public charities in 2020. This rule effectively allows a limited charitable deduction to taxpayers claiming the standard deduction.

2. The limitation on charitable deductions for individuals that is generally 60% of modified adjusted gross income (the contribution base) doesn’t apply to cash contributions made, generally, to public charities in 2020 (qualifying contributions). Instead, an individual’s qualifying contributions, reduced by other contributions, can be as much as 100% of the contribution base. No connection between the contributions and COVID-19 activities is required.

3. Similarly, the limitation on charitable deductions for corporations that is generally 10% of (modified) taxable income doesn’t apply to qualifying contributions made in 2020. Instead, a corporation’s qualifying contributions, reduced by other contributions, can be as much as 25% of (modified) taxable income. No connection between the contributions and COVID-19 activities is required.

4. For contributions of food inventory made in 2020, the deduction limitation increases from 15% to 25% of taxable income for C corporations and, for other taxpayers, from 15% to 25% of the net aggregate income from all businesses from which the contributions were made.

Exclusion for employer payments of student loans. An employee currently may exclude $5,250 from income for benefits from an employer-sponsored educational assistance program. The CARES Act expands the definition of expenses qualifying for the exclusion to include employer payments of student loan debt made before January 1, 2021.

Break for remote care services provided by high deductible health plans. For plan years beginning before 2021, the CARES Act allows high deductible health plans to pay for expenses for tele-health and other remote services without regard to the deductible amount for the plan.

Break for nonprescription medical products. For amounts paid after December 31, 2019, the CARES Act allows amounts paid from Health Savings Accounts and Archer Medical Savings Accounts to be treated as paid for medical care even if they aren’t paid under a prescription. And, amounts paid for menstrual care products are treated as amounts paid for medical care. For reimbursements after December 31, 2019, the same rules apply to Flexible Spending Arrangements and Health Reimbursement Arrangements.

Business only provisions

Employee retention credit for employers. Eligible employers can qualify for a refundable credit against, generally, the employer’s 6.2% portion of the Social Security (OASDI) payroll tax (or against the Railroad Retirement tax) for 50% of certain wages (below) paid to employees during the COVID-19 crisis.

The credit is available to employers carrying on business during 2020, including non-profits (but not government entities), whose operations for a calendar quarter have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also available to employers who have experienced a more than 50% reduction in quarterly receipts, measured on a year-over-year basis relative to the corresponding 2019 quarter, with the eligible quarters continuing until the quarter after there is a quarter in which receipts are greater than 80% of the receipts for the corresponding 2019 quarter.

For employers with more than 100 employees in 2019, the eligible wages are wages of employees who aren’t providing services because of the business suspension or reduction in gross receipts described above.

For employers with 100 or fewer full-time employees in 2019, all employee wages are eligible, even if employees haven’t been prevented from providing services. The credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in eligible wages and compensation paid by the employer to an employee. Thus, the credit is a maximum $5,000 per employee.

Wages don’t include:

1. Wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave,

2. Wages taken into account for the employer income tax credit for paid family and medical leave (under Code Sec. 45S) or

3. Wages in a period in which an employer is allowed for an employee a work opportunity credit (under Code Sec. 51).

An employer can elect to not have the credit apply on a quarter-by-quarter basis.

The IRS has authority to advance payments to eligible employers and to waive penalties for employers who do not deposit applicable payroll taxes in reasonable anticipation of receiving the credit. The credit is not available to employers receiving Small Business Interruption Loans. The credit is provided for wages paid after March 12, 2020 through December 31, 2020.

Delayed payment of employer payroll taxes. Taxpayers (including self-employeds) will be able to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Taxes that can be deferred include the 6.2% employer portion of the Social Security (OASDI) payroll tax and the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer 6.2% Social Security (OASDI) rate). The relief isn’t available if the taxpayer has had debt forgiveness under the CARES Act for certain loans under the Small Business Act as modified by the CARES Act (see below). For self-employeds, the deferral applies to 50% of the Self-Employment Contributions Act tax liability (including any related estimated tax liability).

Net operating loss liberalizations. The 2017 Tax Cuts and Jobs Act (the 2017 Tax Law) limited NOLs arising after 2017 to 80% of taxable income and eliminated the ability to carry NOLs back to prior tax years. For NOLs arising in tax years beginning before 2021, the CARES Act allows taxpayers to carryback 100% of NOLs to the prior five tax years, effectively delaying for carrybacks the 80% taxable income limitation and carryback prohibition until 2021.

The Act also temporarily liberalizes the treatment of NOL carryforwards. For tax years beginning before 2021, taxpayers can take an NOL deduction equal to 100% of taxable income (rather than the present 80% limit). For tax years beginning after 2021, taxpayers will be eligible for:

1. A 100% deduction of NOLs arising in tax years before 2018, and

2. A deduction limited to 80% of taxable income for NOLs arising in tax years after 2017.

The provision also includes special rules for REITS, life insurance companies, and the Code Sec. 965 transition tax. There are also technical corrections to the 2017 Tax Law effective dates for NOL changes.

Deferral of noncorporate taxpayer loss limits. The CARES Act retroactively turns off the excess active business loss limitation rule of the TCJA in Code Sec. 461(l) by deferring its effective date to tax years beginning after December 31, 2020 (rather than December 31, 2017). (Under the rule, active net business losses in excess of $250,000 ($500,000 for joint filers) are disallowed by the 2017 Tax Law and were treated as NOL carryforwards in the following tax year.)

The CARES Act clarifies, in a technical amendment that is retroactive, that an excess loss is treated as part of any net operating loss for the year, but isn’t automatically carried forward to the next year. Another technical amendment clarifies that excess business losses do not include any deduction under Code Sec. 172 (NOL deduction) or Code Sec. 199A (qualified business income deduction).

Still another technical amendment clarifies that business deductions and income don’t include any deductions, gross income or gain attributable to performing services as an employee. And because capital losses of non-corporations cannot offset ordinary income under the NOL rules, capital loss deductions are not taken into account in computing the Code Sec. 461(l) loss and the amount of capital gain taken into account cannot exceed the lesser of capital gain net income from a trade or business or capital gain net income.

Acceleration of corporate AMT liability credit. The 2017 Tax Law repealed the corporate alternative minimum tax (AMT) and allowed corporations to claim outstanding AMT credits subject to certain limits for tax years before 2021, at which time any remaining AMT credit could be claimed as fully-refundable. The CARES Act allows corporations to claim 100% of AMT credits in 2019 as fully-refundable and further provides an election to accelerate the refund to 2018.

Relaxation of business interest deduction limit. The 2017 Tax Law generally limited the amount of business interest allowed as a deduction to 30% of adjusted taxable income (ATI). The CARES Act generally allows businesses, unless they elect otherwise, to increase the interest limitation to 50% of ATI for 2019 and 2020, and to elect to use 2019 ATI in calculating their 2020 limitation. For partnerships, the 30% of ATI limit remains in place for 2019 but is 50% for 2020. However, unless a partner elects otherwise, 50% of any business interest allocated to a partner in 2019 is deductible in 2020 and not subject to the 50% (formerly 30%) ATI limitation. The remaining 50% of excess business interest from 2019 allocated to the partner is subject to the ATI limitations. Partnerships, like other businesses, may elect to use 2019 partnership ATI in calculating their 2020 limitation.

Technical correction to restore faster write-offs for interior building improvements. The CARES Act makes a technical correction to the 2017 Tax Law that retroactively treats

1. A wide variety of interior, non-load-bearing building improvements (qualified improvement property (QIP)) as eligible for bonus deprecation (and hence a 100% write-off) or for treatment as 15-year MACRS property or

2. If required to be treated as alternative depreciation system property, as eligible for a write-off over 20 years.

The correction of the error in the 2017 Tax Law restores the eligibility of QIP for bonus depreciation, and in giving QIP 15-year MACRS status, restores 15-year MACRS write-offs for many leasehold, restaurant and retail improvements.

Accelerated payment of credits for required paid sick leave and family leave. The CARES Act authorizes IRS broadly to allow employers an accelerated benefit of the paid sick leave and paid family leave credits allowed by the Families First Coronavirus Response Act by, for example, not requiring deposits of payroll taxes in the amount of credits earned.

Pension funding delay. The CARES Act gives single employer pension plan companies more time to meet their funding obligations by delaying the due date for any contribution otherwise due during 2020 until January 1, 2021. At that time, contributions due earlier will be due with interest. Also, a plan can treat its status for benefit restrictions as of December 31, 2019 as applying throughout 2020.

Certain SBA loan debt forgiveness isn’t taxable. Amounts of Small Business Administration Section 7(a)(36) guaranteed loans that are forgiven under the CARES Act aren’t taxable as discharge of indebtedness income if the forgiven amounts are used for one of several permitted purposes. The loans have to be made during the period beginning on February 15, 2020 and ending on June 30, 2020. Follow the link for additional guidance on loan provisions of the CARES Act.

Suspension of certain alcohol excise taxes. The CARES Act suspends alcohol taxes on spirits withdrawn during 2020 from a bonded premises for use in or contained in hand sanitizer produced and distributed in a manner consistent with FDA guidance related to the outbreak of virus SARSCoV- 2 or COVID-19.

Suspension of certain aviation taxes. The CARES Act suspends excise taxes on air transportation of persons and of property and on the excise tax imposed on kerosene used in commercial aviation. The suspension runs from March 28, 2020 to December 31, 2020.

IRS information site. Ongoing information on the IRS and tax legislation response to COVID- 19 can be found at www.irs.gov/coronavirus.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

Federal Actions to Combat COVID-19

Dear Tax Constituent:

Many people and businesses have been adversely affected by the outbreak of the novel Coronavirus (COVID-19). The following is a summary of IRS action taken and federal tax legislation enacted through March 24, 2020, to ease tax compliance burdens and economic pain caused by COVID-19.

Treasury has deferred filing and payment deadlines.

After briefly offering more limited relief, the IRS almost immediately pivoted to a policy that provides the following to all taxpayers—meaning all individuals, trusts, estates, partnerships, associations, companies or corporations regardless of whether or how much they are affected by COVID-19:

1. For a taxpayer with a Federal income tax return or a Federal income tax payment due on April 15, 2020, the due date for filing and paying is automatically postponed to July 15, 2020, regardless of the size of the payment owed.

2. The taxpayer doesn’t have to file Form 4686 (automatic extensions for individuals) or Form 7004 (certain other automatic extensions) to get the extension.

3. The relief is for

   • Federal income tax payments (including tax payments on self-employment income) and Federal income tax returns due on April 15, 2020, for the person’s 2019 tax year, and

   • Federal estimated income tax payments (including tax payments on self-employment income) due on April 15 for the person’s 2020 tax year.

4. No extension is provided for the payment or deposit of any other type of Federal tax (e.g. payroll, estate or gift taxes) or the filing of any Federal information return.

5. As a result of the return filing and tax payment postponement from April 15, 2020, to July 15, 2020, that period is disregarded in the calculation of any interest, penalty, or addition to tax for failure to file the postponed income tax returns or pay the postponed income taxes. Interest, penalties and additions to tax will begin to accrue again on July 16, 2020.

6. This extension is valid for the 2019 IRA and HSA contribution deadline as well.

California follows the extended due dates above, and provides additional relief in that the second quarter 2020 estimate payment due date of normally June 15, 2020, has been extended to July 15, 2020. LLC tax and fee estimates for 2020 are also due July 15, 2020.

Families First Coronavirus Response Act

On March 18, President Trump signed into law the Families First Coronavirus Response Act (the Act, PL 116-127), which eased the compliance burden on businesses. The Act includes the four tax credits and one tax exemption discussed below.

Payroll tax credit for required paid sick leave (the payroll sick leave credit). The Emergency Paid Sick Leave Act (EPSLA) division of the Act generally requires private employers with fewer than 500 employees to provide 80 hours of paid sick time to full-time employees who are unable to work for virus-related reasons (with an administrative exemption for less-than-50-employee businesses where compliance with this act would jeopardize the business’ continued existence). A pro-rated amount of paid leave for two weeks should be provided to hourly and part-time employees. The pay is up to $511 per day with a $5,110 overall limit for an employee directly affected by the virus and up to $200 per day with a $2,000 overall limit for an employee that is a caregiver.

The tax credit corresponding with the EPSLA mandate is a credit against the employer’s 6.2% portion of the Social Security (OASDI) payroll tax for 100% of the paid leave. The limit on the credit amount generally tracks the $511/$5,110 and $200/$2,000 per-employee limits described above. The credit can be increased by

• The amount of certain expenses in connection with a qualified health plan if the expenses are excludible from employee income and

• The employer’s share of the payroll Medicare hospital tax imposed on any payments required under the EPSLA.

Credit amounts earned in excess of the employer’s 6.2% Social Security (OASDI) tax (or in excess of the Railroad Retirement tax) are refundable. The credit is electable and includes provisions that prevent double tax benefits (for example, using the same wages to get the benefit of the credit and of the current law employer credit for paid family and medical leave). The credit applies to wages paid

• Beginning on April 1, 2020 and

• Ending on December 31, 2020.

Income tax sick leave credit for the self-employed (self-employed sick leave credit). The Act provides a refundable income tax credit (including against the taxes on self-employment income and net investment income) for sick leave to a self-employed person by treating the self-employed person both as an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for a sick leave credit to the extent that an employer would earn the payroll sick leave credit if the self-employed person were an employee.

Accordingly, the self-employed person can receive an income tax credit with a maximum value of $5,110 or $2,000 per the payroll sick leave credit based on average daily self-employment income. However, those amounts are decreased to the extent that the self-employed person has received paid sick leave from an employer under the Act. The credit applies

• Beginning on April 1, 2020 and

• Ending on December 31, 2020.

Payroll tax credit for required paid family leave (the payroll family leave credit). The Emergency Family and Medical Leave Expansion Act (EFMLEA) division of the Act requires employers with fewer than 500 employees to provide both paid and unpaid leave (with an administrative exemption for less-than-50-employee businesses where compliance with this act would jeopardize the business’ continued existence). The leave generally is available when an employee must take time off to care for the employee’s child under age 18 because of a COVID-19 emergency declared by a federal, state, or local authority that either

• Closes a school or childcare place or

• Makes a childcare provider unavailable.

Generally, the first 10 days of leave can be unpaid (or covered by EPSLA above) and then paid leave is required, generally at 2/3 the employee’s pay rate for regular hours. However, the paid leave can’t exceed $200 per day and $10,000 in the aggregate per employee.

The tax credit corresponding with the EFMLEA mandate is a credit against the employer’s 6.2% portion of the Social Security (OASDI) payroll tax for 100% of the paid leave. The limit on the credit amount generally tracks the $200/$10,000 per employee limits described above. The other important rules for the credit, including its effective period, are the same as those described above for the payroll sick leave credit.

Income tax family leave credit for the self-employed (self-employed family leave credit). The Act provides to the self-employed a refundable income tax credit (including against the taxes on self-employment income and net investment income) for family leave similar to the self-employed sick leave credit discussed above. Thus, a self-employed person is treated as both an employer and an employee for purposes of the credit and is eligible for the credit to the extent that an employer would earn the payroll family leave credit if the self-employed person were an employee.

Accordingly, the self-employed person can receive an income tax credit with a maximum value of $10,000 as per the payroll family leave credit. However, under rules similar to those for the self-employed sick leave credit, that amount is decreased to the extent that the self-employed person has insufficient self-employment income determined under a formula or to the extent that the self-employed person has received paid family leave from an employer under the Act. The credit applies

• Beginning on April 1, 2020 and

• Ending on December 31, 2020.

Exemption for employer’s portion of any Social Security (OASDI) payroll tax or railroad retirement tax arising from required payments. Wages paid as required sick leave payments because of EPSLA or as required family leave payments under EFMLEA aren’t considered wages for purposes of the employer’s 6.2% portion of the Social Security (OASDI) payroll tax or for purposes of the Railroad Retirement tax.

IRS information site.

Ongoing information on the IRS and tax legislation response to COVID- 19 can be found here .

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

2019 California Business Tax Updates

Dear Tax Constituent:

The following is a summary of some of the major developments with tax implications specifically for California businesses:

WAYFAIR

In July, 2018, the U.S. Supreme Court decided one of the biggest tax cases in decades, which dramatically expands when states can require out-of-state businesses selling to customers in their state to collect and remit sales and use taxes. This change has a huge impact on anyone selling goods, particularly through the internet.

Prior to the U.S. Supreme Court’s decision in Wayfair, Inc. v. South Dakota, a state could only require a business to collect sales or use taxes from customers if the business had some type of physical presence in the state, usually by owning, leasing, or storing property in the state or having an employee or agent in the state. 

Now states can require out-of-state sellers to collect and remit sales and use taxes if they make a minimum number of sales to customers in their state (in terms of dollars and/or transactions), even if they have no physical presence in the state. To complicate matters even more, each state and each local taxing jurisdiction may have different rules.

Most small retailers making only a few sales into a state should not be impacted because states are generally providing exceptions for businesses only making a minimum level of sales (e.g., less than $100,000 in annual gross revenues and/or less than 200 annual transactions). However, each state can set its own threshold.

California’s Thresholds

In late April 2019, California enacted AB 147 which provides some relief to small businesses. The bill:

• Establishes an economic nexus sales threshold of $500,000, effective April 1, 2019. There is no transaction threshold, which means a seller can make an unlimited number of sales and not establish economic nexus as long as the total sales do not exceed $500,000;

• Beginning April 25, 2019, requires both in-state and out-of-state retailers to collect district use taxes if the retailer has more than $500,000 of sales statewide;

• Effective October 1, 2019, shifts the responsibility for collecting sales and use and district taxes to marketplace facilitators for all sales made over the marketplace; and

• Provides penalty relief for small, out-of-state retailers who make a good faith effort to comply with the new collection requirements.

An out-of-state retailer is considered "engaged in business in California," and therefore must collect California state and district use taxes, if its total sales of tangible personal property for delivery in California exceed $500,000 in the current or prior calendar year. An in-state retailer with less than $500,000 in sales must collect state tax but only district taxes where they have physical presence.

Threshold Period

Taxpayers must look to their sales for the current and prior calendar years to determine whether they have met the $500,000 threshold.

If a retailer met the threshold in the prior year, they must collect state and district taxes in the current year, even if their sales in the current year do not exceed $500,000.

If a retailer did not meet the threshold in the prior year, they must still monitor their sales in the current year. Once a retailer meets the over-$500,000 threshold for the current year, the retailer must collect for the remainder of that year and the following year. Thus, for 2020, if the retailer did not meet the $500,000 in 2019, the retailer is not required to collect tax until and unless the total sales to California customers exceed $500,000.

District tax collection requirements

Many California businesses selling goods outside their taxing district may be impacted.

Effective April 25, 2019, AB 147 and SB 92 require retailers that make over $500,000 of sales in the state to begin collecting and remitting all district use taxes for sales made to customers in any district in the state, even if the retailer does not:

• Meet the threshold in the district in which the customer is located; or

• Have physical presence in that district. (R&TC §7262)

California businesses selling outside of California

Whether a California business must collect other states' state and local use taxes on sales made to customers in those states is determined by those states' rules, not California's rules. Most states have adopted the Wayfair economic nexus threshold of $100,000 in sales or 200 transactions.

INDEPENDENT CONTRACTORS

In 2019, the Governor of California signed AB 5. Under AB 5, most workers are presumed to be employees for purposes of the Labor Code, the Unemployment Insurance Code, and for most wage orders of the Industrial Welfare Commission unless a hiring entity satisfies a three-factor test, referred to as the ABC test. This means that many workers previously classified as independent contractors may now be considered employees under California law and the hiring entity must withhold California income and payroll taxes, and meet California’s minimum wage and overtime requirements.

The ABC test

Under the ABC test, all three of these conditions must be met in order to treat the worker as an independent contractor:

A.   The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, commonly known as the Borello “control test” (S.G. Borello & Sons, Inc. v. Dept. of Ind. Rel. (1989) 48 Cal.3rd 342);

B. The worker performs work that is outside the usual course of the hiring entity’s business; and

C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

The ABC test means, for example, that a hospital who hires nurses to work in specialized areas, such as an anesthesia nurse or neonatal nurse, may not treat the nurse as an independent contractor if those nurses are filling in for employee-nurses and don’t work for multiple hospitals. While physicians have their own specific exemption from AB 5, the same treatment would apply to other medical services, as well as consulting services, the entertainment industry, truck drivers and most notably, rideshare and delivery service workers.

Exemptions

While applying the ABC test to workers will result in many more workers being classified as employees, the legislation provides for numerous exemptions to the application of the ABC test. The exemptions are complicated, and very specific. However, the exemptions do not mean workers are automatically independent contractors.

If an exemption applies, you are still required to apply the traditional tests to determine if a worker is an employee or an independent contractor. Under these traditional tests, the “B” part of the ABC test will still be considered, but it is not a make-or-break factor.

Penalties could apply

Be aware that California law includes severe financial penalties for willfully treating an employee as an independent contractor.

The penalties, which are in addition to other assessments, penalties, or fines, are:

• $5,000 to $15,000 for each violation (a single misclassified individual); and

• $10,000 to $25,000 for each violation if the Labor Commissioner, or a court, determines there is a “pattern and practice” of these violations.

With the exception of an attorney or other employee of the business, these penalties also apply to your tax professional or any paid person who advises you to incorrectly treat a worker as an independent contractor. This means that you may be required to obtain a legal opinion if there is a question as to the classification of employees.

Important points

There are three important points to understand:

1. Forming or operating as a corporation or an LLC is not an effective work-around. The corporation or LLC will be ignored if the worker does not meet the ABC test, and the worker who owns the entity will still be an employee of the payor;

2. In many cases the worker may still be an independent contractor for federal purposes if the “A” and “C” test apply; and

3. The effective date of the law is January 1, 2020, but could be applied retroactively.

We can discuss further employee v. independent contractor considerations with you, but an attorney’s opinion would be necessary for a more definitive classification.

CALSAVERS

In June 2020 California will begin mandating employer participation in the CalSavers program for employers with more than 100 employees. Under the CalSavers program (previously named the California Secure Choice Retirement Program), private employers that don't already offer a retirement plan must enroll their employees in a CalSavers account , unless:

• The employees opt out; or

• The employer has less than five employees.

The CalSavers program is essentially a payroll deduction Roth IRA program. Employers will be required to register, and if employees don't opt out, contributions will be taken from their paychecks.

Participation is not mandatory until 2020. The program will be phased in over a three-year period. Employers with:

• More than 100 employees must register by June 30, 2020;

• More than 50 employees must register by June 30, 2021; and

• More than 5 employees must register by June 30, 2022.

The CalSavers program will notify employers of their requirement to register in the program. Once registered, the employer must provide CalSavers enrollment information packets to employees who are age 18 or older during an annual enrollment period. For employees who do not opt out, the employer must collect, remit, and report contributions for each payroll period.

An employee's initial default contribution rate is 5% the first year the employee is enrolled, increasing by 1 % each year, up to 8%. Employees choose how their money is invested and have the option to:

• Opt out at any time; or

• Pay lower or higher contribution rates. 

Employer liabilities

Employers who fail to comply with the program requirements will be subject to a $250 per- employee penalty after receiving a notice of noncompliance from the EDD. The penalty will be increased to $500 per employee if the employer does not comply within 180 days.

Litigation pending

A federal district court has ruled that CalSavers, California's state-mandated retirement program for private employees, does not violate ERISA. (Howard Jarvis Taxpayers Association v. The California Secure Choice Retirement Savings Program (March 28, 2019) U.S. Dist. Ct., East. Dist. of Calif., Case No. 2:18-cv-01584-MCE-KJN) However, the court allowed the Howard Jarvis Taxpayers Association to file an amended complaint, so the litigation is far from over. As a matter of fact, the United States Department of Justice filed a "Statement of  Interest" in the U.S. district court agreeing with the Howard Jarvis Taxpayers Association in the case. It's anticipated that the court will rule on the amended complaint before the end of the year, but there is no definitive timeline.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

2019 Tax Extender Legislation

Dear Tax Constituent:

On December 20, the President signed into law the “Taxpayer Certainty and Disaster Tax Relief Act of 2019” (the “Disaster Act”) as part of an omnibus spending package, the "Further Consolidated Appropriations Act, 2020". The Disaster Act extends over 30 Code provisions, generally through 2020.  The following summary explains the major extended tax provisions of the law:

Exclusion from gross income of discharge of qualified principal residence indebtedness

Under pre-Disaster Act law, discharge of indebtedness income from qualified principal residence debt, up to a $2 million limit ($1 million for married individuals filing separately), was, in tax years beginning before Jan. 1, 2018, excluded from gross income.

New law. The Disaster Act retroactively extends this exclusion to discharges of indebtedness before Jan. 1, 2021.

The Disaster Act also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged pursuant to a binding written agreement entered into before Jan. 1, 2021. This applies to discharges of indebtedness after Dec. 31, 2017.

Treatment of mortgage insurance premiums as qualified residence interest

Under pre-Disaster Act law, mortgage insurance premiums paid or accrued before Jan. 1, 2018 by a taxpayer in connection with acquisition indebtedness with respect to the taxpayer's qualified residence were treated as deductible qualified residence interest, subject to a phase-out based on the taxpayer's adjusted gross income (AGI). The amount allowable as a deduction was phased out ratably by 10% for each $1,000 by which the taxpayer's adjusted gross income exceeded $100,000 ($500 and $50,000, respectively, in the case of a married individual filing a separate return). Thus, the deduction wasn't allowed if the taxpayer's AGI exceeded $110,000 ($55,000 in the case of married individual filing a separate return).

New law. The Disaster Act extends this treatment through 2020 for amounts paid or incurred after Dec. 31, 2017.

Reduction in medical expense deduction floor

The Code provides that, individuals, for 2017 and 2018, could claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceeded 7.5% of AGI.

New law. The Disaster Act extends this threshold of 7.5% for tax years beginning after Dec. 31, 2018 and before Jan. 1, 2021.

Deduction of qualified tuition and related expenses

The Code provides an above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose AGI does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).

New law. The Disaster Act retroactively extends this deduction through 2020. This applies to tax years beginning after Dec. 31, 2017.

Nonbusiness energy property

The Code provides a credit for purchases of nonbusiness energy property. The Code allows a credit of 10% of the amounts paid or incurred by the taxpayer for qualified energy improvements to the building envelope (windows, doors, skylights, and roofs) of principal residences. The Code allows credits of fixed dollar amounts ranging from $50 to $300 for energy-efficient property including furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditioners, and circulating fans, and is subject to a lifetime cap of $500.

New law. The Disaster Act retroactively extends this credit through 2020. This applies to property placed in service after Dec. 31, 2017.

Qualified fuel cell motor vehicles

The Code provides a credit for purchases of new qualified fuel cell motor vehicles. The Code allows a credit of between $4,000 and $40,000, depending on the weight of the vehicle, for the purchase of such vehicles. Other vehicles, depending on their fuel efficiency, may qualify for an additional $1,000 to $4,000 credit.

New law. The Disaster Act extends this credit through 2020.

2-wheeled plug-in electric vehicle credit

The Code provides a 10% credit for highway-capable, two-wheeled plug-in electric vehicles (capped at $2,500). Battery capacity within the vehicles must be greater than or equal to 2.5 kilowatt-hours.

New law. The Disaster Act extends this credit so that it applies to vehicles acquired before Jan. 1, 2021.

Energy efficient commercial buildings deduction

The Code provides a deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings. This includes a $1.80 deduction per square foot for construction on qualified property. A partial $0.60 deduction per square foot is allowed if certain subsystems meet energy standards but the entire building does not, including the interior lighting systems, the heating, cooling, ventilation, and hot water systems, and the building envelope.

New law. The Disaster Act extends these deductions to property placed into service before Jan. 1, 2021.

Empowerment zone tax incentives

The designation of an economically depressed census tract as an “Empowerment Zone” renders businesses and individual residents within such a Zone eligible for special empowerment zone tax incentives, including: the 20% wage credit ; liberalized Code Sec. 179 expensing rules ($35,000 extra expensing and the break allowing only 50% of expensing eligible property to be counted for purposes of the investment-based phaseout of expensing); tax-exempt bond financing ; and deferral of capital gains tax on sale of qualified assets sold and replaced.

Under pre-Disaster Act law, Empowerment Zone designations expired on Dec. 31, 2017.

New law. The Disaster Act extends through Dec. 31, 2020, the period for which the designation of an empowerment zone is in effect.

The Disaster Act also provides that where a nomination of an empowerment zone included a termination date of Dec. 31, 2017, termination will not apply with respect to the designation if, after Dec. 20, 2019, the entity that made such nomination amends the nomination, in such manner as the IRS may provide, to provide for a new termination date. This applies to tax years beginning after Dec. 31, 2017.

Energy efficient homes credit

The Code provides a credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy efficient home that meets qualifying criteria.

New law. The Disaster Act extends the credit for energy-efficient new homes to homes acquired before Jan. 1, 2021.

American Samoa economic development credit

There is provided a credit to certain corporations in American Samoa that may be claimed against U.S. corporate income tax in an amount equal to the sum of certain percentages of a domestic corporation’s employee wages, employee fringe benefit expenses, and tangible property depreciation allowances for the tax year in respect of the active conduct of a trade or business in American Samoa.

New law. The Disaster Act extends this credit through 2020.

Biodiesel and renewable diesel

The Code provides a $1.00-per-gallon tax credit for biodiesel and biodiesel mixtures, and the small agri-biodiesel producer credit of 10 cents per gallon.

New law. The Disaster Act extends the biodiesel fuels income tax credit and the excise tax credits.

Additionally, the Disaster Act amends the Code to treat renewable diesel the same as biodiesel, except there is no small producer credit. 

Second generation biofuel producer credit

Under pre-Disaster Act law, a producer of qualified biofuel produced after Dec. 31, 2008, could claim a credit, as part of the alcohol fuel credit, for each gallon of “qualified second generation biofuel production.” The credit was equal to the “applicable amount” ($1.01) for each gallon of qualified second generation biofuel production.

Under pre-Disaster Act law, this credit didn't apply to second generation biofuel produced after Dec. 31, 2018.

New law.  The Disaster Act extends the credit for two years, i.e., for production before Jan. 1, 2021.

Special allowance for second generation biofuel plant property

The Code provides an additional first-year 50% bonus depreciation for cellulosic biofuel facilities.

New law. The Disaster Act extends this additional first-year 50% bonus depreciation to property placed into service before Jan. 1, 2021.

Alternative fuel refueling property credit

Under pre-Disaster Act law, a taxpayer could claim a 30% credit for the cost of installing non-hydrogen alternative vehicle refueling property for use in the taxpayer's trade or business (up to $30,000 maximum per year per location) or installed at the taxpayer's principal residence (up to $1,000 per year per location).

Under pre-Disaster Act law, this provision didn't apply to property placed in service after Dec. 31, 2017.

New law. The Disaster Act extends this credit so that it applies to property placed in service before Jan. 1, 2021.

Credit for electricity produced from certain renewable resources

An income tax credit is allowed for the production of electricity from qualified energy resources at qualified facilities (the “renewable electricity production credit”). Qualified energy resources means wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. Qualified facilities are, generally, facilities that generate electricity using qualified energy resources.

Under pre-Disaster Act law, qualifying facilities generating electricity using closed-loop biomass, open-loop biomass, geothermal energy, land fill gas and trash (both of which used municipal solid waste), qualified hydropower, and marine and hydrokinetic renewable energy facilities had to have begun constructions before Jan. 1, 2018, to claim the credit.

In addition, under pre-Disaster Act law, taxpayers could elect to have qualified property which is part of a qualified facility, which were placed in service after 2008 and the construction of which begins before Jan. 1, 2018, treated as property eligible for an energy credit.

New law. The Disaster Act extends the date by which construction of a qualifying facility must begin, to before Jan. 1, 2021, for the following facilities: qualifying closed-loop biomass, open-loop biomass, geothermal energy, land fill gas and trash, qualified hydropower, and marine and hydrokinetic renewable energy facilities.

In addition, the Disaster Act extends the above qualified facilities eligible to be treated as property for an energy credit, to facilities which were placed in service after 2008 and the construction of which begins before Jan. 1, 2021.

For wind facilities the construction of which begins in calendar year 2020, the Disaster Act reduces the credit by 40%.

Production credit for Indian coal facilities

Under pre-Disaster Act law, a credit based on the production of Indian coal was available to producers of Indian coal at Indian coal facilities during the 12-year period beginning on Jan. 1, 2006 (i.e., before 2018). For 2018, the credit had expired.

New law. The Disaster Act extends the credit for three years, i.e., it provides a credit for producers of Indian coal at Indian coal facilities during the 15-year period beginning on Jan. 1, 2006 (i.e., before Jan. 1, 2021).

Special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities

Previously a vertically integrated electric utility could elect to defer over eight years gain on sales of: (i) property used in the trade or business of providing electric transmission services; or (ii) any stock or partnership interest in an entity whose principal trade or business consists of providing electric transmission services to Federal Energy Regulatory Commission (FERC)-approved independent transmission companies.

Under pre-Disaster Act law, this deferral didn't apply to sales that took place after Dec. 31, 2017.

New law. The Disaster Act extends this gain deferral provision for dispositions made before Jan. 1, 2021.

Extension and clarification of excise tax credits relating to alternative fuels

A 50¢-per-gallon (or gasoline gallon equivalent for non-liquid fuel) excise tax credit was allowed against the retail fuel excise tax liability for alternative fuel sold for use or used by a taxpayer. A credit was also allowed against the removal at terminal excise tax liability for alternative fuel used to produce an alternative fuel mixture for sale or use in the taxpayer's trade or business. A taxpayer could claim an excise tax refund (or, in some cases, a credit against income tax) to the extent the taxpayer's alternative fuel or mixture excise tax credit exceeded the taxpayer's retail fuel excise tax and removal at terminal excise tax liability.

New law. The Disaster Act extends these incentives through 2020.

Oil spill liability trust fund rate

The Code imposes an excise tax of $0.09 per barrel on crude oil received at a refinery and petroleum products entered into the United States and deposited into the Oil Spill Liability Trust Fund. 

New law. The Disaster Act extends this excise tax through 2020, effective beginning on January 1, 2020.

New Markets Tax Credit

The Code provides a New Markets Tax Credit which is available to both individual and corporate taxpayers and is equal to 39% of the capital invested in a qualified community development entity, a for profit or nonprofit entity that commits to the rules of the program, which in turn must loan to or invest substantially all of such capital in qualified businesses operating in low-income communities.

New law. The Disaster Act provides a $5 billion New Markets Tax Credit allocation for 2020.

The Disaster Act also extends for one year, through 2025, the carryover period for unused New Markets Tax Credits.

Employer tax credit for paid family and medical leave

The Code provides an employer credit for paid family and medical leave, which permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per tax year.

New law. The Disaster Act extends this credit through 2020.

Work Opportunity Tax Credit

The Code provides an elective general business credit to employers hiring individuals who are members of one or more of ten targeted groups under the Work Opportunity Tax Credit program.

New law. The Disaster Act extends this credit through 2020.

Certain rules related to beer, wine, and distilled spirits

New law. The Disaster Act extends the reduction of certain excise taxes related to beer, wine, and distilled spirits.

Look-through rule for related controlled foreign corporations

The Code provides look-through treatment for payments of dividends, interest, rents, and royalties between related controlled foreign corporations.

New law. The Disaster Act extends this look-through treatment through 2020.

Credit for health insurance costs of eligible individuals

The Code provides a refundable credit (commonly referred to as the health coverage tax credit or “HCTC”) equal to 72.5% of the premiums paid by certain individuals for coverage of the individual and qualifying family members under qualified health insurance.

New law. The Disaster Act extends the HCTC through 2020.

Black lung liability trust fund excise tax

The Code imposes an excise tax of $1.10 per ton for coal from underground mines and $0.55 per ton for coal from surface mines, each up to 4.4% the sale price effective beginning on the first day of the first calendar month after date of enactment.

New law. The Disaster Act extends these excise taxes through 2020, and the extension shall apply on and after Jan. 1, 2020 (i.e., the first day of the first calendar month beginning after Dec. 20, 2019).

Indian employment credit

The Code provides a credit on the first $20,000 of qualified wages and qualified employee health insurance costs paid to or incurred by the employer with respect to each qualified employee who works on an Indian reservation. Generally, a qualified employee is someone who is an enrolled member of an Indian tribe or the spouse of an enrolled member; who performs substantially all of the services for the employer within an Indian reservation; and whose principal place of abode is on or near the reservation in which the services are performed. The credit is equal to 20% of the excess of eligible employee qualified wages and health insurance costs incurred during the current year over the amount of such wages and costs incurred by the employer during 1993.

Under pre-Disaster Act law, the credit didn't apply for any tax year beginning after Dec. 31, 2017.

New law. The Disaster Act extends this credit to tax years beginning before January 1, 2021.

Railroad track maintenance credit

The Code provides a credit for 50% of qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer. Qualified railroad track maintenance expenditures are gross expenditures for maintaining railroad track (including roadbed, bridges, and related track structures) owned or leased as of Jan. 1, 2015, by a Class II or Class III railroad. Determined by the Surface Transportation Board, a Class II railroad has annual operating revenues of less than $447,621,226 but in excess of $35,809,698, and a Class III railroad has annual operating revenues of $35,809,698 or less. The credit cannot exceed the product of $3,500 times the number of miles of railroad track owned or leased by the eligible taxpayer as of the close of the tax year.

New law. The Disaster Act extends this credit through 2022.

The Disaster Act also provides a safe harbor. Any assignment, including related expenditures paid or incurred, for a tax year beginning on or after Jan. 1, 2018, and ending before Jan. 1, 2020, is treated as effective as of the close of such tax year if made pursuant to a written agreement entered into no later than March 19, 2020 (90 days following the date of the enactment of the Disaster Act). This applies to expenditures paid or incurred during tax years beginning after Dec. 31, 2017.

Mine rescue team training credit

The Code provides employers a credit equal to the lesser of 20% of the training program costs incurred, or $10,000, with respect to the training program costs of each qualified mine rescue team employee.

New law. The Disaster Act extends this credit through 2020.

Classification of certain race horses as 3-year property

The Code assigns a 3-year recovery period for race horses two years old or younger. 

New law. The Disaster Act extends the 3-year recovery period to race horses two years old or younger placed in service before 2021.

7-year recovery period for motorsports entertainment complexes

The Code provides a 7-year recovery period for motorsports entertainment complexes. A motorsports entertainment complex is defined as a racing track facility that is permanently situated on land and that hosts one or more racing events within 36 months of the month it is placed in service.

New law. The Disaster Act extends the 7-year recovery period through 2020, applicable to property placed into service after Dec. 31, 2017.

Accelerated depreciation for business property on Indian reservation

The Code provides accelerated depreciation for qualified Indian reservation property. To qualify, property must be predominantly used for business purposes within a reservation, owned by someone unrelated to previous owner, and unrelated to gaming practices. The depreciation deduction allowed also extends to the alternative minimum tax.

New law. The Disaster Act extends the use of this accelerated depreciation through 2020, applicable to property placed into service after Dec. 31, 2017.

Extension of expensing rules for certain productions

The Code provides a deduction for qualified film, television, and theatrical productions of up to $15 million of the aggregate cost ($20 million for certain areas) of a qualifying film, television, or theatrical production in the year the expenditure was incurred.

New law. The Disaster Act extends this deduction through 2020, for productions commencing after Dec. 31, 2017.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

SECURE Act of 2019

Dear Tax Constituent:

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law. This Act’s primary purpose was to expand opportunities for individuals to increase their savings and make administrative simplifications to the retirement system. The following summary explains the major provisions of the law:

INDIVIDUALS

Repeal of the maximum age for traditional IRA contributions.

Before 2020, traditional IRA contributions were not allowed once the individual attained age 70½. Starting in 2020, the new rules allow an individual of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.

Required minimum distribution age raised from 70½ to 72.

Before 2020, retirement plan participants and IRA owners were generally required to begin taking required minimum distributions, or RMDs, from their plan by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the retirement plan context in the early 1960s and, until recently, had not been adjusted to account for increases in life expectancy.

For distributions required to be made after Dec. 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plan or IRA is increased from 70½ to 72.

Partial elimination of stretch IRAs.

For deaths of plan participants or IRA owners occurring before 2020, beneficiaries (both spousal and nonspousal) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary s life or life expectancy (in the IRA context, this is sometimes referred to as a “stretch IRA”).

However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most nonspouse beneficiaries are generally required to be distributed within ten years following the plan participant s or IRA owner s death. So, for those beneficiaries, the “stretching” strategy is no longer allowed.

Exceptions to the 10-year rule are allowed for distributions to (1) the surviving spouse of the plan participant or IRA owner; (2) a child of the plan participant or IRA owner who has not reached majority; (3) a chronically ill individual; and (4) any other individual who is not more than ten years younger than the plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancy (as allowed under the rules in effect for deaths occurring before 2020).

Expansion of Section 529 education savings plans to cover registered apprenticeships and distributions to repay certain student loans.

A Section 529 education savings plan (a 529 plan, also known as a qualified tuition program) is a tax-exempt program established and maintained by a state, or one or more eligible educational institutions (public or private). Any person can make nondeductible cash contributions to a 529 plan on behalf of a designated beneficiary. The earnings on the contributions accumulate tax-free. Distributions from a 529 plan are excludable up to the amount of the designated beneficiary's qualified higher education expenses.

Before 2019, qualified higher education expenses didn't include the expenses of registered apprenticeships or student loan repayments.

But for distributions made after Dec. 31, 2018 (the effective date is retroactive), tax-free distributions from 529 plans can be used to pay for fees, books, supplies, and equipment required for the designated beneficiary s participation in an apprenticeship program. In addition, tax-free distributions (up to $10,000) are allowed to pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.

Kiddie tax changes for gold star children and others.

In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), which made changes to the so-called “kiddie tax,” which is a tax on the unearned income of certain children. Before enactment of the TCJA, the net unearned income of a child was taxed at the parents' tax rates if the parents' tax rates were higher than the tax rates of the child.

Under the TCJA, for tax years beginning after Dec. 31, 2017, the taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. Children to whom the kiddie tax rules apply and who have net unearned income also have a reduced exemption amount under the alternative minimum tax (AMT) rules.

There had been concern that the TCJA changes unfairly increased the tax on certain children, including those who were receiving government payments (i.e., unearned income) because they were survivors of deceased military personnel (“gold star children”), first responders, and emergency medical workers.

The new rules enacted on Dec. 20, 2019, repeal the kiddie tax measures that were added by the TCJA. So, starting in 2020 (with the option to start retroactively in 2018 and/or 2019), the unearned income of children is taxed under the pre-TCJA rules, and not at trust/estate rates. And starting retroactively in 2018, the new rules also eliminate the reduced AMT exemption amount for children to whom the kiddie tax rules apply and who have net unearned income.

Penalty-free retirement plan withdrawals for expenses related to the birth or adoption of a child.

Generally, a distribution from a retirement plan must be included in income. And, unless an exception applies (for example, distributions in case of financial hardship), a distribution before the age of 59-1/2 is subject to a 10% early withdrawal penalty on the amount includible in income.

Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption.

Taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes.

Before 2020, stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation for IRA contribution purposes, and so could not be used as the basis for making IRA contributions.

Starting in 2020, the new rules remove that obstacle by permitting taxable non-tuition fellowship and stipend payments to be treated as compensation for IRA contribution purposes. This change will enable these students to begin saving for retirement without delay.

Tax-exempt difficulty-of-care payments are treated as compensation for determining retirement contribution limits.

Many home healthcare workers do not have taxable income because their only compensation comes from “difficulty-of-care” payments that are exempt from taxation. Because those workers do not have taxable income, they were not able to save for retirement in a qualified retirement plan or IRA.

For IRA contributions made after Dec. 20, 2019 (and retroactively starting in 2016 for contributions made to certain qualified retirement plans), the new rules allow home healthcare workers to contribute to a retirement plan or IRA by providing that tax-exempt difficulty-of-care payments are treated as compensation for purposes of calculating the contribution limits to certain qualified plans and IRAs.

EMPLOYER-SPONSORED RETIREMENT PLANS

Unrelated employers are more easily allowed to band together to create a single retirement plan.

A multiple employer plan (MEP) is a single plan maintained by two or more unrelated employers. Starting in 2021, the new rules reduce the barriers to creating and maintaining MEPs, which will help increase opportunities for small employers to band together to obtain more favorable investment results, while allowing for more efficient and less expensive management services.

New small employer automatic plan enrollment credit.

Automatic enrollment is shown to increase employee participation and retirement savings. Starting in 2020, the new rules create a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to an existing plan start-up credit, and is available for three years. The new credit is also available to employers who convert an existing plan to a plan with an automatic enrollment design.

increased credit for small employer pension plan start-up costs.

The new rules increase the credit for plan start-up costs to make it more affordable for small businesses to set up retirement plans. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit on the credit to the greater of

1. $500, or

2. The lesser of:

   a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan, or

   b) $5,000.

The credit applies for up to three years.

Expand retirement savings by increasing the auto enrollment safe harbor cap.

An annual nondiscrimination test called the actual deferral percentage (ADP) test applies to elective deferrals under a 401(k) plan. The ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or non-elective contributions under either of two safe harbor plan designs and meets certain other requirements. One of the safe harbor plans is an automatic enrollment safe harbor plan.

Starting in 2020, the new rules increase the cap on the default rate under an automatic enrollment safe harbor plan from 10% to 15%, but only for years after the participant's first deemed election year. For the participant's first deemed election year, the cap on the default rate is 10%.

Allow long-term part-time employees to participate in 401(k) plans.

Currently, employers are generally allowed to exclude part-time employees (i.e., employees who work less than 1,000 hours per year) when providing certain types of retirement plans—like a 401(k) plan—to their employees. As women are more likely than men to work part-time, these rules can be especially harmful for women in preparing for retirement.

However, starting in 2021, the new rules will require most employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (with the 1,000-hour rule), or three consecutive years of service where the employee completes at least 500 hours of service per year. For employees who are eligible solely by reason of the new 500-hour rule, the employer will be allowed to exclude those employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.

Looser notice requirements and amendment timing rules to facilitate adoption of nonelective contribution 401(k) safe harbor plans.

The actual deferral percentage nondiscrimination test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or nonelective contributions under either of two plan designs (referred to as a "401(k) safe harbor plan"), as well as certain required rights and features, and satisfies a notice requirement. Under one type of 401(k) safe harbor plan, the plan either

1. Satisfies a matching contribution requirement, or

2. Provides for a nonelective contribution to a defined contribution plan of at least 3% of an employee's compensation on behalf of each nonhighly compensated employee who is eligible to participate in the plan.

For plan years beginning after Dec. 31, 2019, the new rules change the nonelective contribution 401(k) safe harbor to provide greater flexibility, improve employee protection, and facilitate plan adoption. The new rules eliminate the safe harbor notice requirement, but maintain the requirement to allow employees to make or change an election at least once per year. The rules also permit amendments to nonelective status at any time before the 30th day before the close of the plan year. Amendments after that time are allowed if the amendment provides

1. A nonelective contribution of at least 4% of compensation (rather than at least 3%) for all eligible employees for that plan year, and

2. The plan is amended no later than the last day for distributing excess contributions for the plan year (i.e., by the close of following plan year).

Expanded portability of lifetime income options.

Starting in 2020, the new rules permit certain retirement plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan, or IRA, of a lifetime income investment or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. This change permits participants to preserve their lifetime income investments and avoid surrender charges and fees.

Qualified employer plans barred from making loans through credit cards and similar arrangements.

For loans made after Dec. 20, 2019, plan loans may no longer be distributed through credit cards or similar arrangements. This change is intended to ensure that plan loans are not used for routine or small purchases, thereby helping to preserve retirement savings.

Nondiscrimination rules modified to protect older, longer service participants in closed plans.

Starting in 2020, the nondiscrimination rules as they pertain to closed pension plans (i.e., plans closed to new entrants) are being changed to permit existing participants to continue to accrue benefits. The modification will protect the benefits for older, longer-service employees as they near retirement.

Plans adopted by filing due date for year may be treated as in effect as of close of year.

Starting in 2020, employers can elect to treat qualified retirement plans adopted after the close of a tax year, but before the due date (including extensions) of the tax return, as having been adopted as of the last day of the year. The additional time to establish a plan provides flexibility for employers who are considering adopting a plan, and the opportunity for employees to receive contributions for that earlier year.

New annual disclosures required for estimated lifetime income streams.

The new rules (starting at a to-be-determined future date) will require that plan participants' benefit statements include a lifetime income disclosure at least once during any 12-month period. The disclosure will have to illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant s surviving spouse and a single life annuity.

Fiduciary safe harbor added for selection of annuity providers.

When a plan sponsor selects an annuity provider for the plan, the sponsor is considered a plan "fiduciary," which generally means that the sponsor must discharge his or her duties with respect to the plan solely in the interests of plan participants and beneficiaries (this is known as the "prudence requirement").

Starting on Dec. 20, 2019 (the date the SECURE Act was signed into law), fiduciaries have an optional safe harbor to satisfy the prudence requirement in their selection of an insurer for a guaranteed retirement income contract, and are protected from liability for any losses that may result to participants or beneficiaries due to an insurer's future inability to satisfy its financial obligations under the terms of the contract. Removing ambiguity about the applicable fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a plan.

Increased penalties for failure-to-file retirement plan returns.

Starting in 2020, the new rules modify the failure-to-file penalties for retirement plan returns.

The penalty for failing to file a Form 5500 (for annual plan reporting) is changed to $250 per day, not to exceed $150,000.

• A taxpayer's failure to file a registration statement incurs a penalty of $10 per participant per day, not to exceed $50,000.

• The failure to file a required notification of change results in a penalty of $10 per day, not to exceed $10,000.

• The failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

2019 Year-End Tax Planning

Dear Tax Constituent:

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next.

Year-end planning for 2019 takes place against the backdrop of recent major changes in the rules for individuals and businesses. For individuals, these changes include lower income tax rates, a boosted standard deduction, severely limited itemized deductions, no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT). For businesses, the corporate tax rate has been reduced to 21%, there is no corporate AMT, there are limits on business interest deductions, and there are very generous expensing and depreciation rules. And non-corporate taxpayers with qualified business income from pass-through entities may be entitled to a special deduction.

Despite these major changes, the time-tested approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers, along with the tactic of “bunching” expenses into this year or the next to get around deduction restrictions.

We have compiled a list of actions based on current federal tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals

• Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of:

  • net investment income (NII), or

  • the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

  As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

• The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of a threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he or she would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.

• Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $78,750 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year—for example, you are a joint filer who made a profit of $5,000 on the sale of stock bought in 2009, and other taxable income for 2019 is $70,000—then before year-end, try not to sell assets yielding a capital loss because the first $5,000 of such losses won't yield a benefit this year. And if you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.

• Postpone income until 2020 and accelerate deductions into 2019 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2019 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2019. For example, that may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or expects to be in a higher tax bracket next year.

• If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2019 if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2019, and possibly reduce tax breaks geared to AGI (or modified AGI).

• It may be advantageous to try to arrange with your employer to defer, until early 2020, a bonus that may be coming your way. This could cut as well as defer your tax.

• Many taxpayers won't be able to itemize because of the high basic standard deduction amounts that apply for 2019 ($24,400 for joint filers, $12,200 for singles and for marrieds filing separately, $18,350 for heads of household), and because many itemized deductions have been reduced or abolished. No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees and unreimbursed employee expenses) are not deductible for federal purposes; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses but only to the extent they exceed 10% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won't save taxes if they don't cumulatively exceed the standard deduction amount that applies to your filing status.

• Some taxpayers may be able to work around these deduction restrictions by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer will benefit by making two years' worth of charitable contributions this year, instead of spreading out donations over 2019 and 2020.

• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2019 deductions even if you don't pay your credit card bill until after the end of the year.

• If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2019, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2019. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one to the extent it causes your 2019 state and local tax payments to exceed $10,000.

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70½. (That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire.) Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Thus, if you turn age 70½ in 2019, you can delay the first required distribution to 2020, but if you do, you will have to take a double distribution in 2020—the amount required for 2019 plus the amount required for 2020. Think twice before delaying 2019 distributions to 2020, as bunching income into 2020 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2020 if you will be in a substantially lower bracket that year.

• If you are age 70½ or older by the end of 2019, have traditional IRAs, and particularly if you can't itemize your deductions, consider making 2019 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result in tax savings.

• If you are younger than age 70½ at the end of 2019, you anticipate that in the year that you turn 70½ and/or in later years you will not itemize your deductions, and you don't have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs in 2019. If these circumstances apply to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs in 2019. Then, when you reach age 70½, make your charitable donations by way of qualified charitable distributions from your IRA. Doing all of this will allow you to, in effect, convert nondeductible charitable contributions that you make in the year you turn 70½ and later years, into deductible-in-2019 IRA contributions and reductions of gross income from age 70½ and later year distributions from the IRAs.

• Take an eligible rollover distribution from a qualified retirement plan before the end of 2019 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2019. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2019, but the withheld tax will be applied pro rata over the full 2019 tax year to reduce previous underpayments of estimated tax.

• Consider increasing the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.

• If you become eligible in December of 2019 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2019.

• Make gifts sheltered by the annual gift tax exclusion before the end of the year if doing so may save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

• If you were in federally declared disaster area, and you suffered uninsured or unreimbursed disaster-related losses, keep in mind you can choose to claim them either on the return for the year the loss occurred (in this instance, the 2019 return normally filed next year), or on the return for the prior year (2018).

• If you were in a federally declared disaster area, you may want to settle an insurance or damage claim in 2019 in order to maximize your casualty loss deduction this year.

Year-End Tax-Planning Moves for Businesses & Business Owners

• Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2019, if taxable income exceeds $321,400 for a married couple filing jointly, $160,700 for singles and heads of household, and $160,725 for marrieds filing separately, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in–for example, the phase-in applies to joint filers with taxable income between $321,400 and $421,400 and to single taxpayers with taxable income between $160,700 and $210,700.

• Taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2019. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting your tax adviser.

• More “small businesses” are able to use the cash (as opposed to accrual) method of accounting in than were allowed to do so in earlier years. To qualify as a “small business” a taxpayer must, among other things, satisfy a gross receipts test. For 2019, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don't exceed $26 million (the dollar amount was $25 million for 2018, and for earlier years it was $5 million). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.

• Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2019, the expensing limit is $1,020,000, and the investment ceiling limit is $2,550,000. Expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It is also available for qualified improvement property (generally, any interior improvement to a building's interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2019, rather than at the beginning of 2020, can result in a full expensing deduction for 2019.

• Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment—bought used (with some exceptions) or new—if purchased and placed in service this year. The 100% writeoff is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year writeoff is available even if qualifying assets are in service for only a few days in 2019.

• Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2019.

• A corporation (other than a “large” corporation) that anticipates a small net operating loss (NOL) for 2019 (and substantial net income in 2020) may find it worthwhile to accelerate just enough of its 2020 income (or to defer just enough of its 2019 deductions) to create a small amount of net income for 2019. This will permit the corporation to base its 2020 estimated tax installments on the relatively small amount of income shown on its 2019 return, rather than having to pay estimated taxes based on 100% of its much larger 2020 taxable income.

• To reduce 2019 taxable income, consider deferring a debt-cancellation event until 2020.

• To reduce 2019 taxable income, consider disposing of a passive activity in 2019 if doing so will allow you to deduct suspended passive activity losses.

These are just some of the year-end steps that can be taken to save taxes.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA

Q2 2019

Dear Tax Constituent:

The following is a summary of important tax developments that have occurred in April, May, and June of 2019 that may affect you, your family, your investments, and your livelihood.

Final regulations shoot down states' SALT limitation workaround. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) limits an individual taxpayer's annual SALT (state and local tax) deductions to a maximum of $10,000, with no carryover for taxes paid in excess of that amount. (The SALT deduction limit doesn't apply to property taxes paid by a trade or business or in connection with the production of income.) As a result, many taxpayers won't get a full federal income tax deduction for their payments of state and local taxes. Following the TCJA's passage, some high-tax states implemented workarounds to mitigate the effect of the SALT deduction limit for their residents. One method used was to set up charitable funds to which taxpayers can contribute and receive a tax credit in exchange. The IRS has issued final regulations, which generally apply to contributions after Aug. 27, 2018, that effectively kill this workaround. The regulations provide that a taxpayer who makes payments to, or transfers property to, an entity eligible to receive tax deductible contributions must reduce his or her charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

The IRS also issued a safe harbor that allows an individual who itemizes deductions to treat, in certain circumstances, payments that are or will be disallowed as charitable contribution deductions under the final regulations, as state or local taxes for federal income tax purposes. Eligible taxpayers can use this safe harbor to determine their SALT deduction on their tax-year 2018 return. Those who have already filed may be able to claim a greater SALT deduction by filing an amended return, Form 1040-X, if they have not already claimed the $10,000 maximum amount.

Taxpayer First Act grants new protections to taxpayers. In June, Congress passed the Taxpayer First Act of 2019 (the Act), and it was signed into law by the President on July 1. The Act, among other things, provides some new safeguards to taxpayers in their interactions with the IRS, including the following.  

• Notice to taxpayer of IRS contact with third party. Effective for notices provided, and contacts of persons made, after Aug. 15, 2019, the Act provides that the IRS may not contact any person other than the taxpayer regarding the determination or collection of the tax liability of the taxpayer without providing the taxpayer with notice at least 45 days before the beginning of the period of the contact.

• Structuring transactions and IRS seizures. Effective on July 1, 2019, the Act provides that, in the case of a suspected structuring violation (i.e., structuring transactions to avoid Bank Secrecy Act rules), the IRS may only pursue seizure or forfeiture of assets if either the property to be seized was derived from an illegal source or the transactions were structured for the purpose of concealing a violation of a criminal law or regulation other than rules against structuring.

• John Doe summonses. If certain requirements are met, the IRS may issue a third-party summons that doesn't identify the taxpayer (a "John Doe" summons). Effective for summonses served after Aug. 15, 2019, the Act prevents the IRS from issuing a John Doe summons unless the information sought to be obtained is narrowly tailored and pertains to the failure (or potential failure) of a person or group or class of persons to comply with one or more provisions of the tax law which have been identified.

• Seizure and sale of perishable goods. Effective for property seized after July 1, 2019, the Act limits the property that may be sold under the IRS's authority to seize and sell tangible property to satisfy unpaid taxes, to property that is liable to perish.

• Misdirected tax refund deposits. The Act requires the IRS to issue regulations, by Jan. 1, 2020, to establish procedures to allow taxpayers to report instances in which a refund made by electronic funds transfer was not transferred to the account of the taxpayer, to coordinate with financial institutions to identify and recover these payments, and to deliver refunds to the correct accounts of taxpayers.

• Notification of suspected identity theft. Effective for determinations made after Jan. 1, 2020, the Act requires the IRS to notify a taxpayer if it determines there has been any suspected unauthorized use of a taxpayer's identity, or that of the taxpayer's dependents, if an investigation has been initiated and its status, whether the investigation substantiated any unauthorized use of the taxpayer's identity, and whether any action has been taken (such as a referral for prosecution). Additionally, when an individual is charged with a crime, the IRS must notify the victim as soon as possible, giving such victims the ability to pursue civil action against the perpetrators.

• IRS management of stolen identity cases. The Act requires that, not later than July 1, 2020, the IRS must develop and implement publicly available guidelines that reduce the burdens for identity theft tax refund fraud (IDTTRF) victims as they work with the IRS to sort out their tax affairs. The guidelines may include procedures to reduce the amount of time victims must wait to receive their tax refunds, the number of IRS employees with whom victims would need to interact, and the timeframe within which the issues related to the IDTTRF should be resolved.

Final regulations permit integrating HRAs with individual health insurance plans or Medicare. Final regulations have been issued allowing health reimbursement arrangements (HRAs) and other account-based group health plans to be integrated with individual health insurance coverage or Medicare, if certain conditions are satisfied (an individual coverage HRA). An account-based group health plan is an employer-provided group health plan that reimburses medical care expenses, subject to a maximum fixed-dollar amount of reimbursements for a period (e.g., a calendar year). An HRA is a type of account-based group health plan funded solely by employer contributions that reimburses employees solely for medical care expenses of employees or qualifying family members, up to a maximum dollar amount for a coverage period. The reimbursements are not taxed to employees.

Under the new regulations, an employer-funded individual coverage HRA reimburses employees for their (and eligible family members') medical care expenses. The employer can allow unused amounts in any year to roll over from year to year. Employees must enroll in individual health insurance (or Medicare) for each month the employee (or the employee's family member) is covered by the Individual coverage HRA. But the individual health insurance cannot be short-term, limited-duration insurance (STLDI) or coverage consisting solely of dental, vision, or similar "excepted benefits". There are other important requirements as well.

The new regulations also increase flexibility in employer-sponsored insurance by creating another, limited kind of HRA that can be offered in addition to a traditional group health plan. These "excepted benefit HRAs" permit employers to finance additional medical care (for example to help cover the cost of copays, deductibles, or other expenses not covered by the primary plan) even if the employee declines enrollment in the traditional group health plan.

Employers can start offering individual coverage HRAs and excepted benefit HRAs on Jan. 1, 2020.

Next year's inflation adjustments for health savings accounts. The IRS has provided the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2020 for health savings accounts (HSAs). Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers as well as other persons (e.g., family members) also may contribute on behalf of an eligible individual. Employer contributions generally are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from income. In general, a person is an "eligible individual" if he is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a high deductible plan, unless the other coverage is permitted insurance (e.g., for worker's compensation, a specified disease or illness, or providing a fixed payment for hospitalization).

For calendar year 2020, the limitation on deductions is $3,550 (up from $3,500 for 2019) for an individual with self-only coverage. It's $7,100 (up from $7,000 for 2019) for an individual with family coverage under a HDHP. Each of these amounts is increased by $1,000 if the eligible individual is age 55 or older. For calendar year 2020, an HDHP is a health plan with an annual deductible that is not less than $1,400 (up from $1,350 for 2019) for self-only coverage or $2,800 (up from $2,700 for 2019) for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, not including premiums) do not exceed $6,900 (up from $6,750 for 2019) for self-only coverage or $13,800 (up from $13,500 for 2019) for family coverage.

2019 luxury auto depreciation dollar limits and lease income add-backs released. Annual depreciation and expensing deductions for so-called luxury autos are limited to specific dollar amounts. The dollar limits amounts are inflation-adjusted each year. The IRS has announced that for autos (which includes trucks or vans) acquired and first placed in service during 2019, the dollar limit for the first year an auto is in service is $18,100 ($10,100 if the bonus first-year depreciation allowance does not apply, for example, because the taxpayer elects out of bonus first-year depreciation); for the second tax year, $16,100; for the third tax year, $9,700; and for each succeeding year, $5,760. These dollar limits are $100 higher than the dollar limits that applied for 2018 (except for the post-third tax year figure, which remains the same).

A taxpayer that leases a business auto may deduct the part of the lease payment representing its business/investment use. So that auto lessees can't avoid the effect of the luxury auto limits, however, taxpayers must include a certain amount in income during each year of the lease to partially offset the lease deduction. The amount varies with the initial fair market value of the leased auto and the year of the lease, and is adjusted for inflation each year. The IRS has released a new inclusion amount table for autos first leased during 2019.

Cents-per-mile & fleet average FMV maximums for 2019. IRS has announced that the 2019 inflation-adjusted maximum fair market values (FMVs) for employer-provided vehicles, the personal use of which can be valued for fringe benefit purposes at the mileage allowance rate (58¢ per mile for 2019). For 2019, the FMV can't exceed $50,400 (was $50,000 for 2018). In addition, the 2019 maximum fleet-average vehicle FMV for vehicles, for purposes of the use of the annual lease value fringe benefit valuation method for an employer with a fleet of 20 or more vehicles, also is $50,400 (was $50,000 for 2018). The IRS also announced that certain employers may switch to the cents-per-mile valuation method or the fleet-average FMV maximum for the 2018 or 2019 tax year.

IRS accepting ITIN renewal applications for next year. Individual Taxpayer Identification Numbers (ITINs) are used by people who have tax filing requirements under U.S. law but are not eligible for a Social Security number. The IRS has announced that it is now accepting renewal applications for the ITINs set to expire at the end of 2019. ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire on Dec. 31, 2019. In addition, ITINs with middle digits 83, 84, 85, 86 or 87 that have not already been renewed will also expire at the end of this year. IRS urged taxpayers affected by changes to the ITIN program to submit their renewal applications as soon as possible to avoid an anticipated rush.

If you would like more information on these topics or another tax topic of interest to you, please contact our office.

—McAvoy + Co, CPA