The IRS has issued guidance clarifying that taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct their business expenses, even if their PPP loans are forgiven. The IRS previously issued Notice 2020-32 and Rev. Rul. 2020-27, which stated that taxpayers who received PPP loans and had those loans forgiven would not be able to claim business deductions for their otherwise deductible business expenses.

The IRS has issued guidance clarifying that taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct their business expenses, even if their PPP loans are forgiven. The IRS previously issued Notice 2020-32 and Rev. Rul. 2020-27, which stated that taxpayers who received PPP loans and had those loans forgiven would not be able to claim business deductions for their otherwise deductible business expenses.

The COVID-Related Tax Relief Act of 2020 ( P.L. 116-260) amended the CARES Act ( P.L. 116-136) to clarify that business expenses paid with amounts received from loans under the PPP are deductible as trade or business expenses, even if the PPP loan is forgiven. Further, any amounts forgiven do not result in the reduction of any tax attributes or the denial of basis increase in assets. This change applies to years ending after March 27, 2020.

Notice 2020-32, I.R.B. 2020-21, 83 and Rev. Rul. 2020-27, I.R.B. 2020-50, 1552 are obsoleted.

The IRS has waived the requirement to file Form 1099 series information returns or furnish payee statements for certain COVID-related relief that is excluded from gross income.

The IRS has waived the requirement to file Form 1099 series information returns or furnish payee statements for certain COVID-related relief that is excluded from gross income.

Reporting Affected

The IRS waives the requirement to file Form 1099 series information returns, or furnish payee statements, for the following:

• forgiveness of covered loans under the original Paycheck Protection Program (PPP);
• forgiveness of covered loans under the Paycheck Protection Program Second Draw (PPP II);
• Treasury Program loan forgiveness under section 1109 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136);
• certain loan subsidies authorized under section 1112(c) of the CARES Act;
• certain COVID-related student emergency financial aid grants under section 3504, 18004, or 18008 of the CARES Act or section 277(b)(3) of the COVID-related Tax Relief Act of 2020 (COVID Relief Act) (Division N, P.L. 116-260);
• Economic Injury Disaster Loan (EIDL) grants under section 1110(e) of the CARES Act or section 331 of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) (Division N, P.L. 116-260); and
• shuttered venue operator grants under section 324(b) of the Economic Aid Act.

Other Reporting

The waivers do not affect requirements to file and furnish other forms, such as forms in the 1098 series. For example, the waiver does not apply to the requirement to file and furnish Form 1098-T, Tuition Statement, for qualified tuition and related expense payments, including qualified tuition and related expenses paid with COVID-related student emergency financial aid grants. Also, because borrowers may deduct mortgage interest that the Small Business Administration paid to lenders, lenders may include those mortgage interest payments in Box 1 of Form 1098, Mortgage Interest Statement. Lenders who are unable to furnish with this information by February 1, 2021, are encouraged to furnish a corrected Form 1098 as promptly as possible.

Due to the COVID-19 pandemic, certain employers and employees who use the automobile lease valuation rule to determine the value of an employee’s personal use of an employer-provided automobile may switch to the vehicle cents-per-mile method.

Due to the COVID-19 pandemic, certain employers and employees who use the automobile lease valuation rule to determine the value of an employee’s personal use of an employer-provided automobile may switch to the vehicle cents-per-mile method.

Background

Under the general rule, an employer who provides an employee a vehicle must adopt one of the following methods to determine the value of an employee’s personal use of the vehicle: the automobile lease valuation rule, or the vehicle cents-per-mile valuation rule. (In certain cases, a third method, the commuting valuation rule, may be used.)

The employer and the employee must use the chosen valuation method consistently (that is, in each subsequent year), except that the employer and the employee may use the commuting valuation rule if its requirements are satisfied.

As a result of the pandemic, many employers suspended business operations or implemented telework arrangements for employees, thus reducing business and personal use of employer-provided automobiles, This has increased the lease value to be included in an employee’s income for 2020 compared to prior years. In contrast, the vehicle cents-per-mile valuation rule includes in income only the value that relates to actual personal use, providing a more accurate reflection of the employee’s income in these circumstances.

Switch to Cents-per-Mile

Due to the suddenness and unexpected onset of the COVID-19 pandemic, the IRS is allowing an employer that uses the automobile lease valuation rule for the 2020 calendar year to instead use the vehicle cents-per-mile valuation rule beginning on March 13, 2020, if:

• at the beginning of 2020, the employer reasonably expected that an automobile with a fair market value not exceeding $50,400 would be regularly used in the employer’s trade or business throughout the year; and
• due to the COVID-19 pandemic, the automobile was not regularly used in the employer’s trade or business throughout the year.

Employers that choose to switch from the automobile lease valuation rule to the vehicle cents-per-mile valuation rule in the 2020 calendar year must prorate the value of the vehicle using the automobile lease valuation rule for January 1, 2020, through March 12, 2020.

Employers that switch to the vehicle cents-per-mile valuation rule during 2020 generally may:

• revert to the automobile lease valuation rule for 2021; or
• continue using vehicle cents-per-mile valuation rule for 2021.

In either case, the special valuation rule used in 2021 must be used for all subsequent years.

Employees must use the same special valuation rule used by their employer.

Estimated tax underpayment penalties under Code Sec. 6654 are waived for certain excess business loss-related payments for tax years beginning in 2019. The relief is available to individuals, as well as trusts and estates that are treated as individuals for estimated tax payment penalty purposes.

Estimated tax underpayment penalties under Code Sec. 6654 are waived for certain excess business loss-related payments for tax years beginning in 2019. The relief is available to individuals, as well as trusts and estates that are treated as individuals for estimated tax payment penalty purposes.

Rules Delayed

Certain business losses were limited in tax years beginning in 2017 through 2025 by the excess business loss rules of Code Sec. 461(l). Under these rules, any disallowed excess business losses are carried forward as net operating losses (NOLs). The Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) postponed application of the excess business loss rules to tax years beginning after December 31, 2020.

Relief for 2019

The relief is available only for estimated tax income tax installments due on or before July 15 2020 for a tax year that began in 2019.

An individual taxpayer may have underpaid one or more installments for the tax year that began in 2019, if the individual anticipated having a lower required annual payment after using an NOL carried forward from a prior-year excess business loss that, before the enactment of the CARES Act, would have been available to reduce taxable income in the tax year that began in 2019.

Waiver Request

To qualify for the relief, the taxpayer must:

• have filed a timely 2019 federal income tax return;
• complete the 2019 version of Form 2210, Underpayment of Estimated Taxes, or Form 2210-F, Underpayment of Tax for Farmers and Fishermen; and
• include certain required attachments and calculations.

The IRS has extended the time period during which employers must withhold and pay the employee portion of Social Security tax that employers elected to defer on wages paid from September 1, 2020, through December 31, 2020.

The IRS has extended the time period during which employers must withhold and pay the employee portion of Social Security tax that employers elected to defer on wages paid from September 1, 2020, through December 31, 2020. Specifically:

• the end date of the period for withholding and paying the deferred tax is postponed from April 30, 2021, to December 31, 2021; and
• any interest, penalties, and additions to tax for late payment of any unpaid deferred tax will begin to accrue on January 1, 2022, rather than on May 1, 2021.

Notice 2020-65, I.R.B. 2020-38, 567, is modified.

Employee Tax Deferral

In response to the coronavirus (COVID-19) disaster, President Trump issued a memorandum on August 8, 2020, directing the Treasury Secretary to use his Code Sec. 7508A authority to defer the withholding, deposit, and payment of the employee portion of the 6.2-percent old-age, survivors and disability insurance (OASDI) tax (Social Security tax) under Code Sec. 3101(a), and the Railroad Retirement Tax Act (RRTA) Tier 1 tax that is attributable to the 6.2-percent Social Security tax under Code Sec. 3201. The deferral was available only for tax on wages paid from September 1, 2020, through December 31, 2020, and only for employees whose biweekly, pre-tax pay was less than $4,000, or a similar amount where a different pay period applied.

The Treasury Secretary and the IRS then issued Notice 2020-65, directing employers that elected to apply the deferral to withhold and pay the deferred taxes ratably from wages and compensation paid between January 1, 2021, and April 30, 2021. Interest, penalties, and additions to tax would begin to accrue on May 1, 2021, on any unpaid applicable taxes.

Payment Period Extended

The recent COVID-related Tax Relief Act of 2020 (Division N, P.L. 116-260) extended the payment period, and required the Treasury Secretary to apply Notice 2020-65 by substituting "December 31, 2021" for "April 30, 2021" and substituting "January 1, 2022" for "May 1, 2021."

Employers that elected to defer employees’ payroll taxes can now withhold and pay the deferred tax throughout 2021, instead of just during the first four months of the year.

The IRS has issued guidance that provides partnerships with relief from certain penalties for the inclusion of incorrect information in reporting their partners’ beginning capital account balances on the 2020 Schedules K-1 (Forms 1065 and 8865). The IRS has also provided relief from accuracy-related penalties for any tax year for the portion of an imputed underpayment attributable to the inclusion of incorrect information in a partner’s beginning capital account balance reported by a partnership for the 2020 tax year.

The IRS has issued guidance that provides partnerships with relief from certain penalties for the inclusion of incorrect information in reporting their partners’ beginning capital account balances on the 2020 Schedules K-1 (Forms 1065 and 8865). The IRS has also provided relief from accuracy-related penalties for any tax year for the portion of an imputed underpayment attributable to the inclusion of incorrect information in a partner’s beginning capital account balance reported by a partnership for the 2020 tax year.

Penalty Relief

A partnership will not be subject to a penalty under Code Secs. 6698, 6721, or 6722 for the inclusion of incorrect information in reporting its partners’ beginning capital account balances on the 2020 Schedules K-1 if the partnership can show that it took ordinary and prudent business care in following the 2020 Form 1065 Instructions. Under those instructions, a partnership can report its partners’ beginning capital account balances using any one of the following methods: tax basis method, modified outside basis method, modified previously taxed capital method, or section 704(b) method.

In addition, a partnership will not be subject to a penalty under Code Secs. 6698, 6721, or 6722 for the inclusion of incorrect information in reporting its partners’ ending capital account balances on Schedules K-1 in tax year 2020, or its partners’ beginning or ending capital account balances on Schedules K-1 in tax years after 2020, to the extent the incorrect information is attributable solely to the incorrect information reported as the beginning capital account balance on the 2020 Schedule K-1 for which relief is provided by this guidance.

Finally, on certain conditions, the IRS will waive any accuracy-related penalty under Code Sec. 6662 for any tax year with respect to any portion of an imputed underpayment that is attributable to an adjustment to a partner’s beginning capital account balance reported by the partnership for the 2020 tax year. However, this waiver will be granted only to the extent the adjustment arises from the inclusion of incorrect information for which the partnership qualifies for relief under section 3 of this guidance.

Final regulations provide guidance related to the limitation on the deduction for employee compensation in excess of $1 million.

Final regulations provide guidance related to the limitation on the deduction for employee compensation in excess of $1 million. Specifically, the regulations address:

• what constitutes a publicly held corporation for purposes of Code Sec. 162(m)(2);
• the definition of a covered employee for purposes of Code Sec. 162(m)(3);
• the definition of compensation for purposes of Code Sec. 162(m)(4);
• the application of Code Sec. 162(m) to a taxpayer’s deduction for compensation for a tax year ending on or after a privately held corporation becomes public; and
• what constitutes a binding contract and material modification for purposes of the grandfather rule in Code Sec. 162(m)(4)(B).

The IRS has adopted the proposed regulations with a small number of modifications.

Background

The Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA) modified the definitions of "covered employee," "compensation," and "publicly held corporation" for purposes of the limitation on the deduction for excessive employee compensation paid by publicly held corporations.

Publicly Held Corporations

The TCJA expanded the definition of publicly held corporation to include: (1) corporations with any class of securities and (2) corporations that are required to file reports under section 15(d) of the Exchange Act. The final regulations adopt the prosed regulation’s stance that a corporation is publicly held if, as of the last day of its tax year, its securities are required to be registered under section 12 of the Exchange Act or is required to file reports under section 15(d). A foreign private issuer (FPI) is also a publicly held corporation if it meets the same requirements.

Under the regulations, a publicly held corporation includes an affiliated group of corporations (affiliated group) that contains one or more publicly held corporations. In addition a subsidiary corporation that meets the definition of publicly held corporation is separately subject to Code Sec. 162(m) compensation limitations. Furthermore, an affiliated group includes a parent corporation that is privately held if one or more of its subsidiary corporations is a publicly held corporation. The regulations provide further clarification for affiliated groups where certain members are not publicly held. In the case where a covered employee of two or more members of an affiliated groups is paid by a member of the affiliated group that is not a publicly held, the compensation is prorated for purposes of determining the deduction.

In instances where a privately held corporation becomes public, Code Sec. 162(m) applies to the deduction for any compensation that is otherwise deductible for the tax year ending on or after the date that the corporation becomes a publicly held corporation. The regulations provide that a corporation is considered to become publicly held on the date that its registration statement becomes effective either under the Securities Act or the Exchange Act.

Covered Employees

Under the TCJA, a covered employee is the principal executive officer (PEO), the principal financial officer (PFO), or one of the three other highest compensated executives. The final regulations adopt the proposed regulation’s stance that there is no requirement that an employee must an executive officer at the end of the tax year to be a covered employee. Covered employees may include employees who have left the corporation. Furthermore, the definition applies regardless of whether the executive officer’s compensation is subject to disclosure for the last completed fiscal year under the applicable SEC rules.

The term "covered employee" also includes any employee who was a covered employee of any predecessor of the publicly held corporation for any preceding taxable year beginning after December 31, 2016. The regulations provide rules for determining the predecessor of a publicly held corporation for various corporate transactions. With respect to asset acquisitions, the regulations provide that, if an acquiror corporation acquires at least 80% of the net operating assets (determined by fair market value on the date of acquisition) of a publicly held target corporation, then the target corporation is a predecessor of the acquiror corporation for purposes of covered employees.

Applicable Employee Compensation

The final regulations define compensation as the aggregate amount allowable as a deduction for services performed by a covered employee, without regard for Code Sec. 162(m). Compensation includes payment for services performed by a covered employee in any capacity, including as a common law employee, a director, or an independent contractor. The regulations clarify that compensation also includes an amount that is includible in the income of, or paid to, a person other than the covered employee, including after the death of the covered employee.

In cases where a publicly held corporation holds a partnership, it must:

• take into account its distributive share of the partnership’s deduction for compensation paid to the publicly held corporation’s covered employee and
• aggregate that distributive share with the corporation’s otherwise allowable deduction for compensation paid directly to that employee in applying the Code Sec. 162(m) deduction limitation.

Grandfather Rules

The amendments made by the TCJA to Code Sec. 162(m) do not apply to any compensation paid under a written binding contract that is effect on November 2, 2017, and is not materially modified after that date. A contract is binding if it obligates a publicly held company to pay the compensation if the employee performs services or satisfies requirements in the contract. Under the final regulations:

• The TCJA amendments apply to any amount of compensation that exceeds the amount that applicable law obligates the corporation to pay under a written binding contract that was in effect on November 2, 2017.
• A provision in a compensation agreement that purports to give the employer discretion to reduce or eliminate a compensation payment (negative discretion) is taken into account only to the extent the corporation has the right to exercise that discretion under applicable law, such as state contract law.
• Under an ordering rule, the grandfathered amount is allocated to the first otherwise deductible payment paid under the arrangement, then to the next otherwise deductible payment, etc. For tax years ending before December 20, 2019, the final regulations allow the grandfathered amount to be allocated to the last otherwise deductible payment or to each payment on a pro rata basis.
• A material modification occurs when a contract is amended to increase the amount of compensation payable to the employee. However, a modification that defers compensation is not a material modification if any compensation that exceeds the original amount based on a reasonable rate of interest or a predetermined actual investment.

The final regulations depart from the proposed regulations with respect to the recovery of compensation. Under the proposed regulations, a corporation’s right to recover compensation is disregarded in determining the grandfathered amount only if the corporation recovery right or obligation depends on a future condition that is objectively outside of the corporation’s control. However, the final regulations recognize that a recovery right is a contractual right that is separate from the corporation’s binding obligation to pay the compensation. Accordingly, the final regulations provide that the corporation’s right to recover compensation does not affect the determination of the amount of compensation the corporation has a written binding contract to pay under applicable law as of November 2, 2017.

The final regulations also clarify the application of the grandfather rule to compensation payable under nonqualified deferred compensation (NQDC) plans. Specifically, the grandfathered amount under an is the amount that the corporation is obligated to pay under the terms of the plan as of November 2, 2017. The regulations also provide rules for calculating the grandfather amount for account balance plans, and analogous rules for nonaccount balance plans when:

• the corporation is obligated to pay the employee the account balance that is credited with earnings and losses and has no right to terminate or materially amend the contract;
• the terms of a plan that is a written binding contract as of November 2, 2017, provide that the corporation may terminate the plan and distribute the account balance to the employee; or
• the plan provides that the corporation may not terminate the contract, but may discontinue future contributions and distribute the account balance.

However, the corporation may instead elect to treat the account balance as of the termination or freeze date as the grandfathered amount regardless of when the amount is paid and regardless of whether it has been credited with earnings or losses prior to payment.

In addition, the final regulations provide that all compensation attributable to the exercise of a non-statutory stock option or a stock appreciation right (SAR) is grandfathered if the option or SAR is grandfathered and the extension satisfies Reg. §1.409A-1(b)(5)(v)(C)(1).

Effective Dates

Generally, these final regulations apply to taxable years beginning on or after the date that they are published as final in the federal register. However, taxpayers may choose to apply these final regulations to a taxable year beginning after December 31, 2017. Taxpayers that elect to apply the final regulations before the effective date must apply the final regulations consistently and in their entirety to that taxable year and all subsequent taxable years.

In addition, the final regulations include special applicability dates for certain aspects of the definition of:

• a covered employee,
• a predecessor of a publicly held corporation,
• compensation, and
• a written binding contract and material modification.

The regulations also include a special applicability date for the application of the Code Sec. 162(m) deduction limitations deductible for a taxable year ending on or after a privately held corporation becomes a publicly held corporation.

The IRS has issued final regulations providing additional guidance on the limitation on the deduction for business interest under Code Sec. 163(j). The regulations finalize various portions of the proposed regulations issued in 2020 with few modifications. They address the application of the limit in the context of calculating adjusted taxable income (ATI) with respect to depreciation, amortization, and depletion. The regulations also finalize rules on the definitions of real property development and redevelopment, as well as application to passthrough entities, regulated investment companies (RICs), and controlled foreign corporations.

The IRS has issued final regulations providing additional guidance on the limitation on the deduction for business interest under Code Sec. 163(j). The regulations finalize various portions of the proposed regulations issued in 2020 with few modifications. They address the application of the limit in the context of calculating adjusted taxable income (ATI) with respect to depreciation, amortization, and depletion. The regulations also finalize rules on the definitions of real property development and redevelopment, as well as application to passthrough entities, regulated investment companies (RICs), and controlled foreign corporations.

Calculating ATI

A taxpayer’s ATI for purposes of the Section 163(j) limit is the taxpayer’s tentative taxable income for the tax year with certain adjustments. For example, depreciation, amortization, and depletion for tax years beginning before January 1, 2022, is added back to tentative taxable income, but is subtracted from tentative taxable income if the taxpayer sells or disposes the property before January 1, 2022.

The final regulations provide that a taxpayer has the option to use an alternative computation method for property dispositions where the ATI adjustment is the lesser of: (1) any gain recognized on the sale or disposition; or (2) the greater of the allowed or allowable depreciation, amortization, or depletion deduction of the property sold before January 1, 2022.

Similar rules apply for the sale or other disposition of an interest in a partnership or stock of a member of a consolidated group. However, the negative adjustment to tentative taxable income is reduced to the extent the taxpayer establishes that the additions to tentative taxable income in a prior tax year did not result in an increase in the amount allowed as a deduction for business interest expense for the year.

Real Property Development

The Section 163(j) limit does not apply to certain excepted trades or businesses, including an electing real property trade or business. An electing real property trade or business is any trade or business described in Code Sec. 469(c)(7)(C).

In response to comments about the application of this definition to timberlands, the 2020 proposed regulations provided definitions for real property development and redevelopment for clarity relying on the Code Sec. 464(e) definition of farming for that purpose. Section 464(e) generally excludes the cultivation and harvesting of trees (except those bearing fruit or nuts) from the definition of "farming".

The final regulations retain these definitions for real property development and real property redevelopment. Thus, to the extent the evergreen trees may be located on parcels of land covered by forest, the business activities of cultivating and harvesting such evergreen trees are a component of a "real property development" or "real property redevelopment" trade or business.

Self-Charged Lending

The final regulations adopt the proposed rules for self-charged lending transactions between partners and partnerships without change. For a transaction between a lending partner and a borrowing partnership in which the lending partner owns a direct interest, any business interest expense of the borrowing partnership attributable to a self-charged lending transaction is business interest expense of the borrowing partnership.

However, to the extent the lending partner receives interest income attributable to the self-charged lending transaction and also is allocated excess business interest in the same tax year, the lending partner may treat that interest income as an allocation of excess business income from the borrowing partnership to the extent of the lending partner’s allocation of excess business interest expense.

The IRS has released final regulations that address the changes made to Code Sec. 162(f) by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), concerning the deduction of certain fines, penalties, and other amounts. The final regulations also provide guidance relating to the information reporting requirements for fines and penalties under Code Sec. 6050X.

The IRS has released final regulations that address the changes made to Code Sec. 162(f) by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), concerning the deduction of certain fines, penalties, and other amounts. The final regulations also provide guidance relating to the information reporting requirements for fines and penalties under Code Sec. 6050X.

The final regulations adopt proposed regulations released last May ( NPRM REG-104591-18), with modifications.

TCJA Changes

Under changes made to Code Sec. 162(f) by the TCJA, businesses may not deduct fines and penalties paid or incurred after December 21, 2017, due to the violation of a law (or the investigation of a violation) if a government (or similar entity) is a complainant or investigator. Exceptions to this rule are available if the payment was for restitution, remediation, taxes due, or paid or incurred to come into compliance with a law. For the exceptions to apply, the taxpayer must identify the payment as restitution, remediation, or compliance in a court order or settlement agreement. In addition, Code Sec. 6050X now requires the officer or employee that has control over the suit or agreement to file a return with the IRS

The final regulations establish that a taxpayer generally may not take a deduction for any amount that was paid or incurred:

• by suit, agreement, or otherwise;
• to, or at the direction of, a government or governmental entity; and
• in relation to the violation, or investigation or inquiry by the government or governmental entity into the potential violation, of any civil or criminal law.

This rule applies regardless of whether the taxpayer admits guilt or liability, or pays the amount imposed for any other reason. This includes instances where the taxpayer pays to avoid the expense or uncertain outcome of an investigation or litigation.

The final regulations also clarify that a suit or agreement is treated as binding under applicable law even if all appeals have not been exhausted.

Governmental Entities

Under the final regulations, governmental entities include nongovernmental entities that exercise self-regulatory powers, including imposing sanctions.

The regulations also clarify that, for purposes of the information reporting requirements in Code Sec. 6050X, a nongovernmental entity treated as a governmental entity does not include a nongovernmental entity of a territory of the United States, including American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands, a foreign country, or a Native American tribe.

Violations of Law

Under the final regulations, violations of the law do not include any order or agreement in a suit in which a government or governmental entity enforces rights as a private party.

Investigations

The final regulations also make clear that amounts paid or incurred for required routine investigations or inquiries continue to be deductible. In general, amounts paid or incurred for routine investigations or inquiries, such as audits or inspections, required to ensure compliance with rules and regulations applicable to the business or industry, which are not related to any evidence of wrongdoing or suspected wrongdoing, are not amounts paid or incurred relating to the potential violation of any law.

Establishing Payment

Under the final regulations, a taxpayer can establish that a payment was made for restitution or remediation by providing documentary evidence of the following:

• the taxpayer was legally obligated to pay the amount that the order or agreement identified as restitution, remediation, or to come into compliance with a law;
• the amount paid or incurred for the nature and purpose identified; and
• the date on which the amount was paid or incurred.

The final regulations expand the list of documentary evidence that may be used to meet the establishment requirement. According to the regulations, taxpayers may be able to use documentary evidence in a foreign language to satisfy the establishment requirement if the taxpayer provides a complete and accurate certified English translation of the documentary evidence.

Reporting of the amount by a government or governmental entity under Code Sec. 6050X alone does not satisfy the establishment requirement.

Disgorgement, Forfeiture of Profits

Under the final regulations, a taxpayer’s claim for a deduction for amounts paid or incurred through disgorgement or forfeiture of profits will be permitted if:

• the amount is otherwise deductible;
• the order or agreement identifies the payment, not in excess of net profits, as restitution, remediation, or an amount paid to come into compliance with a law;
• the taxpayer establishes that the amount was paid as restitution, remediation, or an amount paid to come into compliance with a law; and
• the origin of the taxpayer’s liability is restitution, remediation, or an amount paid to come into compliance with a law.

However, amounts paid or incurred through disgorgement will be disallowed if the amounts are disbursed to the general account of the government or governmental entity for general enforcement efforts or other discretionary purposes.

Restitution, Remediation

Final Reg. §1.162-21(e)(4)(i) clarifies that restitution and remediation do not include amounts paid to a general account or for discretionary purposes. In addition, the final regulations provide that if amounts paid by the taxpayer pursuant to an order or an agreement is returned, the taxpayer must include the amount in its income under the tax benefit rule.

Reg. §1.162-21(e)(4)(i)(A) also provides special restitution and remediation rules to address amounts paid or incurred for irreparable harm to the environment, natural resources, or wildlife.

Coming into Compliance

The final regulations list certain payments that will not be treated as “paid or incurred to come into compliance with a law.” In addition, the taxpayer must perform any required services or take any required action in order to come into compliance with the law.

The final regulations also modify an example to clarify that when a taxpayer upgrades equipment or property to a higher standard than what is required to come into compliance with the law, the taxpayer will be able to deduct the difference between what the taxpayer paid and the amount required to come into compliance.

Identification

Under Code Sec. 162(f)(2)(A), an order or agreement must identify the amount paid or incurred as restitution, remediation, or to come into compliance with a law. The final regulations modify the proposed rule for payment amounts not identified. Under this rule, the identification requirement may be met even if the order or agreement does not allocate the total lump-sum payment amount among restitution, remediation, or to come into compliance with the law. The rule also applies when the order or agreement fails to allocate the total payment among multiple taxpayers. In addition, the final regulations clarify that the identification requirement may be met even in cases where the order or agreement does not provide an estimated payment amount.

Consistent with Code Sec. 162(f)(2)(A)(ii), the final regulations provide that the order or agreement, not the taxpayer, must meet the identification requirement with language specifically stating or describing that the amount will be paid or incurred as restitution, remediation, or to come into compliance with a law.

The final regulations eliminated the rebuttable presumption for the identification requirement. Instead, the identification requirement is met when the order or agreement specifically states that the payment constitutes restitution, remediation, or an amount paid to come into compliance with a law, or when it uses a different form of the required words. For orders or agreements in a foreign language, in order to meet the identification requirement the taxpayer must provide a complete and accurate certified English translation that describes the nature and purpose of the payment using the foreign language equivalent of restitution, remediation, or coming into compliance with the law.

According to the final regulations, an order or agreement will also meet the identification requirement if it describes the damage done, harm suffered, or manner of noncompliance with a law, and describes the action required of the taxpayer to (1) restore the party, property, or environment harmed or (2) perform services, take action, or provide property to come into compliance with that law.

Taxes and Interest

Under Code Sec. 162(f)(4), taxpayers may still deduct any taxes due, including any related interest on the taxes. However, the final regulations clarify that if penalties are imposed with respect to otherwise deductible taxes, a taxpayer may not deduct the penalties or the interest paid with respect to such penalties.

Multiple Payors

The final regulations address situations where there are multiple payors and the aggregate amount they are required to pay, or the costs to provide the property or the service, meets or exceeds the threshold amount. In those instances, the appropriate official should file an information return and furnish a written statement for the separate amount that each individually liable payor is required to pay, even if a payor’s payment liability is less than the threshold amount.

Material Change

According to the TCJA, the amendments to Code Sec. 162(f) apply to agreements entered into on or after December 22, 2017. However, the proposed regulations clarified that if the parties to an agreement that was binding prior to December 22, 2017, make a material change to that agreement on or after the date that the proposed regulations become final, the regulations will apply to the agreement. The final regulations have eliminated that requirement.

Reporting Requirements

The final regulations provide that if the aggregate amount a payor is required to pay equals or exceeds the threshold amount of $50,000 under Reg. §1.6050X-1(f)(6), the appropriate official of a government or governmental entity must file an information return with the IRS with respect to the amounts or incurred paid and any additional information required. That information includes:

• the amounts paid or incurred pursuant to the order or agreement;
• the payor’s taxpayer identification number (TIN); and
• other information required by the information return and the related instructions.

The official must provide this information by filing Form 1098-F, Fines, Penalties, and Other Amounts, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns, on or before the annual due date. However, the regulations do not require an appropriate official to file information returns for each tax year in which a payor makes a payment pursuant to a single order or agreement. Instead, the appropriate official should only one information return for the aggregate amount identified in the order or agreement.

In instances where the final amount is unknown but is expected to meet or exceed the $50,000 threshold amount, the appropriate official should report the threshold amount on Form 1098-F.

The appropriate official must also furnish a written statement with the same information to the payor. They can satisfy this requirement by providing a copy of Form 1098-F. This statement must be provided by January 31 of such year.

Effective Date

The final regulations apply to tax years beginning on or after the date of publication in the Federal Register. The final regulations under Reg. §1.6050X-1 apply only to orders and agreements, pursuant to suits and agreements, that become binding under applicable law on or after January 1, 2022.

The IRS has provided a safe harbor allowing a trade or business that manages or operates a qualified residential living facility to be treated as a "real property trade or business" solely for purposes of qualifying to make the Code Sec. 163(j)(7)(B) election. This guidance formalizes the proposed safe harbor issued in Notice 2020-59, I.R.B. 2020-34, 782. Taxpayers may apply the rules to tax years beginning after December 31, 2017.

The IRS has provided a safe harbor allowing a trade or business that manages or operates a qualified residential living facility to be treated as a "real property trade or business" solely for purposes of qualifying to make the Code Sec. 163(j)(7)(B) election. This guidance formalizes the proposed safe harbor issued in Notice 2020-59, I.R.B. 2020-34, 782. Taxpayers may apply the rules to tax years beginning after December 31, 2017.

Qualified Residential Living Facilities

A facility is deemed to be a "qualified residential living facility" if it:

• consists of multiple rental dwelling units within one or more buildings or structures that generally serve as primary residences on a permanent or semi-permanent basis to individual customers or patients;
• provides supplemental assistive, nursing, or other routine medical services;
• has an average period of customer or patient use of individual rental dwelling units of 30 days or more; and
• retains books and records to substantiate requirements.

Further, taxpayers must use the Code Sec. 168(g) alternative depreciation system to depreciate the property under Code Sec. 168(g)(8).

Taxpayers satisfying the requirements of the safe harbor after a deemed cessation of the electing trade or business will have their initial election under Code Sec. 163(j)(7)(B) automatically reinstated.

The IRS has released final regulations addressing the post-2017 simplified accounting rules for small businesses. The final regulations adopt and modify proposed regulations released in August 2020.

The IRS has released final regulations addressing the post-2017 simplified accounting rules for small businesses. The final regulations adopt and modify proposed regulations released in August 2020.

Implementation of the Rules

The Tax Cuts and Jobs Act ( P.L. 115-97) put in place a single $25 million gross receipts test for determining whether certain taxpayers qualify as small taxpayers that can use the cash method of accounting, are not required to use inventories, are not required to apply the Uniform Capitalization (UNICAP rules), and are not required to use the percentage of completion method for a small construction contract.

Highlights of Changes in the Final Regulations

Annual syndicate election. The proposed regulations permit a taxpayer to elect to use the allocated taxable income or loss of the immediately preceding tax year to determine whether the taxpayer is a syndicate under Code Sec. 448(d)(3) for the current tax year. Under the proposed regulations, a taxpayer that makes this election must apply the rule to all subsequent tax years, unless it receives IRS permission to revoke the election.

The final regulations provide additional relief by making the election an annual election. The election is valid only for the tax year for which it is made, and once made, cannot be revoked. The IRS intends to issue procedural guidance to address the revocation of an election made under the proposed regulations as a result of the application of the final regulations.

Five-year written consent requirement relaxed. The proposed regulations require a taxpayer that meets the gross receipts test in the current tax year to obtain the written consent of the Commissioner before changing to the cash method if the taxpayer had previously changed its overall method from the cash method during any of the five tax years ending with the current tax year. The final regulations remove the 5-year restriction on making automatic accounting method changes for certain situations.

Other changes. Additional changes include the following:

• To reduce confusion about the nature of property treated as non-incidental materials and supplies under Code Sec. 471(c)(1)(B)(i), the final regulations refer to the method under that provision as the "section 471(c) NIMS inventory method."
• The final regulations provide that inventory costs includible in the section 471(c) NIMS inventory method are direct material costs of the property produced or the costs of property acquired for resale.
• Examples are added to clarify the principle that a taxpayer may not ignore its regular accounting procedures or portions of its books and records under the non-AFS section 471(c) inventory method.
• The final regulations clarify how a taxpayer treats costs to acquire or produce tangible property that the taxpayer does not capitalize in its books and records.

Applicability Date

The final regulations are applicable for tax years beginning on or after the date of publication in the Federal Register. However, a taxpayer may apply the final regulations under a particular Code provision for a tax year beginning after December 31, 2017, if the taxpayer follows all the applicable rules contained in the regulations that relate to that Code provision for the tax year and all subsequent tax years, and follows the administrative procedures for filing a change in method of accounting.

The upcoming filing season is expected to be challenging for taxpayers and the IRS as new requirements under the Patient Protection and Affordable Care Act kick-in. Taxpayers, for the first time, must make a shared responsibility payment if they fail to carry minimum essential health care coverage or qualify for an exemption. At the same time, there is growing uncertainty over one of the key elements of the Affordable Care Act: the Code Sec. 36B premium assistance tax credit as litigation makes its way to the U.S. Supreme Court.

The upcoming filing season is expected to be challenging for taxpayers and the IRS as new requirements under the Patient Protection and Affordable Care Act kick-in. Taxpayers, for the first time, must make a shared responsibility payment if they fail to carry minimum essential health care coverage or qualify for an exemption. At the same time, there is growing uncertainty over one of the key elements of the Affordable Care Act: the Code Sec. 36B premium assistance tax credit as litigation makes its way to the U.S. Supreme Court.

Individual shared responsibility payment

Individuals who are not exempt from the individual mandate and who do not carry minimum essential coverage in 2014 must make a shared responsibility payment. The payment is due when the individual files his or her 2014 tax return in 2015. In November, the IRS’s national ACA coordinator said that the agency will work with individuals who owe a shared responsibility payment and may not have the resources to make the payment when they file their return. Keep in mind that the IRS will apply any refund to a taxpayer’s unpaid shared responsibility payment. The IRS cannot, however, use its lien and levy power to collect an unpaid shared responsibility payment.

Note. For 2014, the shared responsibility payment amount generally is the greater of: One percent of the person's household income that is above the tax return threshold for their filing status; or a flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285. The individual shared responsibility payment, however, does not stay at this level after 2014. By 2016, the payment grows significantly.

In November, the IRS clarified when Medicaid coverage qualifies as minimum essential coverage and when it may not. The IRS also clarified how employer contributions to a cafeteria plan impact minimum essential coverage. Final regulations exclude employer contributions to a cafeteria plan from an employee’s household income for purposes of determining minimum essential coverage,

Exemptions

The IRS reminded individuals in November that they may be exempt from the requirement to carry minimum essential coverage. There are nine main exemptions: religious conscience; health care sharing ministries; members of federally recognized Native American nations; individuals whose income is below the minimum return filing threshold; individuals with a short coverage gap; hardship cases; affordability cases; incarcerated individuals; and individuals not lawfully present in the U.S.

Some exemptions are obtained through the Marketplaces, some through the filing process, and some either way. The exemptions for members of federally recognized Native American nations, members of health care sharing ministries and individuals who are incarcerated are available either from the Marketplace or claiming the exemption as part of filing a federal income tax return. The exemptions for lack of affordable coverage, a short coverage gap, and household income below the filing threshold and individuals who are not lawfully present in the U.S. may be claimed only as part of filing a federal income tax return. In November, the IRS removed references to specific hardships and streamlined the process for obtaining an exemption because of a hardship.

Code Sec. 36B litigation

The Code Sec. 36B premium assistance tax credit helps offset the cost of health insurance obtained through the ACA Marketplace. According to the U.S. Department of Health and Human Services (HHS), more than two-thirds of enrollees in Marketplace coverage were eligible for the credit in 2014. IRS regulations for the credit, however, have come under fire for being contrary to the ACA. The regulations allow enrollees in state-run Marketplaces and federal-facilitated Marketplaces to claim the credit. 

In July, the U.S. Court of Appeals for the District of Columbia Circuit struck down the IRS regulations in Halbig, 2014-2 USTC ¶50,366. The D.C. Circuit found that the plain language of the Affordable Care Act limits the credit to enrollees in state-run Marketplaces. In contrast, the Court of Appeals for the Fourth Circuit upheld the regulations in King, 2014-2 USTC ¶50,367. The Fourth Circuit found that it could not say definitively that Congress intended to limit the Code Sec. 36B credit to individuals who obtain insurance through state-run Marketplaces.

The U.S. Supreme Court announced in November that it will hear an appeal of King. The Supreme Court is expected to hear oral arguments about the IRS regulations in early 2015. A decision will likely be announced in June 2015. Our office will keep you posted of developments.

Open enrollment

The ACA Marketplace opened for enrollment for 2015 coverage on November 15 and runs through February 15, 2015. HHS explained that it has streamlined application procedures for individuals who are renewing coverage and who are applying for coverage for the first time. The Small Business Health Option Program (SHOP) also opened on November 15. Small employers (employers with 50 or fewer full-time equivalent employees) may enroll qualified employees in health coverage through SHOP.

Please contact our office if you have any questions about the Affordable Care Act and the new requirements.

As most people know, a taxpayer can take a distribution from an IRA without being taxed if the taxpayer rolls over (contributes) the amount received into an IRA within 60 days. This tax-free treatment does not apply if the individual rolled over another distribution from an IRA within the one-year period ending on the day of the second distribution.

As most people know, a taxpayer can take a distribution from an IRA without being taxed if the taxpayer rolls over (contributes) the amount received into an IRA within 60 days. This tax-free treatment does not apply if the individual rolled over another distribution from an IRA within the one-year period ending on the day of the second distribution.

Taxpayers and the IRS both believed that this one-rollover-per-year limit was applied separately to each IRA owned by the individual. If an individual owned two IRAs, for example, the taxpayer could do two rollovers in the appropriate period - one from each IRA. The IRS applied this interpretation in proposed regulations and in Publication 590, IRAs.

One rollover per taxpayer

In Bobrow, TC Memo. 2014-21, CCH Dec. 59,823(M), issued in January 2014, the Tax Court concluded that a taxpayer could make only one nontaxable rollover between IRAs within a one-year period, regardless of how many IRAs the taxpayer maintained. Thus, the one-per-year limit applied to the taxpayer, not to each separate IRA owned by the taxpayer.

In Notice 2014-15 and Announcement 2014-32, the IRS indicated that it would follow the Bobrow interpretation. It withdrew the proposed regulations, and will issue a new Publication 590-A, Contributions to IRAs, that applies the Bobrow interpretation.

Transition rule

In the notice and the announcement, the IRS provided a transition rule that it will not apply the new interpretation of the limit on permissible IRA rollovers until January 1, 2015. A distribution from an IRA in 2014 that is rolled over to another IRA will be disregarded in applying the new rule to 2015 distributions, provided that the 2015 distribution is from a different IRA that was included in the 2014 rollover.

Exceptions

The IRS noted that there are several types of rollovers that that are not subject to the Bobrow rule: a rollover from a traditional IRA to a Roth IRA; a rollover to or from a qualified plan; and trustee-to-trustee transfers. The IRS stated that trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly between IRAs, or by providing the IRA owner with a check made payable to the trustee of the receiving IRA.

However, a rollover between Roth IRAs would preclude a separate rollover within the one-year period between the individual's traditional IRAs; similarly, a rollover between traditional IRAs would preclude a rollover between Roth IRAs with the one-year period.

The Affordable Care Act—enacted nearly five years ago—phased in many new requirements affecting individuals and employers. One of the most far-reaching requirements, the individual mandate, took effect this year and will be reported on 2014 income tax returns filed in 2015. The IRS is bracing for an avalanche of questions about taxpayer reporting on 2014 returns and, if liable, any shared responsibility payment. For many taxpayers, the best approach is to be familiar with the basics before beginning to prepare and file their returns.

The Affordable Care Act—enacted nearly five years ago—phased in many new requirements affecting individuals and employers. One of the most far-reaching requirements, the individual mandate, took effect this year and will be reported on 2014 income tax returns filed in 2015. The IRS is bracing for an avalanche of questions about taxpayer reporting on 2014 returns and, if liable, any shared responsibility payment. For many taxpayers, the best approach is to be familiar with the basics before beginning to prepare and file their returns.

Individual mandate

Beginning January 1, 2014, the Affordable Care Act requires individuals (and their dependents) to have minimum essential health care coverage or make a shared responsibility payment, unless exempt. This is commonly called the "individual mandate."

Employer reporting

Nearly all employer-provided health coverage is treated as minimum essential coverage. This includes self-insured plans, COBRA coverage, and retiree coverage. Large employers will provide employees with new Form 1095-C, Employer-Provided Health Insurance Coverage and Offer, which will report the type of coverage provided. The IRS has encouraged employers to voluntarily report starting in 2015 for the 2014 plan year. Mandatory reporting begins in 2016 for the 2015 plan year.

Marketplace coverage

Coverage obtained through the Affordable Care Act Marketplace is also treated as minimum essential coverage. Marketplace enrollees should expect to receive new Form 1095-A, Health Insurance Marketplace Statement, from the Marketplace. Individuals with Marketplace coverage will indicate on their returns that they have minimum essential coverage. Because so many individuals with Marketplace coverage also qualify for a special tax credit, they will also likely need to complete new Form 8962, Premium Tax Credit (discussed below).

Medicare, Medicaid and other government coverage

Medicare, TRICARE, CHIP, Medicaid, and other government health programs are treated as minimum essential coverage. There are some very narrow exceptions but overall, most government-sponsored coverage is minimum essential coverage.

Exemptions

Some individuals are expressly exempt under the Affordable Care Act from making a shared responsibility payment. There are multiple categories of exemptions. They include:

• Short coverage gap
• Religious conscience
• Federally-recognized Native American nation
• Income below income tax return filing requirement

The short coverage gap applies to individuals who lacked minimum essential coverage for less than three consecutive months during 2014. They will not be responsible for making a shared responsibility payment. Individuals who are members of a religious organization recognized as conscientiously opposed to accepting insurance benefits also are exempt from the individual mandate. Similarly, members of a federally-recognized Native American nation are exempt. If a taxpayer’s income is below the minimum threshold for filing a return, he or she is exempt from making a shared responsibility payment.

The IRS has developed new Form 8965, Health Coverage Exemptions. Taxpayers exempt from the individual mandate will file Form 8965 with their federal income tax return.

Shared responsibility payment

All other individuals - individuals without minimum essential coverage and who are not exempt - must make a shared responsibility payment when they file their 2014 return. For 2014, the payment amount is the greater of: One percent of the person’s household income that is above the tax return threshold for their filing status; or a flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285. The individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014. Taxpayers will report the amount of their individual shared responsibility payment on their 2014 Form 1040.

The IRS has cautioned that it will offset a taxpayer’s refund if he or she fails to make a shared responsibility payment if required. However, the Affordable Care Act prevents the IRS from using its lien and levy authority to collect an unpaid shared responsibility payment.

Code Sec. 36B credit

Only individuals who obtain coverage through the Marketplace are eligible for the Code Sec. 36B premium assistance tax credit. The U.S. Department of Health and Human Services (HHS) has reported that more than two-thirds of Marketplace enrollees are eligible for the credit and many enrollees have received advance payment of the credit.

All advance payments of the credit must be reconciled on new Form 8962, which will be filed with the taxpayer’s income tax return. Taxpayers will calculate the actual credit they qualified for based on their actual 2014 income. If the actual premium tax credit is larger than the sum of advance payments made during the year, the individual will be entitled to an additional credit amount. If the actual credit is smaller than the sum of the advance payments, the individual’s refund will be reduced or the amount of tax owed will be increased, subject to a sliding scale of income-based repayment caps.

A change in circumstance, such as marriage or the birth/adoption of a child, could increase or decrease the amount of the credit. Individuals who are receiving an advance payment of the credit should notify the Marketplace of any life changes so the amount of the advance payment can be adjusted if necessary. Please contact our office if you have any questions about the Code Sec. 36B credit.

IRS officials have told Congress that the agency is ready for the new filings and reporting requirements. Our office will keep you posted of developments.

Businesses generally want to write off costs more quickly, to reduce their taxable income and their tax burden. One mechanism for accomplishing this is to deduct the costs of depreciable property rather than capitalizing them. Under Code Sec. 179, taxpayers can expense a prescribed amount of their costs for tangible depreciable property, even if the ordinary accounting treatment would be to capitalize the costs.

Businesses generally want to write off costs more quickly, to reduce their taxable income and their tax burden. One mechanism for accomplishing this is to deduct the costs of depreciable property rather than capitalizing them. Under Code Sec. 179, taxpayers can expense a prescribed amount of their costs for tangible depreciable property, even if the ordinary accounting treatment would be to capitalize the costs.

Code Sec. 179 applies primarily to personal property, but can apply to some real property. In recent years (through 2013), the expensing limit has been as high as $500,000 a year. However, for 2014, the expensing deduction limit is $25,000. (Congress could raise the limit for 2014 but has not done so.)

Because of the dramatic reduction in the Code Sec. 179 expensing limits, taxpayers may want to consider using the de minimis safe harbor in the final "repair" regulations as an alternative means of deducting costs that they would otherwise have to capitalize. The IRS issued final repair regulations in 2013 on the treatment of costs incurred with respect to depreciable property. The regulations are effective for tax years beginning on or after January 1, 2014 and provide guidance on whether to expense or capitalize relevant costs.

The safe harbor

The de minimis safe harbor applies to smaller priced items used in the business. The safe harbor can apply in the following situation: a taxpayer with a $500 per item expensing policy buys 1,000 calculators for $100 each. If the taxpayer elects the safe harbor, the taxpayer can deduct the entire cost of the calculators in the year paid or incurred. The total deduction is $100,000, much greater than the $25,000 limit under Code Sec. 179 for 2014.

The safe harbor is an election, not an accounting method. It can be applied for any year (or not) as determined by the taxpayer. The taxpayer can make an election for 2014, for example. The deadline is the extended due date of the taxpayer’s original income tax return. An election statement must be attached to the return. The election is irrevocable.

Two alternatives

There are two alternative de minimis safe harbors. The primary safe harbor, for use by any taxpayer but primarily for larger entities, allows taxpayers to deduct items that cost $5,000 or less (per item or invoice). The items must be deductible under the taxpayer’s financial accounting procedures and in accordance with the company’s applicable financial statement (AFS). An AFS is a financial statement filed with the Securities and Exchange Commission or another government agency, or a certified audited financial statement. The taxpayer must also have a written accounting policy, put into effect at the beginning of the year, to treat the cost of the items as an expense.

Similar requirements apply to smaller business taxpayers who do not have an AFS, with the following two differences: the accounting policy does not have to be in writing; and the amount paid for the property may not exceed $500 per invoice or per item. If the cost of the items exceeds $500 per item, the taxpayer must capitalize the cost. The taxpayer cannot avoid the $500 (or $5,000) threshold by breaking an item into components whose separate cost is below the limit. For example, the taxpayer could not split the cost of a truck into separate components such as the engine, cab, and chassis.