New Legislation - AdditionalChapter 13 pp. 487-560

2018 National IncomeTax Workbook™

1

New Legislation – Additional p 487

Additional New Legislation Foreign Tax Matters Table of Expiration Dates

2

Disaster Tax Relief and Airport and Airway Extension Act of 2017

pp. 488-489

Tax Relief for Hurricanes Harvey, Irma, Maria No additional tax on early withdrawal Employee retention credit Suspension of limit on charitable contributions Personal casualty losses

▪ No requirement to exceed 10% of AGI▪ Add to standard deduction

Use prior year income for EIC and CTC

3

Hurricane Relief p 488

1. Up to $100K of retirement distributions2. Repayment over 3 years (option) or3. Taxed ratably over 3 years4. Recontribute withdrawals for cancelled

home purchaseSpecific dates relation to 3 hurricanes

4

Employee Retention Credit p 488

IRC Section 503 – hurricane relief 40% on up to $6,000 of wagesMaximum credit - $2,400

5

Charitable Contributions p 488

Suspends limit on charitable contributions Between August 23 & December 31,

2017 Cash only Originations providing hurricane relief

6

Personal Causality Loss p 489

In a P.D. disaster area only No 10% AGI requirement May increase Standard Deduction if you

don’t itemized May use 2017 earned income to

calculate EIC & CTC

7

Federal Register Printing Savings Act of 2017 p. 489

Suspends ACA taxes:▪ Cadillac tax suspended to 12/31/2021▪ Medical device excise tax suspended to

12/31/2019▪ Fee on health insurance providers

suspended for 2019

8

Bipartisan Budget Act of 2018p. 490

Relief for victims of CA wildfires Additional hurricane relief Extenders

9

BBA CA Wildfire Relief pp. 490-491

No additional tax on early withdrawal Increase plan loan limits and time to pay Amend plans to conform w/ new law Employee retention credit Suspends charitable contribution limit Personal casualty loss changes Use prior year income for EIC and CTC

10

BBA Hurricane Relief pp. 491-492

Extension to 10/17/17 to declare disaster area for Hurricanes Harvey, Irma, Maria

Additional relief for Puerto Rico and Virgin Islands

11

The BBA retroactively extends the following business provisions through 2017 p 492

I.R.C. § 168(i)(15)(D) 7-year recovery period for motor sports entertainment complexes I.R.C. § 181(g) special expensing rules

for certain film, television, and theatrical productions I.R.C. § 1201(b) special rule for

qualified timber gain

BBA Extenders pp. 492-493

Qualified principal residence indebtedness not COD income (2017) Deductible mortgage insurance (2017) Deduction for qualified tuition (2017) Business extenders (2017) Energy extenders (most 2017 but

residential energy, solar, etc. longer)

13

BBA Other Provisions pp. 493-495

Extends time to claim refund for wrongfully incarcerated

Hold IRS harmless from wrongful levy on retirement plan

Locks in installment agreement user fee Form 1040SR for seniors

14

BBA Other Provisions pp. 493-495

Above the line deduction for attorney fees from whistleblower action Repeal 6-month prohibition on

contribution after a hardship waiver

BBA Other Provisions Con’tp. 495

Puerto Rico communities designated as opportunity zones Tax home for TP in combat zone is

foreign country Repeals 2020 accelerated estimated tax

for large corps.

16

2018 Consolidated Appropriations Act p. 496

1099A deduction for cooperative Increases state housing ceiling credit

17

Rev. Proc. 2018-18 pp. 496

Safe harbor methods to determine personal casualty loss of residential real property▪ Personal use residential real property

is real property (building, trees, shrubbery) that contains a residence

▪ Doesn’t include condo, coop, mobile home, trailer

18

Estimated Repair Cost Safe Harbor p 496-497

Residential real property Measuring decrease in FMV Lessor of 2 repair estimates Independent & Licensed contractors No addition costs to increase FMV Limited to $20,000

19

De Minimis Safe Harbor Method p 497

Residential real property TP – estimates cost of repairs to pre-

existing conditions No additional improvements Limited to $5,000 or less

20

Insurance Safe Harbor Method p 497

Residential real property Estimates from homeowners or flood

insurance company

21

Federally Declared Disasters p 497

Personal use residence & personal property Contractor safe harbor method or Disaster loan method

22

Personal Belongings p 497

Tangible personal property Not used in a trade or business Not a boat, aircraft, mobile home, trailer,

auto, antique… De Minimis Safe harbor method $5,000

23

Federally Declared Disaster Areas p 497

Replacement cost method Start with current cost Reduce by 10% for every year owned 9 years or more = 10% of original cost

24

Rev. Proc. 2018-9 p. 498

Cost indexes safe harbor method for casualty loss of residential real property b/c 2017 hurricanesUse cost indexes in section 4 to determine decrease in valueCost indexes based on sq. footage and location

27

Reg. 102951-16 p. 498

250 returns must file electronically Reg. will aggregate all returns (1099,

W-2) Not effective until final regs issued (but

not before 1/1/19)

28

New Form 1040pp. 498-502

New Form 1040 replaces 1040A and EZTwo half pages (Figure 13.1)6 Schedules (Figure 13.2)

29

Small Business Accounting Method p 49

Expands eligibility for cash method Average GR for prior 3-yr-period ≤ $25M C corps & farms w/C PN qualify if ≤ $25MEases requirements for maintain’g inventory $25M gross receipts test applied Treat as non-incidental materials &

supplies or treat as in TP’s books

30

Small Business Accounting Method p 49-50

Expands exception from UNICAP using $25M GR testExpands exception for small construction contracts from required % of completion1. Is expected to be completed w/in 2 yrs &2. In year of contact TP meets $25M GR test

Change in Accounting Method: 481(a) adjmtbut for % of completion (cut off)

31

Rev. Proc. 2018-40pp. 502-503

Automatic consent for change in accounting b/c new accounting rules Change to cash method (include open A/R as

actually or constructively received) Change from capitalizing Change from inventories Change from % of completion method for long-

term contracts (cut off basis)

32

Reg. 104397-18p. 504

Proposed regs. for AFYD for property placed in service after 9/27/17 Eligible if:1. Specified type2. Original use or meets used requirements3. Placed in service w/in specified time4. Acquired after 9/27/17

33

AFYD pp. 504-505

Specified Type

Included (list pp. 504-505) Excluded (list p. 505) Includes new and used property New property must be original use – first

use to which property is put

34

Excluded Property p 505

Autos – using the standard mileage rate Property required to use ADS Property where TP elects out of AFYD Specified plants – TP elects 168(k)(5) for

the prior year Property where the TP elects IRC

168(K)(4) Floor Plan property (auto dealerships)

35

Used Property pp. 505-506

AFYD for used property if:1. Not used by TP or predecessor anytime

before acquisition2. Not acquire from related, gift,

inheritance, non-recognition3. Cost not determined w/reference to

basis of other property

36

Used Property pp. 505-506

Used by TP or predecessor if had a depreciable interest (regardless of whether depreciation claimed)

Partners have depreciable interest proportionate to interest in partnership property

Placed in service after 9/27/17 before 1/1/2027 (2028 for certain property)

Acquired after 9/27/1737

AFYD Regs. pp. 506-507

Deduction = unadjusted depreciable basis of qualified property x applicable percentage Elect out for a class of property – applies

to all property in that class Elect to deduct 50% first year Revoke election w/ IRS consent

38

AFYD Phasedown NIB

Year Percent2023 80%2024 60%2015 40%2026 20%

39

TD 9839 pp. 538-539

Expansion of the scope of tax adjustments under new partnership rules Shifts labilities to partnership level

40

New Partnership Rules NIB

Partnership adjustable items include –anything relevant in determining the tax liability of any person without regard to weather the item appears on the partnership return

41

New Partnership Rules NIB

Statute of limitations Old law – SOL determined at the

partner level New law – SOL based on partnership

filing

42

TD 9839 pp. 538-539

Final regs re partnership representative (PR) Eligibility – can be disregarded entity or

partnership itself Substantial presence – reasonable time

and place for examination Capacity to act – remove criteria

43

PR Final Regulations pp. 539-540

Time to change – can change before administrative proceedings starts Resignation – resigning PR can’t

designate successor Revocation – any partner, no reason Effective date – upon receipt

44

PR Final Regulations p. 540

Notice of change – only to IRS IRS designates PR – if designation not

in effect, can consider factors including profits interest Authority of PR – partnership contests

notice

45

Reg. 2018-17614 pp. 542-543

“Income, gain, loss, deduction, credit”Changed to “partnership-related items” Adjustments, assessment, and

collection at the partnership level Partnership-related items can include

amounts not on a return

46

Imputed Underpayments pp. 543

If adjustments lead to imputed underpayment, partnership must pay in adjustment year If adjustments don’t result in

underpayment, partnership must still take into account in adjustment year Tax rate is highest rate for that year

47

Partnership Adjustmentspp. 544-545

Process to determine imputed underpayment▪ Adjustments are grouped▪ Not netted between groupings▪ Partners and partnership must adjust

specified tax attributes b/c adjustment and payment

48

Alternative Payment pp. 545-546

Elect to have reviewed year partners take into account adjustments and pay tax

No assessment or levy against the partnership

Partnership must file and furnish tracking statement

Partner can raise partnership level defense -first pay penalty and then claim refund

49

AARs pp. 546-547

Partnership procedures to file administrative adjustment request (AAR) to correct errors Procedures for notice of proceedings

and adjustments Rules for assessment, collection, and

payment

50

Partnership Audit Regs pp. 548-549

Rules for interest and penalties on imputed underpayments 90 days to seek judicial review Mailing final partnership adjustment

doesn’t suspend SOL

51

Partnership Options

Electing out – using old rules under TEFRA Adjustments flow directly to partners Election made each year with a timely

filed return Must notify each partner

52

Making the Election

Timely filed return – each year Notify each partner/former partner IRS can challenge

53

54

55

Foreign Tax Matters pp. 550-551

US has worldwide taxation – US persons taxed on worldwide income Most other countries have territorial

taxation – tax income earned in their borders

56

CFC’s p. 551

Controlled foreign corporations (CFCs) – US persons own more than 50% Formed to reduce impact of worldwide

taxation Shareholder not subject to tax until

income distributed (dividend)

57

Repatriation Tax pp. 551-552

IRC 965 one-time tax on US TPs who own CFCs (10% or more) Include pro rata share of accumulated

post 1986 deferred foreign income

58

Repatriation Tax p. 552

Reported in 2017 Corps. - 15.5% rate on cash/equivalents 8.0% rate on other assets Individuals – 17.5% on cash/equivalents 9.0% on other assets

59

Election/Relief p. 553

Elect to pay over 8 years Penalty waiver if failed to timely make

first payment (pay by 4/15/19) Late election to pay over 8 years (by

2017 deadline w/ ext.)

60

GILTI Tax pp. 553-554

US shareholder in CFC subject to tax on share of global intangible low-taxed income (GILTI) Corporations can deduct 50% but not

individuals 962 election or own through C

corporation?

61

New Foreign Tax Laws p. 555

21% corporate tax rate Repatriation tax (one time) GILTI tax (each year) Reduced rate for foreign derived intangible

income Exemption for foreign dividends (only C

corporations) Change in definition of intangibles

62

New Laws pp. 555-556

New foreign tax credit categories Source of income rules changed Foreign tax credit changes No exception for offshore transfers New stock attribution rules Repeal of 30-day CFC exception

63

GILTI Glitch Smoothed Over

Calculating foreign income Calculating foreign tax credit

64

Breweries, Wineries, and Distillery Issues p 345

There are over 150 wineries in Ohio There are over 200 micro breweries in

Ohio How many can you name?

65

Where are the breweries?

66

Wineries NIB

Unique tax issues for wineries Several businesses1. Growing grapes2. Making wine3. Sales (retail, wholesale)

67

Breweries NIB

Growing hops (some) Production of beer Retail & Wholesale

68

Breweries, Wineries, and DistilleriesUNICAP p. 345

§263A: Capitalize direct & indirect costs:▪ To produce certain real & tangible ▪ To acquire certain property for resale

Add costs to inventory or basis Recover costs – CGS, depreciation,

amortization, adjustment to basis

Breweries, Wineries, and DistilleriesUNICAP – Interest Costs p. 345

Indirect interest subject to UNICAP if:▪ Real property w/class life ≥ 20 years▪ Property w/production period > 2 years▪ Property w/production period > 1 year and

costs > $1,000,000 Production period: ▪ Production start to date ready for service/sale▪ Plants: published nat’l weighted average

Starting Grapes Vines

How long does it take from planting to harvesting enough for production? Why does it matter?

71

Breweries, Wineries, and DistilleriesProduction Period pp. 345-346

Wine grape vines: 4 year production pd. Wine grapes: Acquisition of the vine to

production of marketable quantities▪ Covers harvest costs & > de minimis

amount of production costs of plant/crop

Pre-Productive Period

Q. When does the pre-productive period end for grapes?

Why does it matter?

73

Breweries, Wineries, and DistilleriesProduction Period p. 346

TCJA temporarily excludes the aging period from production period▪ For aged wine, beer, distilled spirits▪ Not for distilled spirits unfit as beverage

Exclusion applies only for interest incurred > 12/31/2017 and < 1/1/2020▪ May shorten period such that §263A N/A

Breweries, Wineries, and DistilleriesExcise Taxes pp. 346-347

Producers and importers▪ Beer, wine and distilled spirits▪ Form 5000.24

TCJA provides credit for certain wine products removed during 2018 & 2019 Filing schedule dependent on prior-year

and expected current-year liabilities

Form 5000.24 NIB

76

Form 500.24 NIB

77

Breweries, Wineries, and DistilleriesExcise Taxes - Beer p. 347

Liability arises when produced or imported Tax payable when removed from brewery

or customs for consumption or sale No tax if exported or w/drawn for certain

authorized uses (e.g. industrial, nonbeverage) Go to commonly owned brewery w/o tax Tax Rates – Figure 10.18

Breweries, Wineries, and DistilleriesExcise Taxes - Wine p. 348

Small Producer Rates/Credits – Fig. 10.19 Due: Removed from wine cellar or winery

for consumption or sale No tax on certain transfers

▪ Transfer in bond – customs to winery (bulk), between bonded premises (bulk/bottled)

▪ Exported or w/drawn for specific uses

Breweries, Wineries, and DistilleriesWine –TCJA Credit Changes pp. 348-9

Expanded to include sparkling wines Available to all domestic producers &

importers regardless of size Eliminates phaseout of the credit Allows credit transfer from foreign producer

to domestic importer Increases alcohol level for lowest tax Tax Rates 2018-2019 – Figure 10.19

Breweries, Wineries, and DistilleriesExcise Tax – Distilled Spirits pp. 349-350

2017 rate: $13.50/proof gallon Liability at production or importation Due: domestic bottled when leave distillery Due: imported when leaves customs No tax if transferred in bond TCJA

▪ Reduced 2018 & 2019 rates – Figure 10.21▪ Removed size limit on exempt bulk transfers

Good New For Small Businesses

Section 263A provides several exceptions to the general capitalization requirements, including an exception for taxpayers that have $25,000,000 or less in average annual gross receipts for the preceding 3 tax years.

82

Health Savings Accounts NIB

Individuals with High Deductibles Individual - $1,350 Family - $2,700 Contributions Limits Individual - $3,400 Family - $6,900

83

Business Expense ChangesFood and Beverage pp. 50-51

Can deduct 50% of food/beverage in Tor B (such as when EEs traveling)

12/31/17-12/31/2025: 50% to apply to cost of de minimus fringe eating facility & cost of meals for convenience of ER

After 12/31/2025: No deduction for de minimus fringe facility/convenience meals

Listed Property p. 51

Vehicle into service > 2017, yr ended > 2017 Auto with no bonus depreciation▪ Year 1: $10,000▪ Year 2: $16,000▪ Year 3: $ 9,600▪ Year 4 +: $ 5,760/year

W/bonus dep: $18,000 for Year 1Computer/peripherals no longer listed prop.

Syndicated Conservation Easements

Merrill Fromer

IRC 170 Charitable Contribution

1976 the IRC was amended to allow land owners to report easements as a charitable deduction Congress intent was to protect land and

historical buildings from development The Easement is donated to a “Land

Trust” in perpetuity (for ever without restrictions)

IRC 170 Conservation Easements NIB

The land trust is a 501(C)3 tax exempt organization The deduction amount is the difference

between the FMV before and after the easement

88

Conservation Easement

Voluntary legal agreement between a land owner and a Land Trust or Government agency that permanently limits uses of the land in order to protect the conservation values

Requirements NIB

Must provide public benefits▪ Wildlife habitat▪ Scenic views, Recreation, ▪ Education and or historic preservation▪ Water quality

90

Advertisement/Solicitation

Looking for high wealth investors who need to offset income

Promoters purchase land divide the land Each parcel becomes a separate partnership Contract an appraiser to do a “Best Use”

appraisal New appraisal is generally 20 times or more of

cost Deduction is $4 for every $1 invested (varies)

Example

Purchase land for $9,500,000Appraisal 190,000,000

Investor/partner contribution 1,000,000 Contribution deduction 4,000,000Tax rate X 35%Tax benefit 1,400,000

Example

Seller of land received a partnership interest and reduced his/her gainPromoters made $M on the sales of partnership interestAppraisals were bogus - used a templateCompared unlike properties sales in major cites to land in rural in the deep SouthFMV increased in 10 months from 100 times

New Group Formed to Address Issue

Two new groups of RA’s New group is opening $B in

conversation easement cases New promoter investigations Counsel is winning cases at trial

Other Tools in the Box

40% overvaluation penalty IRC 6700 penalties (50% of promoter

revenues) Promoter & Appraiser injunctions Issue is a Listed Transaction

What Can You Do

Warn your clients Do your due diligence Google Earth the property Review County sales records of the

properties Review the appraisal

96

Questions?

97