President Biden, on August 16, 2022, signed the Inflation Reduction Act ( P.L. 117-169) into law following its passage along party lines in both chambers of Congress.

President Biden, on August 16, 2022, signed the Inflation Reduction Act ( P.L. 117-169) into law following its passage along party lines in both chambers of Congress.

The law is a slimmed down version of the Build Back Better Act that passed the House in 2021 but failed to even come up for a vote in the Senate due to opposition primarily from Sen. Joe Manchin (D-W.V.). The Inflation Reduction Act did manage to keep some of the failed Build Back Better Act’s provisions in terms of generating revenues from corporations and wealthy taxpayers, as well as meeting some of the White House’s goals in the energy and health care sectors.

The law includes a one percent excise tax on stock repurchases, which goes into effect beginning in 2023, as well as a new corporate alternative minimum tax, although that does not apply to companies owned by private equity funds or certain manufacturing.

On the individual side, the IRS received a boost in funding of $80 billion across 10 years, part of which will be used to hire new agents who will help to the agency close the tax gap and get the wealthiest individuals to pay their fair share of taxes. Department of the Treasury Secretary Janet Yellen has directed the Internal Revenue Service to not use any of the new funding to increase the share of small businesses or households making $400,000 or less that are exposed to audit.

To help meet the Biden Administration’s environmental goals, the law includes tax credits for electric vehicle purchases, as well as new tax credits and extensions on expiring tax credits to produce electricity from renewable sources; making homes more energy efficient; and other activities aimed at reducing the carbon output of the nation.

President Biden signed the CHIPS and Science Act into law after it received bipartisan support in both the House of Representatives and the Senate.

President Biden signed the CHIPS and Science Act into law after it received bipartisan support in both the House of Representatives and the Senate.

The law ( H.R. 4346) "will boost American semiconductor research, development, and production, ensuring U.S. leadership in the technology that forms the foundation of everything from automobiles to household appliances to defense systems," the White House said in a fact sheet released August 9, 2022, the day of the signing.

To help with that, the bill contains a 25 percent investment tax credit for the manufacture of semiconductors as well and the manufacture of the tools to do so in addition to the grants that it provides the semiconductor industry.

Department of the Treasury Secretary Janet Yellen is seeking a detailed plan from the Internal Revenue Service on how it plans to spend to the $80 billion in additional funds that the agency received as part of the Inflation Reduction Act that was signed by President Biden on August 16, 2022.

Department of the Treasury Secretary Janet Yellen is seeking a detailed plan from the Internal Revenue Service on how it plans to spend to the $80 billion in additional funds that the agency received as part of the Inflation Reduction Act that was signed by President Biden on August 16, 2022.

"I would like the IRS to work closely with the Deputy Secretary to identify specific operational initiatives and associated timelines that will improve taxpayer services, modernize technology, and increase equity in our system of tax administration by pursuing tax evasion by those at the top who today do not pay their tax bill," Secretary Yellen said in an August 17, 2022, memorandum to IRS Commissioner Charles Rettig.

In the memo, she directed the IRS to deliver an operational plan within six months, which "should include details on how resources will be spent over the ten-year horizon on technology, service equipment, and personnel. This operational plan is key to ensuring the public and Congress are able to hold the agency accountable as it pursues needed improvements."

Yellen added that she is "prepared to approve the near-term use of funds to improve services for next filing season, but we should treat this plan as a prerequisite for expending these resources more broadly, as I think there is value in thinking carefully over the course of the next few months how work should be prioritized and sequenced to achieve our goals."

Replacing Those Who Will Be Retiring

Yellen’s memo comes in the wake of GOP messaging that states the IRS is looking to hire 87,000 new agents that will be coming after the lower and middle class individuals.

Yellen reiterated in her memo that new funds from the Inflation Reduction Act "will not result in households earning $400,000 per year or less or small businesses seeing an increase in the chances they are audited relative to historic levels. Instead, they will allow the IRS to work to end the two-tiered system, where most Americans pay what they owe, but those at the top of the distribution often do not."

Much of the new hiring will go to simply maintaining employment levels as the funds will help "to replace the attrition that is on the horizon from the expected retirement of at least 50,000 employees over the next five years," the memo states. At this time, the official was not able to provide a breakdown in the functions of the people expected to retire, but the official emphasized that these are simply not new employees that would be added to the agency.

A Treasury official noted that revenue agents will not be the main focus of the hiring, but rather the majority will be individuals who will help improve customer service through IT upgrades and serving as customer service representatives. The IRS will also seek out auditors with specialized experience who can enforce the tax laws against high income individuals and corporations who avoid paying their tax bill.

The official noted that the number of IRS auditors that can handle the complex returns of high income individuals and corporations is roughly the same number today as the agency had during World War II, which allows the IRS to exam about 7,500 returns of the nearly 4.5 million it receives in this category.

The Criminal Investigations unit is not expected to see a spike in its number of employed. The official points out that the CI unit accounts for less than three percent of the total IRS workforce (less than 2,000 employees).

Closing The Tax Gap

The aim of the hiring of specialized auditors and agents that target high earners is to close the tax gap. The official noted that with the additional resources from the Inflation Reduction Act, the IRS could collect an additional $400 billion over the next 10 years, although others, including former IRS Commissioner Charles Rossotti puts the collection amount at more than $1 trillion during the additional funding time period, according to testimony he provided to the Senate Finance Committee’s Subcommittee on Taxation and IRS Oversight during a May 11, 2021 hearing.

The Treasury official said the IRS is unable to collect 15 percent of the taxes that are owed, and over the next ten years, the tax gap could reach as high as $7.5 trillion.

National Taxpayer Advocate Erin Collins has taken an "unusual step" to appeal an Internal Revenue Service Deputy Commissioners’ decision directly to Commissioner Charles Rettig for reconsideration regarding the use of scanning technology for paper tax returns.

National Taxpayer Advocate Erin Collins has taken an "unusual step" to appeal an Internal Revenue Service Deputy Commissioners’ decision directly to Commissioner Charles Rettig for reconsideration regarding the use of scanning technology for paper tax returns.

In March, Collins issued a Taxpayer Advocate Directive calling on the agency to work with tax software companies to implement a 2-D barcode on all returns prepared using the software. The barcodes would be printed on the paper returns and, when scanned, would transfer all the information from a paper-filed return without the need for manual entry, which is currently required for all paper returns.

For handwritten returns or returns where the barcode was not readable, the directive called for the agency to use optical scanning technology to automate the processing of those returns.

"If the IRS had implemented scanning technology, it is unlikely the current processing backlog would exist," Collins said in a March 29, 2022, letter outlining the directive.

Collins noted in an August 4 blog post that the IRS Deputy Commissioner for Services and Enforcement Douglas O’Donnell and Deputy Commissioner for Operations Support Jeffrey Tribiano would not be following the directive.

In a July 18, 2022, memorandum for Collins, the deputy commissioners said the agency was exploring various barcoding technologies, but it would not follow the directive related to the scanning of handwritten forms or forms where the barcode could not be read.

Collins stated in the blog that "due to the magnitude of this issue and the unprecedented backlog of paper returns, I took the unusual step of appealing the Deputy Commissioners’ decision to the Commissioner for reconsideration."

In an August 2, 2022, memorandum to Commissioner Rettig, Collins noted that deputy commissioners’ response "declined to make a commitment to implement scanning technology to machine read v-coded returns, and it expressly rejected implementing scanning technology to machine read handwritten returns." She again called for the implementation of the use of some form of barcoding technology by the start of the 2023 filing season and the use of technology to machine read handwritten returns by the start of the 2023 filing season or, if that is not feasible, by the start of the 2024 filing season.

To frame the need, Collins noted in her blog post that the IRS "will have to process an average of about 525,000 paper-filed Forms 1040 per week during the second half of 2022 to eliminate the backlog" that came about as a result of the COVID-19 pandemic. "As of July 15, however, it had processed a weekly average of paper-filed Forms 1040 over the prior four weeks of just 295,000."

She added: "While we all hope the IRS can work through the backlog this year, I often say that hope is not a business plan."

The IRS and the Security Summit partners have warned tax professionals to beware of evolving identity theft scams perpetrated through phishing emails and SMS-text that are designed to trick practitioners into opening embedded links or attachments that infect their computer systems with the potential to steal personal and client information such as passwords, bank account numbers, credit card numbers, or social security numbers.

The IRS and the Security Summit partners have warned tax professionals to beware of evolving identity theft scams perpetrated through phishing emails and SMS-text that are designed to trick practitioners into opening embedded links or attachments that infect their computer systems with the potential to steal personal and client information such as passwords, bank account numbers, credit card numbers, or social security numbers. The IRS has urged tax professionals to work on strengthening their systems and protect client data by avoiding such scams and take necessary measures to protect themselves, such as:

• multi-factor authentication, wherein tax professionals using cloud-based platforms are urged to use multi-factor options like phone, text, or tokens. This could avoid potential vulnerabilities with authentication done just through email, which may be accessible to identity thieves;
• automatic updating of anti-virus software to prevent scams that target software vulnerabilities; and
• drive encryption and regular backing up of files to help stop theft and ransomware attacks.

The IRS has also identified various kinds of scams that tax professionals should keep an eye out for, such as:

• spear phishing in which scammers take time to identify their victim and craft a more enticing phishing email known as a lure;
• identity thieves who pose as potential clients and exchange several emails with tax professionals before following up with an attachment that they claimed was their tax information. Once the tax professional click on the embedded URL and/or opened the attachment, malware is secretly downloaded onto their computers, and gives thieves access to passwords to client accounts or remote access to the computers themselves. After the thieves take over the computer systems, they identify pending tax returns, complete them, and e-file them, changing only the bank account information to steal the refund; and
• ransomware attacks that make an unsuspecting tax professional open links or attachments, triggering malware to attack their computer system to encrypt files and the thieves hold the data for ransom.

The IRS has also reminded tax professionals that securing their network to protect taxpayer data is their responsibility as a tax preparer.

The IRS has extended the deadlines for amending a retirement plan or individual retirement arrangement (IRA) to reflect certain provisions of Division O of the Further Consolidated Appropriations Act, 2020, P. L. 116-94, known as the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and Section 104 of Division M of the Further Consolidated Appropriations Act, 2020, known as the Bipartisan American Miners Act of 2019 (Miners Act). In addition, the IRS has extended the deadline for amending a retirement plan to reflect Section 2203 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P. L. 116-136.The extended amendment deadline for (1) a qualified retirement plan or Code Sec. 403(b) plan (including an applicable collectively bargained plan) that is not a governmental plan or (2) an IRA is December 31, 2025.

The IRS has extended the deadlines for amending a retirement plan or individual retirement arrangement (IRA) to reflect certain provisions of Division O of the Further Consolidated Appropriations Act, 2020, P. L. 116-94, known as the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), and Section 104 of Division M of the Further Consolidated Appropriations Act, 2020, known as the Bipartisan American Miners Act of 2019 (Miners Act). In addition, the IRS has extended the deadline for amending a retirement plan to reflect Section 2203 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), P. L. 116-136.The extended amendment deadline for (1) a qualified retirement plan or Code Sec. 403(b) plan (including an applicable collectively bargained plan) that is not a governmental plan or (2) an IRA is December 31, 2025.

SECURE Act and Miners Act

The deadlines for amending a retirement plan or IRA to reflect the provisions of the SECURE Act or the Miners Act, as set forth in Notice 2020-68 and Notice 2020-86, are extended as follows:

• For a qualified plan (including an applicable collectively bargained plan) that is not a governmental plan within the meaning of Code Sec. 414(d), the deadline to amend a plan for provisions of the SECURE Act, or section 104 of the Miners Act is December 31, 2025.
• The plan amendment deadline for a qualified governmental plan, within the meaning of Code Sec. 414(d), is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023.
• The deadline for a Code Sec. 403(b) plan (including an applicable collectively bargained plan) that is not maintained by a public school, as described in Code Sec. 403(b)(1)(A)(ii), to amend a plan for provisions of the SECURE Act or the regulations thereunder is December 31, 2025.
• The plan amendment deadline for a Code Sec. 403(b) plan that is maintained by a public school, as described in Code Sec. 403(b)(1)(A)(ii), is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023.
• The deadline to amend a governmental plan under Code Sec. 457(b) for provisions of the SECURE Act or section 104 of the Miners Act is the later of (i) 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023, or (ii) if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the Secretary that the plan was administered in a manner that is inconsistent with the requirements of Code Sec. 457(b).
• The deadline to amend the trust governing an IRA that is an individual retirement account or the contract issued by an insurance company with respect to an IRA that is an individual retirement annuity for provisions of the SECURE Act is December 31, 2025, or such later date as the Secretary prescribes in guidance.

Amendments to a retirement plan to reflect a provision of the SECURE Act that are made on or before the dates as extended will not cause the retirement plan to fail to satisfy the anti-cutback requirements of Code Sec. 411(d)(6) or section 204(g) of ERISA by reason of such amendments.

CARES Act

The deadlines for amending a retirement plan to reflect the provisions of section 2203 of the CARES Act are extended as follows:

• the deadline for amending a retirement plan that is not a governmental plan is December 31, 2025; and
• the deadline for amending a retirement plan that is a governmental plan is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023, or, if later, with respect to a governmental plan under Code Sec. 457(b), the first day of the first plan year beginning more than 180 days after the date of notification by the Secretary that the plan was administered in a manner that is inconsistent with the requirements of Code Sec. 457(b).

Notice 2020-68, 2020-38 I.R.B. 567, and Notice 2020-86, 2020-53 I.R.B. 1786 are modified.

The Treasury and IRS have issued final regulations eliminating the signature requirement for making a Code Sec. 754 election (section 754 election). The regulations finalize 2017 proposed regulations ( REG-116256-17), on which taxpayers were entitled to rely.

The Treasury and IRS have issued final regulations eliminating the signature requirement for making a Code Sec. 754 election (section 754 election). The regulations finalize 2017 proposed regulations ( REG-116256-17), on which taxpayers were entitled to rely.

Election Signature Requirement

A partnership can make a section 754 election to adjust the basis of partnership property in the event the inside and outside bases are unequal. If the partnership files a section 754 election and there is a distribution of property, the basis of partnership property will be adjusted in the manner provided in Code Sec. 734. If the partnership files a section 754 election and there is a transfer of a partnership interest, the basis of partnership property will be adjusted in the manner provided in Code Sec. 743. The section 754 election applies to all distributions of property by the partnership and to all transfers of interests in the partnership during the tax year for which the election was filed and all subsequent tax years.

The regulations under Code Sec. 754 require a section 754 election to be made in a written statement (section 754 election statement) filed with the partnership return for the tax year during which the distribution or transfer occurs. The requirement of a written statement applies to returns filed either electronically or on paper. For the election to be valid, the return must be filed by the due date for the return, including extensions.

The amended regulation, which is identical to the 2017 proposed amendment, removes a requirement that the section 754 election statement be signed by one of the partners. Under the regulation before its amendment, a partnership filing an unsigned section 754 election statement with its partnership return failed to make a valid section 754 election. An unsigned statement is valid under the amended regulation if it meets the remaining requirements.

The regulation, as amended, retains two requirements. It continues to provide that a taxpayer making a section 754 election must file a statement with its return that:

• sets forth the name and address of the partnership making the section 754 election, and
• contains a declaration that the partnership elects under section 754 to apply the provisions of Code Sec. 734(b) and Code Sec. 743(b).

Effective and Applicability Dates

The amendment eliminating the signature requirement is effective August 5, 2022, and applies to tax years ending on or after the date of publication of the final regulation in the Federal Register. Taxpayers may, however, apply the amendment to tax years ending before that date.

The American Institute of CPAs highlighted several challenges that tax practitioners are experiencing with the use of the Internal Revenue Service’s Practitioner Priority Service (PPS) line.

The American Institute of CPAs highlighted several challenges that tax practitioners are experiencing with the use of the Internal Revenue Service’s Practitioner Priority Service (PPS) line.

In an August 9, 2022, letter to the agency, the AICPA called the “plummeting” PPS line level of service "an area of continuing concern."

"Anecdotally, we are hearing from tax practitioners everyday regarding their significant PPS line challenges and the impact those challenges have on their interactions with IRS on behalf of taxpayers," the letter states.

The letter highlights issues with the handling of power of attorney (POA), transcripts, and account management versus automated collections, as well as providing some general recommendations.

In the area of power of attorney, the AICPA offered several recommendations, including having customer service representatives provide a fax number at the start of the call if a practitioner states that the POA likely is not on file and where "a delegated POA is presented and appears in order, do not require the first POA be posted to the Central Authorization File (CAF) before recognizing the delegated POA."

The AICPA also noted that customer service representatives "are often inconsistent on what is required to be completed on a POA for it to be valid," and called for better training of the representatives. The organization noted that the agency "should allow use of POAs that are signed by the taxpayer and the representative calling in—even if it is not yet signed by other listed representatives. While the Internal Revenue Manual (IRM) provides that IRS staff are to accept the POAs, the IRM is not universally followed in this regard."

In the area of transcripts, the AICPA asked the IRS to restore customer service representatives’ ability to provide internal screen-print type transactions as well as the IRS message line that existed solely to provide internal and other types of transcripts to practitioners as they waited.

"PPS CSRs have indicated lately that they will not provide internal screen-print type transcripts by fax or secure mailbox; they are only willing to use U.S. mail, which takes 4 to 6 weeks for receipt," the AICPA stated, adding that the delay makes it more difficult to resolve issues in a timely manner.

The AICPA also called for the elimination of the so-called "law line."

"Practitioners should not need to consult with IRS staff on interpretations of law—the practitioners should be competent in those areas. Moreover, the breadth of knowledge of the ‘law line’ staff is often not high or incorrect information is given," the letter states

The organization suggested the law line staff be utilized in other areas of the PPS line to help alleviate long wait times.

Another suggestion forwarded by the AICPA was that the IRS restore the ability of accounts management (AM) staff to grant cycle holds for accounts not in collection.

"Recently, AM has been unwilling to grant cycle holds, referring such requests to ACS [automated collection system]," the letter states. "Restoring authority to grant cycle holds with AM before an account goes to Collection will return more speed and efficiency in resolving issues, will eliminate needless Collection Due Process cases, and will keep more cases out of the Taxpayer Advocate Service as well."

That being said, the AICPA suggested that automated collection system be empowered to resolve more account issues, such as penalty abatement and other account-related issues and authorize PPS CSRs to grant 180-day holds where correspondence was sent in.

Other general recommendations included staffing the PPS line with "highly trained, highly empowered personnel;" discontinuing the practice of asking practitioners for their social security number and date of birth; enhancing the new automatic return call system; providing more supervisor availability; and enabling PPS CSRs to handle international issues.

The American Institute of CPAs offered up suggestions to Congress, focused on the trust and estate proposals found within the fiscal year 2023 revenue proposal, as the legislative branch considers the White House Budget request.

The American Institute of CPAs offered up suggestions to Congress, focused on the trust and estate proposals found within the fiscal year 2023 revenue proposal, as the legislative branch considers the White House Budget request.

In a July 28, 2022, letter sent to Democrat and Republican leadership on both the Senate Finance Committee and the House Ways and Means Committee, AICPA outlined a number of proposals across four areas, including strengthening taxation of high-income taxpayers; modifying estate and gift taxation; and improving tax administration and compliance.

The White House budget revenue proposals were published in March 2022 in the so-called "Green Book."

With regards to strengthening taxation of high-income taxpayers, AICPA noted that it is "currently concerned that some of the provisions in the 2023 Treasury Green Book … regarding valuation rules for certain transfers of assets are inconsistent with well-established valuation principles and could result in valuations that do not reflect the true economic value of transferred assets. These inconsistencies could, in turn, unjustly negatively affect taxpayers."

Specifically, it raised concerns with treating transfers of appreciated property by gift or on death "as realization events," which could alter how the property is valuated and could put taxpayers at a disadvantage for not having complete access to different valuations.

In the tax administration section, AICPA expressed concern that proposed reporting requirements, the organization expressed concern that reporting requirements for tax year would apply to each trust whose estimated total value on the last day of the tax year exceeds $300,000 or whose gross income for the tax year exceeds $10,000, along with what may be overly burdensome informational reporting requirements.

"These low thresholds would capture a substantial number of trusts – many of which are likely of lower risk to the IRS due to the lowers dollars at stake," the letter states.

AICPA also called the taxing of estates the same as trusts for many of the provisions in the Green Book "problematic. The AICPA recommends that estates be treated similar to married filing separately for all estate provisions in the Green Book, as well as existing law (such as income tax and net investment income tax). This recommendation would restore estates to their federal tax position from 1954-1986."

The Affordable Care Act set January 1, 2014 as the start date for many of its new rules, most notably, the employer shared responsibility provisions (known as the "employer mandate") and the individual shared responsibility provisions (known as the "individual mandate").  One - the employer mandate - has been delayed to 2015; the other - the individual mandate - has not been delayed.

The Affordable Care Act set January 1, 2014 as the start date for many of its new rules, most notably, the employer shared responsibility provisions (known as the "employer mandate") and the individual shared responsibility provisions (known as the "individual mandate").  One - the employer mandate - has been delayed to 2015; the other - the individual mandate - has not been delayed.

Employer shared responsibility payments

Very broadly, the Affordable Care Act imposes a shared responsibility payment (also known as a penalty) on an applicable large employer that either:

• Fails to offer to its full-time employees (and their dependents) the opportunity to enroll in MEC (Minimum Essential Coverage) under an eligible employer-sponsored plan and  has under its employ one or more full-time employees that are certified to the employer as having received a premium assistance tax credit or cost-sharing reduction (Code Sec. 4980H(a) liability), or
• Offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan and has under its employ one or more full-time employees that are certified to the employer as having received a premium assistance tax credit or cost-sharing reduction (Code Sec. 4980H(b) liability).

The amount of the employer shared responsibility penalty varies depending on whether the employer is liable under Code Sec. 4980H(a) or Code Sec. 4980H(b). The calculations of the payment are very complex but two examples help to shed some light on how they are intended to work. Example 1 is based on Code Sec. 4980H(a) liability and Example 2 is based on Code Sec. 4980H(b) liability.

Example 1.  Employer A fails to offer minimum essential coverage and has 100 full-time employees, 10 of whom receive a Code Sec. 36B premium assistance tax credit for the year for enrolling in a Marketplace plan. For each employee over a 30-employee threshold, the employer would owe $2,000, for a total penalty of $140,000. The Code Sec. 4980H(a) penalty is assessed on a monthly basis. 

Example 2.  Employer B offers minimum essential coverage and has 100 full-time employees, 20 of whom receive a Code Sec. 36B premium assistance tax credit for the year for enrolling in a Marketplace plan. For each employee receiving a tax credit, the employer would owe $3,000 for a total penalty of $60,000. The maximum penalty for Employer B would be capped at the amount of the penalty that would have been assessed for a failure to provide coverage ($140,000 above in Example 1). Since the calculated penalty of $60,000 is less than the maximum amount, Employer B would pay the calculated penalty of $60,000. The Code Sec. 4980H(b) penalty is assessed on a monthly basis.

These examples are merely provided to illustrate how the employer shared responsibility payment is intended to work.  Every employer's situation will be different depending on the number of employees, the type of insurance offered and many other factors. Please contact our office for more details.

IRS guidance

Since enactment of the Affordable Care Act, the IRS and other federal agencies have issued guidance on the employer shared responsibility provision.  The IRS has defined what is an applicable large employer (generally defined as businesses with 50 or more employees), who is a full-time employee with certain exceptions for seasonal workers, and much more.

The IRS has not, however, issued guidance on reporting requirements by employers and insurers.  The Affordable Care Act generally requires employers, insurers and other entities that offer minimum essential coverage to file annual information returns reporting information about the coverage. As originally enacted, this information reporting was scheduled to take effect in 2014, the same year that the employer shared responsibility provisions were scheduled to take effect.

Delay

In early July, the Treasury Department announced that information reporting by employers, insurers and other entities offering minimum essential coverage will not start in 2014 but will be delayed until 2015. The IRS followed-up with transitional guidance. Information reporting by employers, insurers and other entities offering minimum essential coverage is waived for 2014. However, the IRS encouraged employers, insurers and others to voluntarily report this information. The IRS reported it is working on guidance and expects to issue regulations before year-end.

Because information reporting has been delayed, the Affordable Care Act's employer shared responsibility provisions are waived for 2014. The IRS explained that the transitional relief is expected to make it impractical to determine which employers would owe shared responsibility payments for 2014. As a result, no employer shared responsibility payments will be assessed for 2014.

Individual mandate

The January 1, 2014 scheduled start date of the Affordable Care Act's individual shared responsibility provisions is not delayed. Unless exempt, individuals must carry minimum essential health coverage after 2013 or pay a shared responsibility payment (also called a penalty). The Affordable Care Act exempts many individuals, such as most individuals covered by employer-provided health insurance, individuals enrolled in Medicare and Medicaid, and many others.  

After 2013, individuals may be eligible for a new tax credit (the Code Sec. 36B credit) to help offset the cost of obtaining health insurance. The credit is payable in advance to the insurer.
The January 1, 2014 scheduled start date of the Code Sec. 36B is also not delayed.

Small employers

Qualified small employers will be able to offer health insurance to their employees through the Small Business Health Options Program (SHOP). Enrollment for coverage through SHOP is scheduled to begin October 1, 2013 for coverage starting January 1, 2014. For 2014, SHOP is open to employers with 50 or fewer employees. Beginning in 2016, SHOP will be open to employers with up to 100 employees.

After 2013, the small employer health insurance tax credit is scheduled to increase from 35 percent to 50 percent for small business employers (and from 25 percent to 35 percent for tax-exempt employers). However, the credit is only available after 2013 to employers that obtain coverage through SHOP. This credit is targeted to very small employers with the credit gradually phasing out as the number of employees reaches 50.

If you have any questions about employer reporting or the employer shared responsibility payment-or any questions about the Affordable Care Act-please contact our office.

A business can deduct only ordinary and necessary expenses. Further, the amount allowable as a deduction for business meal and entertainment expenses, whether incurred in-town or out-of-town is generally limited to 50 percent of the expenses. (A special exception that raises the level to 80 percent applies to workers who are away from home while working under Department of Transportation regulations.)

A business can deduct only ordinary and necessary expenses. Further, the amount allowable as a deduction for business meal and entertainment expenses, whether incurred in-town or out-of-town is generally limited to 50 percent of the expenses. (A special exception that raises the level to 80 percent applies to workers who are away from home while working under Department of Transportation regulations.)

Related expenses, such as taxes, tips, and parking fees must be included in the total expenses before applying the 50-percent reduction. The 50-percent reduction is made only after determining the amount of the otherwise allowable deductions. However, allowable deductions for transportation costs to and from a business meal are not reduced.

The 50-percent deduction limitation also applies to meals and entertainment expenses that are reimbursed under an accountable plan to a taxpayer's employees. In that case, it doesn't matter if the taxpayer reimburses the employees for 100 percent of the expenses.

Employee-only meals.  If the value of any property or service provided to an employee is so minimal that accounting for the property or service would be unreasonable or administratively impracticable, it is a de minimis fringe benefit that is excluded for income and employment tax purposes.  Such benefits that are food-related may include occasional parties or picnics, occasional supper money due to overtime work, and employer-furnished coffee and doughnuts.

A subsidized eating facility can be a de minimis fringe if it is located on or near the business premises and the revenue derived from it normally equals or exceeds direct operating costs. Further, if more than one-half of the employees are furnished meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. Therefore, the meals are fully deductible by the employer, instead of possibly being subject to the 50-percent limit on business meal deductions, and excludable by the employees.

For many individuals, volunteering for a charitable organization is a very emotionally rewarding experience. In some cases, your volunteer activities may also qualify for certain federal tax breaks. Although individuals cannot deduct the value of their labor on behalf of a charitable organization, they may be eligible for other tax-related benefits.

For many individuals, volunteering for a charitable organization is a very emotionally rewarding experience. In some cases, your volunteer activities may also qualify for certain federal tax breaks. Although individuals cannot deduct the value of their labor on behalf of a charitable organization, they may be eligible for other tax-related benefits.

Before claiming any charity-related tax benefit, whether for a donation or volunteer activity, you must determine if the charity is a "qualified organization."  Under the tax rules, most charitable organizations, other than churches, must apply to the IRS to become a qualified organization. If you are uncertain about an organization's status as a qualified organization, you can ask the charity. The IRS has a toll-free number (1-877-829-5500) for questions from taxpayers about charities and also maintains an online tool at www.irs.gov/charities.

Time or services

An individual may spend 10, 20, 30 or more hours a week volunteering for a charitable organization. Precisely because the individual is a volunteer, he or she receives no remuneration for his or her time or services and cannot deduct the value of his or her time or services spent on activities for the charitable organization. Unpaid volunteer work is not tax deductible.

Vehicle expenses

Vehicle expenses associated with volunteer activity should not be overlooked.  For example, many individuals use their personal vehicles to transport others to medical treatment or to deliver food to shut-ins. Taxpayers can deduct as a charitable contribution qualified unreimbursed out-of-pocket expenses, such as the cost of gas and oil, directly related to the use of their vehicle in giving services to a charitable organization. However, certain expenses, such as registration fees, or the costs of tires or insurance, are not deductible.  Alternatively, taxpayers can use a standard mileage rate of 14 cents per mile to calculate the amount of their contribution. Do not confuse the charitable mileage rate, which is set by statute, with business mileage rate (56.5 cents per mile for 2013), which generally changes from year to year. Parking fees and tolls are deductible whether the taxpayer uses the actual expense method or the standard mileage rate.

Uniforms

Some volunteers are required to wear a uniform, such as a jacket that identifies the wearer as a volunteer for the charitable organization, while engaged in activity for the charity. In this case, the tax rules generally allow taxpayers to deduct the cost and upkeep of uniforms that are not suitable for everyday use and that the taxpayer must wear while performing donated services for a charitable organization.

Hosting a foreign student

Qualifying expenses for a foreign student who lives in the taxpayer's home as part of a program of the organization to provide educational opportunities for the student may be deductible. The student must not be a relative, such as a child or stepchild, or dependent of the taxpayer and also must be a full-time student in secondary school or any lower grade at a school in the U.S. Among the expenses that may be deductible are the costs of food and certain transportation spent on behalf of the student. The cost of lodging is not deductible. If you are planning to host a foreign-exchange student, please contact our office and we can explore the possible tax benefits.

Travel

Volunteers may be asked to travel on behalf of the charitable organization, for example, to attend a convention or meeting. Generally, qualified unreimbursed expenses may be deductible subject to complicated rules. Very broadly speaking, there must not be a significant element of personal pleasure, recreation, or vacation in the travel. Special rules apply if the charitable organization pays a daily travel allowance to the volunteer. There are also special rules for attendance at a church meeting or convention and the capacity in which the volunteer attends the church meeting or convention. If you plan to travel as part of your volunteer activity for a charitable organization, please contact our office and we can review your plans in greater detail.

If you have any questions, please contact our office.

Vacation homes offer owners tax breaks similar-but not identical-to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income. This combination of current income and tax breaks, combined with the potential for long-term appreciation, can make a second home an attractive investment.

Vacation homes offer owners tax breaks similar-but not identical-to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income. This combination of current income and tax breaks, combined with the potential for long-term appreciation, can make a second home an attractive investment.

Homeowners can deduct mortgage interest they pay on up to $1 million of "acquisition indebtedness" incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.

Vacation homeowners don't need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motorhome so long as it includes sleeping, cooking, and toilet facilities.

Gains from selling a vacation home are generally taxed as short-term or long-term capital gains.  While gain on the sale of a principal residence can be excludable, gain on the sale of a vacation home is not. Recent rules limit the amount of prior gain on a vacation residence that can be sheltered if a vacation home is converted into a primary residence.

Vacation home rentals. Many vacation home owners rent vacation homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.

• Income from rentals totaling not more than 14 days per year is nontaxable.
• Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E (Form 1040), Supplemental Income and Loss. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
• Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true "rental" property if certain rules are followed.

If you are considering the purchase of a vacation home, our offices can help compute your true, "after-tax" cost of ownership in determining whether such a purchase makes sense.

As gasoline prices have climbed in 2011, many taxpayers who use a vehicle for business purposes are looking for the IRS to make a mid-year adjustment to the standard mileage rate. In the meantime, taxpayers should review the benefits of using the actual expense method to calculate their deduction. The actual expense method, while requiring careful recordkeeping, may help offset the cost of high gas prices if the IRS does not make a mid-year change to the standard mileage rate. Even if it does, you might still find yourself better off using the actual expense method, especially if your vehicle also qualifies for bonus depreciation.

Two methods

Taxpayers can calculate the amount of a deductible vehicle expense using one of two methods:

• Standard mileage rate
• Actual expense method

Under the standard mileage rate, taxpayers calculate the amount of the allowable deduction by multiplying all business miles driven during the year by the standard mileage rate. One of the chief attractions of the standard mileage rate is its ease of use. Taxpayers do not have to substantiate expense amounts; however, they must substantiate business purpose and other items. There are also limitations on use of the business standard mileage rate.

The standard mileage rate for 2011 for business use of a car (van, pickup or panel truck) is 51 cents-per-mile. The IRS calculates the standard mileage rate on an annual study of the fixed and variable costs of operating an automobile. The IRS set the standard mileage rate for 2011 in late 2010 when gasoline prices were lower than today. It is a flat amount, whether or not your vehicle is fuel efficient, operates on premium grade fuel, is brand new or ten years old, or is subject to high repair bills.

During past spikes in gasoline prices, the IRS has made a mid-year change to the standard mileage rate for business use of a vehicle. In 2008, the IRS increased the business standard mileage rate from 50.5 cents-per-mile to 58.5 cents-per-mile for last six months of 2008 because of high gasoline prices. The IRS made a similar mid-year adjustment in 2005 when it increased the business standard mileage rate after Hurricane Katrina.

At this time, it is unclear if the IRS will make a similar mid-year adjustment in 2011. IRS officials generally have declined to make any predictions. If the IRS does make a mid-year change, it will likely do so in late June, so the higher rate can apply to the last six months of 2011.

Actual expense method

Rather than rely on a mid-year adjustment from the IRS, which might not come, it's a good idea to compare the actual vehicle costs versus the business standard mileage rate. Taxpayers who use the actual expense method must keep track of all costs related to the vehicle during the year. The cost of operating a vehicle includes these expenses:

• Gasoline
• Repair and maintenance costs
• Cleaning
• Tires
• Depreciation
• Lease payments (if the taxpayer leases the vehicle)
• Interest on a vehicle loan
• Insurance
• Personal property taxes on the vehicle

"Doing the math" this year in weighing whether to take the actual expense method not only should factor in the cost of gasoline but also what depreciation or expensing deductions you will be gaining by using the actual expense method. Enhanced bonus depreciation and enhanced "section 179" expensing for 2011 can increase your deduction for a newly-purchased vehicle in its first year tremendously if the actual expense method is elected.

Certain other costs are deductible whether you take the actual expense method or the standard mileage rate. This group includes parking charges, garage fees and tolls. Expenses incurred for the personal use of your vehicle are generally not deductible. An allocation must be made when the vehicle is used partly for personal purposes

Switching methods

Once actual depreciation in excess of straight-line has been claimed on a vehicle, the standard mileage rate cannot be used for the vehicle in any future year. Absent that prohibition (which usually is triggered if depreciation is taken), a business can switch between the standard mileage rate and actual expense methods from year to year. Businesses that switch methods now cannot make change methods effective in mid-year; you must apply one method retroactively from January 1.

Recordkeeping

The actual expense method requires taxpayers to substantiate every expense. This recordkeeping requirement can be challenging. For example, taxpayers who fill-up often at the gas pump need to keep a record of every purchase. The same is true for tune-ups and other maintenance and repair activity. One way to simplify recordkeeping is to charge all vehicle related expenses to one credit card.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

The IRS requires that business owners keep adequate books and records and that they be available when needed for the administration of any provision of the Internal Revenue Code (i.e., an audit). Here are some basic guidelines:

Copies of tax returns. You must keep records that support each item of income or deduction on a business return until the statute of limitations for that return expires. In general, the statute of limitations is three years after the date on which the return was filed. Because the IRS may go back as far as six years to audit a tax return when a substantial understatement of income is suspected, it may be prudent to keep records for at least six years. In cases of suspected tax fraud or if a return is never filed, the statute of limitations never expires.

Employment taxes. Chances are that if you have employees, you've accumulated a great deal of paperwork over the years. The IRS isn't looking to give you a break either: you are required to keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. These records include payroll tax returns and employee time documentation.

Business assets. Records relating to business assets should be kept until the statute of limitations expires for the year in which you dispose of the asset in a taxable disposition. Original acquisition documentation, (e.g. receipts, escrow statements) should be kept to compute any depreciation, amortization, or depletion deduction, and to later determine your cost basis for computing gain or loss when you sell or otherwise dispose of the asset. If your business has leased property that qualifies as a capital lease, you should retain the underlying lease agreement in case the IRS ever questions the nature of the lease.

For property received in a nontaxable exchange, additional documentation must be kept. With this type of transaction, your cost basis in the new property is the same as the cost basis of the property you disposed of, increased by the money you paid. You must keep the records on the old property, as well as on the new property, until the statute of limitations expires for the year in which you dispose of the new property in a taxable disposition.

Inventories. If your business maintains inventory, your recordkeeping requirements are even more arduous. The use of special inventory valuation methods (e.g. LIFO and UNICAP) may prolong the record retention period. For example, if you use the last-in, first-out (LIFO) method of accounting for inventory, you will need to maintain the records necessary to substantiate all costs since the first year you used LIFO.

Specific Computerized Systems Requirements

If your company has modified, or is considering modifying its computer, recordkeeping and/or imaging systems, it is essential that you take the IRS's recently updated recordkeeping requirements into consideration.

If you use a computerized system, you must be able to produce sufficient legible records to support and verify amounts shown on your business tax return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and business tax return. These records must provide enough detail to identify the underlying source documents. You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system.

Some additional advice: when your records are no longer needed for tax purposes, think twice before discarding them; they may still be needed for other nontax purposes. Besides the wealth of information good records provide for business planning purposes, insurance companies and/or creditors may have different record retention requirements than the IRS.

The decision to start your own business comes with many other important decisions. One of the first tasks you will encounter is choosing the legal form of your new business. There are quite a few choices of legal entities, each with their own advantages and disadvantages that must be taken into consideration along with your own personal tax situation.

The decision to start your own business comes with many other important decisions. One of the first tasks you will encounter is choosing the legal form of your new business. There are quite a few choices of legal entities, each with their own advantages and disadvantages that must be taken into consideration along with your own personal tax situation.

Sole proprietorships. By far the simplest and least expensive business form to set up, a sole proprietorship can be maintained with few formalities. However, this type of entity offers no personal liability protection and doesn't allow you to take advantage of many of the tax benefits that are available to corporate employees. Income and expenses from the business are reported on Schedule C of the owner's individual income tax return. Net income is subject to both social security and income taxes.

Partnerships. Similar to a sole proprietorship, a partnership is owned and operated by more than one person. A partnership can resolve the personal liability issue to a certain extent by operating as a limited partnership, but partners whose liability is limited cannot be involved in actively managing the business. In addition, the passive activity loss rules may apply and can reduce the amount of loss deductible from these partnerships. Partners receive a Schedule K-1 with their share of the partnership's income or loss, which is then reported on the partner's individual income tax return.

S corporations. This type of legal entity is somewhat of a hybrid between a partnership and a C corporation. Owners of an S corporation have the same liability protection that is available from a C corporation but business income and expenses are passed through to the owner's (as with a partnership). Like partners and sole proprietors, however, more-than 2% S corporation shareholders are ineligible for tax-favored fringe benefits. Another disadvantage of S corporations is the limitations on the number and kind of permissible shareholders, which can limit an S corporation's growth potential and access to capital. As with a partnership, shareholders receive a Schedule K-1 with their share of the S corporation's income or loss, which is then reported on the shareholder's individual income tax return.

C corporations. Although they do not have the shareholder restrictions that apply to S corporations, the biggest disadvantage of a C corporation is double taxation. Double taxation means that the profits are subject to income tax at the corporate level, and are also taxed to the shareholders when distributed as dividends. This negative tax effect can be minimized, however, by investing the profits back into the business to support the company's growth. An advantage to this form of operation is that shareholder-employees are entitled to tax-advantaged corporate-type fringe benefits, such as medical coverage, disability insurance, and group-term life.

Limited liability company. A relatively new form of legal entity, a limited liability company can be set up to be taxed as a partnership, avoiding the corporate income tax, while limiting the personal liability of the managing members to their investment in the company. A LLC is not subject to tax at the corporate level. However, some states may impose a fee. Like a partnership, the business income and expenses flow through to the owners for inclusion on their individual returns.

Limited liability partnership. An LLP is similar to an LLC, except that an LLP does not offer all of the liability limitations that are available in an LLC structure. Generally, partners are liable for their own actions; however, individual partners are not completely liable for the actions of other partners.

There are more detailed differences and reasons for your choice of an entity, however, these discussions are beyond the scope of this article. Please contact the office for more information.

Please contact the office for more information on this subject and how it pertains to your specific tax or financial situation.