1. The court will appoint an administrator, for a fee. The administrator will distribute your money and your belongings according to state law. You don't want this to happen because a court-appointed administrator won't know your personal interests and keep your needs in mind. With a will, you choose the person, called an executor, who sees to it that your property is distributed according to your specific wishes.

2. Your spouse may end up with less than s/he needs. Your surviving spouse may not have enough funds to make ends meet because, for example, more money may go to your children than you wanted. In your will, you can make sure that your spouse gets enough money to live comfortably.

3. Your assets may be divided equally among your heirs. If there is no surviving spouse, your assets will be parceled out equally among your heirs. You may not want this to happen. For example, you won't be able to protect your assets from an adult child's creditors or the financial ravages of a divorce decree. Or, one adult child may be well off and not need the money while another child really could use some financial assistance. Also, you may have another family member or friend you want to help and, without a will, it won't be possible.

4. Your grandchildren may not get a cent. When no beneficiaries have been specified, most state courts will grant an estate's assets first to a surviving spouse, then children, often leaving out the generation after. With a will you can allocate assets to go to grandchildren and, through a trust, you can name a guardian to manage their financial affairs until they're ready to do so on their own.

5. Your stepchildren may get nothing. Because most states define heirs as "blood" relatives, stepchildren may not be recognized as heirs. An exception may be made when a stepchild has been legally adopted. A will, however, can insure stepchildren are not left out.

6. You can't name a guardian for minor children. Without a will, you may not get the guardian you want for minor children. With neither parent alive, the grandparents are the natural guardians of minor children, but it may be up to a court to decide which set of grandparents.

7. You won't be able to minimize estate taxes your children or other heirs might have to pay. You and a spouse can shelter as much as $1.3 million of assets from federal estate taxes by setting up trusts within your wills. You'll need the help of a lawyer to draft the wills for you.

8. You can't leave your favorite things to your favorite people. With a will, and an adjoining letter of intent, you can specify who gets what. It's a good way to avoid family fights. A letter of intent is like a laundry list of items with the corresponding beneficiary. (Note: In some states, letters of intent can be changed from time to time without having to re-do the will).

9. You can't leave contributions to a church or charity. State laws do not consider religious and charitable institutions as heirs. Only a will can spell out how your money can be passed to non-heirs and insure your favorite charity gets a donation.

10. Your loved one could lose his/her benefits. You may cause a problem if money ends up going to a parent or other family member who's being cared for by Medicaid in a nursing facility. Medicaid has strict income qualifications. The added income may disqualify your loved one for continuing to receive benefits.

On July 4, President Donald Trump signed into law a Paycheck Protection Program (PPP) application extension bill that Congress had quickly passed just before the Independence Day holiday. According to several senators, the measure was "surprisingly" introduced and approved by unanimous consent in the Senate late on June 30. It cleared the House the evening of July 1.

On July 4, President Donald Trump signed into law a Paycheck Protection Program (PPP) application extension bill that Congress had quickly passed just before the Independence Day holiday. According to several senators, the measure was "surprisingly" introduced and approved by unanimous consent in the Senate late on June 30. It cleared the House the evening of July 1.

Most notably, the bill pushes out the PPP application window deadline five weeks from June 30 to August 8. "The resources are there. The need is there. We just need to change the date," Sen. Ben Cardin, D-Md., said. Prior to the extension, the small business loan program was set to expire at midnight on July 1 with over $130 billion left in funding.

Mnuchin, Rettig Testify
Treasury Secretary Steven Mnuchin and IRS Commissioner Charles "Chuck" Rettig testified before House and Senate committees on June 30, just hours before the PPP application period was set to close.

"There appears to be bipartisan support to repurpose the [remaining] $134 billion for PPP," Mnuchin told lawmakers during a House Financial Services Committee hearing on June 30. Mnuchin stated that "it should be done," and that the administration is looking toward targeted industry-specific relief.

Additionally, Mnuchin told lawmakers that he has been having discussions about more PPP-related relief with the House and Senate Small Business Committees. Reportedly, lawmakers are currently considering an extension or a second round of the PPP.

As for "phase four" of Congress’s next economic relief package, Mnuchin again alluded to a narrower approach. "We would anticipate that any additional relief would be targeted to certain industries that have been especially hard-hit by the pandemic, with a focus on jobs and putting all American workers who lost their jobs, through no fault of their own, back to work."

Meanwhile, several PPP-related bills have been introduced in the Senate over the last few weeks, and most recently a bipartisan PPP Forgiveness bill introduced on June 30. The Paycheck Protection Small Business Forgiveness Bill, authored by bipartisan members of the Senate Banking Committee, would streamline the forgiveness of certain PPP loans.

Senate Minority Leader Chuck Schumer, D-NY, also called for an extension of the small business loan program. "It is the last day small business can apply for PPP, but the economic crisis is not over. Senators Cardin, Shaheen, Coons and I will take to the Senate floor and demand we pass a bill to extend it," Schumer said in a June 30 tweet.

IRS 2020 Filing Season, Agency Redesign
In other news, Rettig testified on June 30 before the Senate Finance Committee (SFC) on IRS operations during the 2020 tax filing season. Notably, Rettig told senators that the decision not to further extend the 2019 tax year filing and payment deadline beyond July 15 was made in consultation with professional services organizations, adding that too many due dates can be confusing for taxpayers.

To that end, Treasury first signaled in a June 29 press release that it would not further extend the 2020 filing season. "Treasury and IRS encourage taxpayers to file their taxes by July 15, or file for an automatic extension of time to file to October 15," the press release stated.

"The IRS understands that those affected by the coronavirus may not be able to pay their balances in full by July 15, but we have many payment options to help taxpayers," Rettig said in the press release. "These easy-to-use payment options are available on IRS.gov, and most can be done automatically without reaching out to an IRS representative."

Additionally, Rettig told SFC members that the IRS is well underway in its redesign of the agency for the first time in over 20 years. As noted in Rettig’s testimony, the foundational components of a new holistic taxpayer experience will include the following:

• Expanded Digital Services. An improved experience through self-service digital channels by building upon existing online accounts and introducing online accounts for tax professionals and business taxpayers.
• Seamless Experience. Taxpayers should be guided to the resources and communication channels that will resolve their issues most effectively and efficiently.
• Proactive Outreach and Education. Educate the taxpayer community by proactively providing information in the language, timing, and method taxpayers need or prefer.
• Focused Strategies for Reaching Underserved Communities. Establish a consolidated program to engage with historically underserved communities to address issues of communication, education, transparency and trust, as well as access to quality products and services.
• Ecosystem of Partnerships. Establish, shepherd, and facilitate a collaborative and interactive network of partnerships across the entire tax ecosystem and bring together existing efforts.
• Enterprise Data Management and Advanced Analytics. An enterprise data management strategy that includes a cross-enterprise understanding of the customer experience, emerging needs and expectations, and operational data.

"If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me." — William Shakespeare

"If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me." — William Shakespeare

The Paycheck Protection Program (PPP) was enacted under the bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) on March 27, 2020. The PPP, a seemingly ever-evolving small business loan program, was derived from an unprecedented partnership between certain private lending institutions and the U.S. Small Business Administration (SBA). After its enactment in late March, the program quickly went from concept to implementation when it launched on April 3, 2020.

Fast forward to a somewhat rocky roll-out with several speed bumps and shake-ups, akin to a Shakespearean plotline, President Donald Trump on June 5, 2020, signed into law the bipartisan Paycheck Protection Program Flexibility Act (PPPFA) of 2020 ( P.L. 116-142). The PPPFA makes several enhancements to the swiftly implemented loan program, including providing for an extension of the expense forgiveness period from 8-to-24 weeks. The legislation also reduces the 75 percent payroll ratio requirement to 60 percent, extends the two-year loan repayment requirement to five years for future borrowers (existing PPP loans can be extended up to five years if lender/borrower agree), allows payroll tax deferment for PPP recipients, and extends the June 30, 2020, rehiring deadline to December 31, 2020.

Accordingly, the SBA, in consultation with Treasury, officially published in the Federal Register updated interim final rules (effective immediately upon publication, as opposed to the "regular order" of first issuing a proposed rule with a preliminary comment period) on June 16 and June 18, and issued new and revised forgiveness applications forms on June 17. Additional guidance is expected. The SBA is accepting comments through the Federal eRulemaking Portal at www.regulations.gov.

Wolters Kluwer recently spoke with Daniel G. Strickland, an associate with Eversheds Sutherland, about some of the underlying tax policy issues and lingering complexities with the PPP, and subsequent legislation and guidance. Strickland, who regularly works with the IRS on behalf of taxpayers to obtain benefits offered by the IRS, and with taxpayers to resolve tax controversy disputes with the IRS, currently serves as co-chair of the Federal Bar Association’s Tax Practice and Procedure Committee, as well as chair of the D.C. Bar Association’s New Tax Practitioner Subcommittee. Prior to tax practice, Strickland clerked for several years at the U.S. Tax Court.

To Double-Dip, or not to Double-Dip: That is the Question…(Well, One of Them)
Wolters Kluwer: Can you expand upon the preventive double-benefit tax policy position behind the IRS’s controversial Notice 2020-32, I.R.B. 2020-21, 837, which states that business expenses paid with tax-exempt income, i.e. a forgivable PPP loan, are not deductible under Code Sec. 265? Treasury Secretary Steven Mnuchin said recently, "if the money that is coming is not taxable, you can't double dip."

Daniel Strickland: Good question. As you correctly state, the IRS published Notice 2020-32 to address the tax treatment of expenses that would otherwise be deductible but that were paid using PPP loan proceeds that are forgiven.

From the IRS’s perspective, Congress only exempted the amount of forgiveness from taxation; it did not allow deductions for the expenses paid with forgiven proceeds. Notice 2020-32 points to section 265 as providing legal support for the proposition that otherwise-deductible expenses are not allowable for deduction to the extent that the income is wholly exempt from taxation.

My take is that the IRS is drawing a line at government-sponsored business expenses. In other words, for the taxpayers to receive forgiveness, the loan proceeds must be spent in a certain way. If they are, then it is as if the government paid those expenses directly in a valiant effort to prop up the COVID-affected small businesses. But there is an issue with the IRS’s position: a borrower cannot know the extent to which it will even be eligible for forgiveness—let alone whether its substantiation will be sufficient. And given the deadline for application for forgiveness, borrowers might not even know in the same tax year.

Wolters Kluwer: Sen. John Cornyn, R-Tex., recently introduced the bipartisan Small Business Expense Protection Act ( S. 3612), which moves to essentially nullify Notice 2020-32, clarifying congressional intent that the receipt and forgiveness of a PPP loan would not affect the deductibility of ordinary business expenses. What is your take on the underlying policy of this bill, and do you see the IRS reversing Notice 2020-32 before the measure moves through Congress?

Daniel Strickland: Senator Cornyn has the right idea. In my mind, a few simple examples show the logic: If I borrowed money from a bank and spent the proceeds on deductible expenses, I could deduct those expenses from my income when I file my taxes. If the bank forgave my debt, I would need to recognize the forgiven amount as income. If, on the other hand, I received a gift, I could also use that gift to pay for deductible expenses and then deduct those expenses from my income. I would not generally include the gift in my income – setting aside the differences between corporate taxes and individual taxes—since many small businesses are sole proprietorships or disregarded entities. When the CARES Act provided that the forgiven PPP loan amounts were not subject to tax, conceptually, the loans are turned into gifts. The deductibility should be no different. And the tax treatment should be the same irrespective of the type of corporate entity involved.

That is where the Senator is coming from. Unfortunately, the existence of a bill in Congress isn’t going to be enough to convince the IRS to about-face. The fact that there are still holds on Senator Cornyn’s bill is concerning to me.

"Know You of This Taxation?"
Wolters Kluwer: Are there other tax-related implications taxpayers and practitioners should keep in mind specific to PPP loan forgiveness?

Daniel Strickland: There are always tax implications. In the absence of congressional action on the deductibility question, another arises regarding timing. As detailed in the SBA’s interim final rule, SBA-2020-0035:

If you do not submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you must begin paying principal and interest after that period. For example, if a borrower’s PPP loan is disbursed on June 25, 2020, the 24-week period ends on December 10, 2020. If the borrower does not submit a loan forgiveness application to its lender by October 10, 2021, the borrower must begin making payments on or after October 10, 2021.

Taxpayers may not know whether—or to what extent—their PPP loans are forgiven until 2021, and some may not know until after they file their 2020 income tax returns. How should the deductions be reported?

In addition, we don’t know how the state and local taxing authorities will react.

Wolters Kluwer: Although the SBA, in consultation with Treasury, has addressed the PPPFA’s 60 percent "cliff" to allow for partial forgiveness if the 60 percent threshold is not reached, an added variable to the equation now exists. According to a June 8 joint Treasury/SBA statement and now updated guidance, partial forgiveness will be subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs. What is your interpretation of this new variable, and is the solution to the 60 percent "cliff," as termed by Sen. Susan Collins, R-Me., who was recently drafting a bill to address the issue, correctly addressed through regulatory guidance? Do you foresee any pushback?

Daniel Strickland: If I am honest, this one took me a couple times to read to understand that it isn’t internally inconsistent:

If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.

I certainly understand what the SBA is trying to do here, but I think the better explanation is in the SBA’s updated interim final rule, Docket No. SBA-2020-0035. The SBA does a great job explaining the math behind the partial forgiveness.

But to your question, I am not sure that this falls within the realm of regulatory guidance. The hurdle is going to be with the language of the PPPFA:

LIMITATION ON FORGIVENESS.—To receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, or any covered utility payment.

That being said, the SBA is creating a taxpayer-favorable solution to the PPPFA’s 60 percent "cliff." I am not sure who in their right mind will object, but given the pressure put onto the SBA’s rules in courts across the country, it will be interesting to see what happens next and how the agencies show reasoned decision-making in their rules that diverge from the statutory text.

"All’s Well That Ends Well?"
Wolters Kluwer: The PPP application process is scheduled to expire on June 30, 2020. Notably, prior to Senate approval of the PPPFA, the congressional record was updated with a letter from the bipartisan, bicameral PPPFA authors and policy architects to state that the PPPFA’s "extension of the covered period does not authorize the [SBA] to issue any new PPP loans after June 30, 2020, as this date remains fixed by section 1102(b) of the CARES Act." Furthermore, Treasury and the SBA, too, recently reaffirmed the June 30 cutoff date.

However, Mnuchin told lawmakers recently that another round of loans is on the discussion table, following Sen. Tim Scott’s, R-S.C., inquiry as to whether there is an appetite for further enhancing and extending the PPP. Moreover, fellow Senate Small Business Committee members Chris Coons, D-Del., and Ben Cardin, D-Md., have introduced the Prioritized Paycheck Protection Program (P4) Bill, which would authorize new lending under the PPP to borrowers with 100 employees or less who have or will soon exhaust the original PPP loan. A Democratic companion bill was introduced in the House on June 18.

Are you aware of any calls among taxpayers or practitioners to extend PPP loan applications beyond June?

Daniel Strickland: The SBA has been processing loans fast, processing more than 14 years’ worth of loans in 14 days in the initial round of funding. Since then, however, things have slowed down. I haven’t heard any calls for extension recently. But at the same time, the most recent numbers I saw suggested that there is still more than $125 billion available. The next round of published data will give us some indication of what happens. If there is still a significant amount of money left over, and if there is a need, I can certainly see Congress extending the loan application deadline without expanding the available funds. It would be additional taxpayer relief at no additional cost to the government. But with the PPPFA’s changes, we might see the remaining funds mostly or completely extended. In that case, I think we wouldn’t see an extension without another tranche of available funding.

"Confusion Now Hath Made His Masterpiece"
Wolters Kluwer: As for when pension expenses are paid and incurred, current guidance does not indicate whether the amount that is "paid by Borrower" can include retirement contributions attributable to all of 2019, 2020, or even the two years combined. Absent any further guidance, how would you advise taxpayers and practitioners on the matter?

Daniel Strickland: That is a tough question. The short answer is that there are a lot of unanswered questions like this one. The SBA and IRS are publishing guidance as quickly as they can, but it isn’t possible to give the requisite considered decision-making and answer all of the outstanding questions at the same time. What that means for taxpayers and practitioners is that each situation needs to be carefully considered. Without specific guidance, there is a risk that certain expenses don’t qualify for forgiveness or that a portion of the loan could be called for repayment.

The first thing that I advise is to work with an attorney to evaluate the specific facts of each situation and to look at the tax and business consequences of each option. In general, where there is no clear answer, having advice in writing from your attorney that the answer you choose is the right answer can help protect businesses from some of the negative consequences of being wrong.

Wolters Kluwer: Outside the most recently published interim final rules, are there other unanswered questions for which you think Treasury and the SBA could issue additional PPP guidance?

Daniel Strickland: There are a number of unanswered questions with respect to definitions. As you reference above, the one that makes most practitioners’ lists is this issue of paid versus incurred. The loan amount is determined using "monthly payments by the applicant for payroll costs incurred." And forgiveness is determined based on "the sum of the following costs incurred and payments made during the covered period." Another outstanding question is how the forgiveness reduction exemptions will work with the cure date being shifted to December 31 and how the "option to use an eight-week covered period" for those taxpayers who have already received their loan proceeds will work if the June 30 cure date falls within the 8-week covered period.

These are just the tip of the iceberg of unanswered questions.

Wolters Kluwer: Executive agencies, including the IRS and SBA, have been increasingly reliant on sub-regulatory FAQs as a means for issuing guidance lately. What are some potential consequences or drawbacks to this method?

Daniel Strickland: Receiving guidance by FAQ is certainly an efficient way to push information out to taxpayers and practitioners. But as you allude, there are some potential issues—both legal and practical. The first for me is in the second introductory paragraph:

Borrowers and lenders may rely on the guidance provided in this document as SBA’s interpretation of the Paycheck Protection Program Interim Final Rules . . . . The U.S. government will not challenge lender PPP actions that conform to this guidance 1[.]

Footnote 1 provides:

This document does not carry the force and effect of law independent of the statute and regulations on which it is based.

Although "borrowers . . . may rely on the guidance," it is only the SBA’s interpretation of its own interim final rules. There is certainly an open question as to the level of deference to which the FAQs are entitled.

Second to that is the issue of whether the government will challenge taxpayer actions that conform to the guidance. Although the guidance provides some comfort to lenders, and the lenders will be the ones approving loan forgiveness applications, there are still a slew of potential consequences in the fine print that could be asserted against borrowers.

Third is the complexity in advising clients. If you are paying daily attention to the guidance, the tempo of guidance isn’t a big deal, but what I am noticing is that the guidance is changing—think about the initial PPP interest rate of 0.50 percent fixed rate announced by Treasury that was later changed to 1.00 percent fixed rate—and few of the published thought guidance pieces are being updated. For practitioners who are trying to play catchup after receiving a client question, this can be complicated and a great deal of time can be lost spinning their wheels trying to figure out why two seemingly well-reasoned articles have divergent facts or conclusions.

Last, but not least, for taxpayers who are looking for answers online, this could be devastating when it comes to applications for forgiveness. If practitioners are having to sift through the outdated legal analysis by comparison to the newest FAQ iteration, how can taxpayers be confident that they are only relying on the correct version. And when the next round of guidance comes out, those taxpayers must rinse and repeat.

"Tomorrow, and Tomorrow, and Tomorrow…"
Wolters Kluwer: Looking ahead, any closing thoughts or advice for practitioners related to the PPP moving forward?

Daniel Strickland: We all want to get to the right answer. For taxpayers and practitioners alike, it is important to ask questions. The SBA, for example, is receptive to discussing concerns and comments. And given the frequency of guidance, it is more important than ever to be involved in the process. For taxpayers specifically, asking questions of their advisers can protect small businesses against the "penny-wise, pound-foolish" adage. I know I want to protect my clients from missteps and help them take fullest advantage of these benefits.

The U.S. Supreme Court upheld the Trump Administration’s rule under the Affordable Care Act (P.L. 111-148) that any nongovernment, nonpublicly traded employer can refuse to offer contraceptive coverage for moral or religious reasons, and that publicly traded employers can refuse to do so for religious reasons. Application of this rule had been halted by litigation, but the Administration is now free to apply it.

The U.S. Supreme Court upheld the Trump Administration’s rule under the Affordable Care Act (P.L. 111-148) that any nongovernment, nonpublicly traded employer can refuse to offer contraceptive coverage for moral or religious reasons, and that publicly traded employers can refuse to do so for religious reasons. Application of this rule had been halted by litigation, but the Administration is now free to apply it.

The issues in the case were: (1) whether the ACA actually requires contraceptive coverage or was that just a creature of regulations that any administration may change, and (2) whether the administration complied with Administrative Procedures Act (APA) in light of the surprising breadth of the regulation going well beyond religious objections to include any moral objection.

Contraceptive Regulation
The prior version of this regulation included an exception for religious employers and small businesses with a religious objection. They had to self-certify that they qualified. Some objected. Shortly after the Administration changed hands, it issued a new version as an interim final regulation.

The Treasury, Health and Human Services (HHS), and Labor Departments have nearly identical versions of these rules. The Treasury version is Reg. §54.9815-2713(a)(1)(iv), but it references HHS regulations (45 CFR 147.131–147.133), and that is where much of the change was made.

The new rule provides that a nongovernment employer that has religious or moral objections to providing coverage for some or all forms of birth control can simply not provide the coverage. These rules also apply to colleges and universities providing student health insurance coverage. The religious exemption is open to any nongovernment employer, including both nonprofit and for-profit entities. The same holds true for the moral exemption, except only the religious exemption is available for publicly traded employers. An objecting employer need not file anything with the government, though affected plan participants need to be notified of mid-plan year coverage changes. Employers are free to pick and choose among contraceptives if they do decide to offer contraceptive coverage.

These regulations extend the exemption for objecting employers to objecting health insurance issuers, and to objecting individuals under which a health insurance issuer may offer a separate benefit package option to any individual who objects to coverage or payments for some or all contraceptive services based on the individual’s sincerely held religious beliefs or moral convictions.

Authority Under ACA
The majority opinion by Justice Thomas viewed the ACA as blank slate on what it required for women’s preventive health. The relevant ACA provision provides that, with respect to women, a group health plan and a health insurance issuer shall, at a minimum provide additional preventive care and screenings "as provided for" in comprehensive guidelines supported by the Health Resources and Services Administration (HRSA), an agency of the Department of Health and Human Services (HHS). At the time of the ACA’s enactment, these guidelines were not yet written.

The HRSA Guidelines were based on recommendations compiled by the Institute of Medicine (now called the National Academy of Medicine). The Guidelines included the contraceptive mandate, which required health plans to provide coverage for all contraceptive methods and sterilization procedures approved by the Food and Drug Administration, as well as related education and counseling.

The same day the Guidelines were issued in 2011, the Departments of Labor, Health and Human Services, and the Treasury (the Departments) issued interim final regulations requiring contraceptive coverage, with exceptions for churches. The Departments determined that it was appropriate that HRSA take into account the mandate’s effect on certain religious employers, and concluded that HRSA had the discretion to do so through the creation of an exemption. Ever since, the HRSA has been tasked (according to the majority opinion) with devising religious exemptions. The majority opinion concluded that ACA granted the HRSA broad authority to define preventive care and screenings, which implies that the HRSA also has broad power to create any religious and moral exemptions. Thus, if the HRSA changes its mind, there is nothing in the ACA to prevent it.

Justice Ginsburg’s dissent (joined by Justice Sotomayor) argued the legislative language HRSA in fact only delegates to the HRSA the task of compiling a list of services that should be provided. The ACA did not delegate the authority to determine who must provide the coverage for these services. Justice Kagan’s concurrence (joined by Justice Breyer) disagreed with the majority and dissent about the clarity of the ACA’s language on this, but from the beginning the Departments acted as if it were up to the HRSA to make this call. Under the Chevron doctrine, the interpretation of unclear legislation by the agency tasked with enforcement is owed due deference by the courts.

No “Open-Mindedness” Test
The majority opinion found no violation of the Administrative Procedures Act. The fact that the final rules made only minor alterations to the interim final regulations did not render the final rules procedurally invalid, because nothing in the record suggested that the Departments maintained an open mind during the post-promulgation process. The “open-mindedness” test has no basis in the APA, according to Justice Thomas.

The majority opinion also addressed the issue of calling the document containing the interim final rules "Interim Final Rules with Request for Comments" instead of "General Notice of Proposed Rulemaking." The request for comments readily satisfied the APA notice requirements, Justice Thomas ruled. Even assuming that the APA requires an agency to publish a document entitled "notice of proposed rulemaking," there was no prejudicial error here.

Justice Kagan’s opinion questioned whether the rule was not arbitrary and capricious. The rule went beyond what the Departments’ justification supported, raising doubts about whether the solution lacks a "rational connection" to the problem described. Few employers have expressed reservations about self-certification, and in any case the new exemption includes any employer (except publicly traded employers) with a moral objection whether it is religious or not.

Where’s RFRA?
The majority opinion stopped its authority analysis at holding that the ACA authorized the regulation, and stated that it did not need go into the requirements of the Religious Freedom Restoration Act of 1993 (RFRA). Justice Alito (joined by Justice Gorsuch) filed a concurrence taking the position that RFRA compels an exemption for the Little Sisters and any other employer with a similar objection to what has been called the accommodation to the contraceptive mandate.

The IRS has issued guidance to employers on the requirement to report the amount of qualified sick and family leave wages paid to employees under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127). This reporting provides employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits under the Families First Act.

The IRS has issued guidance to employers on the requirement to report the amount of qualified sick and family leave wages paid to employees under the Families First Coronavirus Response Act (Families First Act) ( P.L. 116-127). This reporting provides employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits under the Families First Act.

Background
Under the Families First Act, many employers with fewer than 500 employees must provide paid leave to employees due to circumstances related to the Coronavirus Disease 2019 (COVID-19). Certain employers must provide an employee with up to 80 hours of paid sick leave if the employee cannot work or telework because he or she:

1. is subject to a federal, state or local quarantine or isolation order related to COVID-19;
2. has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
3. is experiencing symptoms of COVID-19 and seeking a medical diagnosis;
4. is caring for an individual who is subject to a federal, state, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
5. is caring for a son or daughter if the child’s school or place of care has been closed, or the child’s care provider is unavailable, due to COVID-19 precautions; or
6. is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretaries of the Treasury and Labor.

The employee is entitled to paid sick leave at his or her regular pay rate (or if higher, the applicable federal, state, or local minimum wage), up to:

• $511 per day ($5,110 in the aggregate) if the employee cannot work for reasons listed in (1), (2), or (3), above;
• $200 per day ($2,000 in the aggregate) if the employee cannot work for reasons listed in (4), (5), or (6) above.

The Families First Act also amends the Family and Medical Leave Act of 1993 to require employers to provide expanded paid family and medical leave to employees who cannot work or telework for reasons related to COVID-19. An employee can receive up to 10 weeks of paid family and medical leave at two-thirds the employee’s regular rate of pay, up to $200 per day ($10,000 in the aggregate) if the employee cannot work because he or she is caring for a son or daughter whose school or place of care is closed, or whose child care provider is unavailable, for reasons related to COVID-19.

Eligible employers may receive a refundable payroll credit for required qualified sick leave wages or qualified family leave wages paid to an employee, plus allocable qualified health plan expenses. An equivalent credit is available to self-employed individuals carrying on a trade or business, if the self-employed individual would be entitled to receive paid leave if he or she were an employee of an employer (other than himself or herself). The refundable credits apply to qualified leave wages paid with respect to the period beginning on April 1, 2020, and ending on December 31, 2020.

Reporting Qualified Leave Wages
In addition to reporting qualified sick leave wages paid and qualified family leave wages paid in Boxes 1, 3 (up to the social security wage base), and 5 of Form W-2 (or, in the case of compensation subject to the Railroad Retirement Tax Act (RRTA), in Boxes 1 and 14 of Form W-2), employers must report to the employee the following types and amounts of the wages that were paid, with each amount separately reported either in Box 14 of Form W-2 or on a separate statement:

• the total amount of qualified sick leave wages paid for reasons (1), (2), or (3) above, labelled as "sick leave wages subject to the $511 per day limit" or in similar language;
• the total amount of qualified sick leave wages paid for reasons (4), (5), or (6) above, labelled as "sick leave wages subject to the $200 per day limit" or in similar language; and
• the total amount of qualified family leave wages paid, labelled as "emergency family leave wages" or in similar language.

If a separate statement is provided and the employee receives a paper Form W-2, the statement must be included with the Form W-2 provided to the employee. If the employee receives an electronic Form W-2, the statement must be provided in the same manner and at the same time as the Form W-2.

Self-Employed Individuals
Self-employed individuals who are claiming qualified sick leave equivalent or qualified family leave equivalent credits, and who are also eligible for qualified sick leave and qualified family leave wages as employees, must report the qualified leave wage amounts described above on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, included with their income tax returns. They also must reduce (but not below zero) any qualified sick leave or qualified family leave equivalent credits by the amount of these qualified leave wages.

The IRS has issued guidance and temporary relief for required minimum distribution (RMD) changes in 2020. Distributions that would have been RMDs under old law are treated as eligible rollover distributions. The 60-day rollover period deadline for any 2020 RMDs already taken has been extended to August 31, 2020. Notice 2007-7, I.R.B. 2007-5, 395 is modified.

The IRS has issued guidance and temporary relief for required minimum distribution (RMD) changes in 2020. Distributions that would have been RMDs under old law are treated as eligible rollover distributions. The 60-day rollover period deadline for any 2020 RMDs already taken has been extended to August 31, 2020. Notice 2007-7, I.R.B. 2007-5, 395 is modified.

SECURE and CARES Acts
The new guidance addresses RMD issues arising from recent unexpected changes in the rules. The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) ( P.L. 116-94), enacted at the end of 2019, changed the required beginning date for RMDs for individuals turning age 70-1/2 in 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136), enacted in March 2020, waived the RMD requirements for 2020.

Plans, administrators, and individuals were taken by surprise. Some plans and participants treated distributions as RMDs even though they were not under new rules then in effect. The SECURE Act provided no relief. However, the CARES Act allowed plans and participants to treat would-be RMDs as eligible rollover distributions. Still, under the rules, individuals have 60 days to recontribute distributions, and can only do that once in a 12-month period. That left individuals who took early distributions twisting in the wind, not to mention people taking monthly RMD installments.

60-Day Deadline Extended
Under the new relief, any distribution already taken in 2020 that would have been an RMD under the old rules has a 60-day recontribution deadline of no earlier than August 31. For example, if someone took a distribution in January 2020 that would have been an RMD under the old rules (either sets of old rules), they have until August 31 to recontribute it to an eligible plan or IRA.

For an IRA owner or beneficiary who has already received a distribution that would have been an RMD in 2020 but for the 2020 RMD waiver under the CARES Act or the change in the required beginning date under the SECURE Act, the recipient may repay the distribution to the distributing IRA, even if the repayment is made more than 60 days after the distribution, provided the repayment is made no later than August 31, 2020. The repayment will be treated as a rollover, but will be subject to the one rollover per 12-month period limitation or the restriction on nonspousal beneficiary rollovers.

SECURE Act Relief
Distributions that were intended as RMDs but in fact are not due to the SECURE Act change in required beginning date are treated as eligible rollover distributions. RMDs do not have to satisfy rules regarding mandatory withholding, the option of a direct rollover, and notice of that right. Under this relief, individuals and plans can still treat these as eligible rollover distributions.

2020 Waiver Guidance
The IRS has clarified that the CARES Act relief applies for 2020 distributions that would have been RMDs, had it not been for the 2020 RMD waiver. These include distributions to a plan participant paid in 2020 (or paid in 2021 for the 2020 calendar year in the case of an employee who has a required beginning date of April 1, 2021) if the payments equal the amounts that would have been RMDs in (or for) 2020 had it not been for 2020 RMD waiver. They also include distributions that are one or more payments (that include the 2020 RMDs) in a series of substantially equal periodic payments made at least annually and expected to last for the participant’s life or life expectancy, the joint lives (or joint life expectancies) of the participant and the participant’s designated beneficiary, or for a period of at least 10 years.

For a plan participant with a required beginning date of April 1, 2021, distributions paid in 2021 that would have been an RMD for 2021 had it not been for the CARES Act are treated as eligible rollover distributions. However, a plan participant with a required beginning date of April 1, 2021, must still receive RMD for the 2021 calendar year by December 31, 2021. If the employee receives a distribution during 2021, that distribution is an RMD for the 2021 calendar year to the extent the total RMD for 2021 has not been satisfied even if the distribution is made on or before April 1, 2021, and accordingly, is not an eligible rollover distribution. However, to the extent the RMD for 2021 has been satisfied, subsequent amounts distributed in 2021 that would otherwise not be eligible rollover distributions may be rolled over.

Extended Deadlines Due to 2020 Waiver
If a plan permits an employee or beneficiary to elect whether the 5-year rule or the life expectancy rule applies in determining RMDs, then the deadline for making that election typically would be the end of calendar year following the calendar year of the employee’s death. For example, if a 50-year-old employee in a plan providing the election died in 2019 with his sister as his designated beneficiary, the plan provision would require the election by the end of 2020. However, that type of plan may be amended to permit the extension of the election deadline to the end of 2021.

The RMD waiver extends the time for making a direct rollover for a nonspouse designated beneficiary if the participant died in 2019. A special rule provides that if the 5-year rule applies to a benefit under a plan, the nonspouse designated beneficiary may determine the amount that is not eligible for rollover because it is an RMD using the life expectancy rule in the case of a distribution made prior to the end of the year following the year of death. This special rule is modified so that if the employee’s death occurred in 2019, the nonspouse designated beneficiary has until the end of 2021 to make the direct rollover and use the life expectancy rule.

Plan Amendments
The guidance provides a sample plan amendment for defined contribution plans that plan sponsors may adopt to implement waiver rules. Any plan amendment must be adopted no later than the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024, for governmental plans), and must reflect operation of the plan beginning with the effective date of the plan amendment. Timely adoption of the amendment must be shown by a written document signed and dated by the employer (including an adopting employer of a pre-approved plan). IRAs do not need to be amended.

The IRS has clarified and provided relief for mid-year amendments reducing safe harbor contributions. An updated safe harbor notice and an election opportunity must be provided even if the change is only for highly compensated employees. Coronavirus (COVID-19) relief applies if a plan amendment is adopted between March 13, 2020, and August 31, 2020. For nonelective contribution plans, the supplemental notice requirement is satisfied if provided no later than August 31, 2020, and the amendment that reduces or suspends contributions is adopted no later than the effective date of the reduction or suspension. Notice 2016-16, I.R.B., 2016-7, 318, is clarified.

The IRS has clarified and provided relief for mid-year amendments reducing safe harbor contributions. An updated safe harbor notice and an election opportunity must be provided even if the change is only for highly compensated employees. Coronavirus (COVID-19) relief applies if a plan amendment is adopted between March 13, 2020, and August 31, 2020. For nonelective contribution plans, the supplemental notice requirement is satisfied if provided no later than August 31, 2020, and the amendment that reduces or suspends contributions is adopted no later than the effective date of the reduction or suspension. Notice 2016-16, I.R.B., 2016-7, 318, is clarified.

Mid-Year Amendments
Safe harbor contributions for a plan year may be amended during the plan year to reduce or suspend future matching or nonelective contributions only under certain conditions. Among them are that the employer must either (1) be operating at an economic loss for the plan year, or (2) have included in the plan’s safe harbor notice for the plan year a statement that the plan may be amended during the plan year to reduce or suspend safe harbor contributions, and that the reduction or suspension will not apply earlier than 30 days after all eligible employees are provided notice of the reduction or suspension.

The reduction or suspension of safe harbor contributions may be effective no earlier than the later of the date the amendment is adopted or 30 days after eligible employees are provided in a supplemental notice. Eligible employees must be given a reasonable opportunity (including a reasonable period after receipt of the supplemental notice) prior to the reduction or suspension of safe harbor contributions to change their cash or deferred elections and, if applicable, their employee contribution elections.

Safe Harbor Contributions
Reductions or suspensions of contributions. If a plan amendment that reduces or suspends safe harbor matching or nonelective contributions during a plan year is adopted between March 13, 2020, and August 31, 2020, then the plan will not be treated as failing to satisfy the requirement that the employer either (1) is operating at an economic loss; or (2) has included in the plan’s safe harbor notice for the plan year a statement that (a) the plan may be amended during the plan year to reduce or suspend the safe harbor contributions and (b) the reduction or suspension will not apply until at least 30 days after all eligible employees are provided notice of the reduction or suspension.

Supplemental notice requirement. If a plan amendment that reduces or suspends safe harbor nonelective contributions during a plan year is adopted between March 13, 2020, and August 31, 2020, then the plan will not be treated as failing to satisfy the supplemental notice requirements merely because it is not provided to eligible employees at least 30 days before the reduction or suspension of safe harbor nonelective contributions is effective, provided that (1) the supplemental notice is provided to eligible employees no later than August 31, 2020, and (2) the plan amendment that reduces or suspends safe harbor nonelective contributions is adopted no later than the effective date of the reduction or suspension of safe harbor nonelective contributions.

There is no relief with respect to the timing of supplemental notices for a mid-year reduction or suspension of safe harbor matching contributions because matching contribution levels communicated to employees directly affect employee decisions regarding elective contributions (and, if applicable, employee contributions).

HCE Contributions
The new notice clarifies that an updated safe harbor notice and an election opportunity (as required by Notice 2016-16, I.R.B. 2016-7, 318) must be provided to highly compensated employees (HCEs) to whom the mid-year change applies, determined as of the date of issuance of the updated safe harbor notice. This rule applies even if the change only applies to HCEs.

The IRS amended final regulations with guidance on the Code Sec. 199A deduction for suspended losses and shareholders of regulated investment companies (RICs). The amendments address the treatment of suspended losses included in qualified business income (QBI), the deduction allowed to a shareholder in a regulated investment company (RIC), and additional rules related to trusts and estates. The IRS had previously issued final and proposed regulations addressing these issues (NPRM REG-134652-18)

The IRS amended final regulations with guidance on the Code Sec. 199A deduction for suspended losses and shareholders of regulated investment companies (RICs). The amendments address the treatment of suspended losses included in qualified business income (QBI), the deduction allowed to a shareholder in a regulated investment company (RIC), and additional rules related to trusts and estates. The IRS had previously issued final and proposed regulations addressing these issues ( NPRM REG-134652-18)

Background
Code Sec. 199A provides a deduction of up to 20 percent of qualified business income (QBI) from a U.S. trade or business operated as a sole proprietorship, or through a partnership, S corporation, trust, or estate. If the taxpayer’s taxable income exceeds the threshold amount in Code Sec. 199A(e)(2), the deduction may be limited. Statutory limitations are subject to phase-in rules. Code Sec. 199A also provides individuals and some trusts and estates a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

461(l) Losses
Under Reg. §1.199A-3(b)(1)(iv), previously disallowed losses or deductions allowed in the tax year are generally taken into account for computing QBI, except to the extent the losses or deductions were disallowed, suspended, limited, or carried over from tax years ending before January 1, 2018. The final regulations amend Reg. §1.199A-3(b)(1)(iv)(A) to specifically reference excess business losses disallowed by Code Sec. 461(l) and treated as a net operating loss (NOL) carryover for the tax year for purposes of determining any NOL carryover in subsequent tax years. The IRS notes that the list of statutes in the regulation is not exhaustive

Phase-in Rules for SSTB Losses
The amendments also clarify how the phase-in rules apply when a taxpayer has a suspended or disallowed loss or deduction from a specified service trade or business (SSTB). If the individual’s taxable income is at or below the threshold amount in the year the loss or deduction is incurred, the entire disallowed loss or deduction is treated as QBI from a separate trade or business in the later tax year in which the loss is allowed. If the individual’s taxable income is within the phase-in range, only a percentage of the disallowed loss or deduction is taken into account in the later tax year. If the individual’s taxable income exceeds the phase-in range, the loss or deduction is not included in QBI.

Conduit Treatment
The final regulations provide conduit treatment for qualified REIT dividends earned by a RIC. Conduit treatment happens when a RIC treats dividends paid to a shareholder in the same or similar manner as the shareholder would treat the underlying item of income or gain if the shareholder realized it directly. The Treasury Department and IRS continue to consider comments on whether to provide conduit treatment for qualified PTP income, and for RIC income from an activity that would generate QBI if conducted by a partnership or an S corporation.

Separate Share Rule
The separate share applies for a trust or estate described in Code Sec. 663(c) with substantially separate and independent shares for multiple beneficiaries. Under the final regulations, the trust or estate will be treated as a single trust or estate for determining taxable income, net capital gain, net QBI, W-2 wages, unadjusted basis immediately after acquisition (UBIA) of qualified property, qualified REIT dividends, and qualified PTP income for each trade or business of the trust or estate, and for computing the W-2 wage and UBIA of qualified property limitations.

Applicability
The amended regulations apply to tax years beginning 60 days after publication in the Federal Register. However, taxpayers may choose to apply the amendments before that date. Taxpayers who chose to rely on the proposed regulations issued in February 2019 may continue to do so until the date these amendments are published.

The Treasury Department and the IRS have released drafts of proposed partnership forms for tax year 2021 (the 2022 filing season). The proposed forms are intended to provide greater clarity for partners on how to compute their U.S. income tax liability for relevant international tax items, including claiming deductions and credits. The redesigned forms and instructions will also give useful guidance to partnerships on how to provide international tax information to their partners in a standardized format.

The Treasury Department and the IRS have released drafts of proposed partnership forms for tax year 2021 (the 2022 filing season). The proposed forms are intended to provide greater clarity for partners on how to compute their U.S. income tax liability for relevant international tax items, including claiming deductions and credits. The redesigned forms and instructions will also give useful guidance to partnerships on how to provide international tax information to their partners in a standardized format.

The draft forms are:

• Schedule K-2 (Form 1065), Partners’ Distributive Share Items—International, and Instructions for Schedule K-2.
• Schedule K-3 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc.—International ; and Instructions for Schedule K-3.

These proposed forms would apply to a partnership required to file Form 1065 only if it has "items of international tax relevance" (i.e., generally, foreign activities or foreign partners). The changes would not affect domestic partnerships with no international tax items to report.

Partner Reporting of International Items
Partners must report international tax information on their tax returns on several tax forms and schedules. They generally obtain this information from their partnerships, usually through narrative statements attached to one or more Schedules K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. Since partnerships compile these statements in a variety of formats, partners might have difficulties translating the statements onto their own returns.

To ease this burden, the Treasury and IRS state that the proposed changes would provide a standard format that offers greater clarity to both partnerships and their partners. This standard format is designed to better align the information that partnerships provide on the schedules with the tax forms used by partners, so that partners can more easily prepare their tax returns, and the IRS can more efficiently verify taxpayer compliance. It is intended that all information to be reported on the new schedules is already necessary for the partnership to provide to partners or is available to the partnership.

Draft Schedules K-2 and K-3
Any partnership that is required to file Form 1065, U.S. Return of Partnership Income, and has items relevant to the determination of the U.S. tax or certain withholding tax or reporting obligations of its partners under the international provisions of the Code, will be required to complete the relevant parts of Schedule K-2 and Schedule K-3.

The proposed parts included in new Schedule K-2 (Form 1065) replace portions of existing Form 1065, Schedule K, lines 16(a) through 16(r). The proposed schedule provides for international tax information to be reported in a standardized manner. The partnership will attach Schedule K-2 to its Form 1065.

The proposed parts included in new Schedule K-3 (Form 1065) replace portions of Schedule K-1 (Form 1065), Part III, Boxes 16 and 20. The proposed schedule provides information to the partner generally in the format of the following forms that the partner might need to complete:

• Form 1040, U.S. Individual Income Tax Return;
• Form 1040-NR, U.S. Nonresident Alien Income Tax Return;
• Form 1116, Foreign Tax Credit (Individual, Estate, or Trust;
• Form 1118, Foreign Tax Credit—Corporations;
• Form 1120, U.S. Corporation Income Tax Return;
• Form 1120-F, U.S. Income Tax Return of a Foreign Corporation;
• Form 4797, Sales of Business Property;
• Form 8949, Sales and Other Dispositions of Capital Assets;
• Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts;
• Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI); and
• Form 8993, Section 250 Deduction for Foreign Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI).

The partnership will provide Schedule K-3 to its partners according to the timeline for providing Schedule K-1.

Comments Requested
The draft schedules and instructions have been released to allow partnerships and other stakeholders time to consider the proposed changes and provide comments that can be taken into account in finalizing the schedules and instructions. The Treasury and IRS will be actively engaged with stakeholders to solicit input on these proposed changes before the forms are finalized later in 2020.

Affected stakeholders can submit comments through September 14, 2020. Written comments should be sent to the following email address: lbi.passthrough.international.form.changes@irs.gov with the subject line: "International Form Changes."

For additional information and updates, see https://www.irs.gov/businesses/1065-form-changes.

Other Revisions
The Treasury and IRS plan similar revisions, as applicable, to Form 1120-S, U.S. Income Tax Return for an S Corporation, and Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. They welcome comments on similar changes to be made to these forms for the 2021 tax year.

The Treasury and IRS have issued final regulations covering the Code Sec. 250 deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). Proposed regulations were issued on March 6, 2019 (NPRM REG-104464-18). The final regulations maintain the basic approach and structure of the proposed regulations and provide guidance on computation of the deduction and the determination of FDII, including in the consolidated return context. Additionally, rules requiring the filing of Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income, are finalized.

The Treasury and IRS have issued final regulations covering the Code Sec. 250 deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). Proposed regulations were issued on March 6, 2019 (NPRM REG-104464-18). The final regulations maintain the basic approach and structure of the proposed regulations and provide guidance on computation of the deduction and the determination of FDII, including in the consolidated return context. Additionally, rules requiring the filing of Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income, are finalized.

Section 250 Deduction
The Code Sec. 250 deduction is available to domestic corporations for:

• a portion of profits attributable U.S. activities that serve foreign markets, and
• a portion of profits of controlled foreign corporations (CFCs).

The deduction is available with respect to a domestic corporation’s "excess return" or return in excess of fixed return on tangible assets, derived from serving foreign markets. FDII is the portion of the excess return derived from serving foreign markets directly from the United States. GILTI is the portion of the excess return derived through foreign affiliates. The deduction results in a lower effective U.S. tax rate on a U.S. corporation’s FDII and GILTI.

Documentation Requirements
The proposed regulations defined terms and provide specific documents that were required to establish that income was derived from serving foreign markets. Commentators found that the proposed regulations could present compliance burdens. Accordingly, the final regulations provide a more flexible approach than the specific documentation requirements.

For many types of sales and services, eligibility for the Code Sec. 250 deduction is subject to the general requirement under the Code that deductions must be supported by sufficient substantiation, including the use of available business records.

More specific substantiation requirements are required for:

• intangible property;
• sales of general property to resellers and manufacturers; and
• the provision of general services to recipients.

The requirements include either:

• a specific document;
• information from the recipient obtained or created in the ordinary course of a trade or business; or
• a taxpayer statement with corroborating evidence.

Taxpayers may choose a method of substantiation among the methods. The specific substantiation requirements do not apply to businesses with less than $25 million in gross receipts. The final regulations also eliminate references to the use of market research to establish foreign use.

The final regulations clarify how to establish foreign use for sales of digital content and how to establish a recipient’s location outside of the United States with respect to electronically supplied services and advertising services. The final regulations:

• evaluate the sale of a copyrighted article under the general property rules, rather than under the rules for foreign use of intangible property;
• provide new rules for establishing whether a sale of digital content is for foreign use;
• define "digital content" as a computer program or any other content in digital format; and
• provide that a sale of general property that primarily includes digital content is a foreign-derived deduction eligible income (FDDEI) sale if the end user downloads or accesses the content on a device located outside of the United States.

The final regulations add two subcategories of general services:

• a subcategory of general services for electronically supplied services; and
• a subcategory for advertising services.

In these cases, the location of the recipient is where the content is accessed or viewed.

Foreign Military Sales and Services
The proposed regulations provided special rules to cover U.S. Defense Contractors’ military sales of equipment and provision of services to the U.S. government that are subsequently sold or provided to a foreign government.

The final regulations adopt the proposed regulations, which treat sales and services provided to the U.S. government under the Arms Export Control Act as a sale or provision of services to the foreign government that is eligible for the deduction. The final regulations relax the substantiation requirements, so that the general substantiation requirements apply.

Ratio of FDDEI to DEI
A corporation’s FDII is defined as its deemed intangible income (DII) multiplied by the corporation’s foreign-derived ratio. This is the ratio of the corporation’s foreign-derived deduction eligible income (FDDEI) to its deduction eligible income (DEI).

The final regulations retain the rule that the domestic corporation must allocate expenses to its gross FDDEI to determine the numerator of the foreign-derived ratio.

Deduction for Individuals
The final regulations extend the Code Sec. 250 deduction with respect to GILTI, to individuals—including individual partners and individual S corporation shareholders—making the Code Sec. 962 election to be treated as a domestic corporation.

Additional Changes
Additional changes in the final regulations generally expand situations in which a transaction will be an FDDEI transaction, including:

• a property service may be a FDDEI service if it is provided with respect to property temporarily located in the United States;
• the definition of transportation services is revised to include freight forwarding services;
• the sale of a manufacturing method or process intangible to a foreign unrelated party is for foreign use based on the location of the manufacture rather that the end user;
• elimination of the rule that allowed the deduction for sales of international property only if certain time and use thresholds were met and the replacement of foreign use based on place of registration;
• clarification that general property includes physical commodities sold pursuant to derivative contracts, and that hedging sales impact a taxpayer’s income; and
• removal of the rule that the sale of an interest in a foreign branch is treated as giving rise to foreign branch income preventing the deduction.

Taxpayers can also use any reasonable method to determine the ordering of rules that limit deductions based on taxable income until additional rules are issued.

The IRS is calling on any taxpayers involved in syndicated conservation easement transactions who receives a settlement offer from the agency to accept it soon. The Service made this request in the wake of the Tax Court’s recent strike down of four additional abusive syndicated conservation easement transactions.

Settlement Offers
Time-limited settlement offers, which the IRS announced on June 25 ( IR-2020-130), are only being made to certain taxpayers with pending docketed Tax Court cases involving this type of abusive transaction. The IRS declared that these and other recent Tax Court decisions support the abusive nature of the underlying syndicated conservation easement deduction.

The four recent Tax Court decisions in question disallowed conservation easement deductions totaling nearly $21 million ( Village at Effingham, LLC, TC Memo. 2020-102, Dec. 61,715(M); Riverside Place, LLC, TC Memo. 2020-103, Dec. 61,716(M); Maple Landing, LLC, TC Memo. 2020-104, Dec. 61,717(M); Englewood Place, LLC, TC Memo. 2020-105, Dec. 61,718(M)).

Abusive Transactions
While recognizing the important role of legitimate conservation easement deductions in incentivizing land preservation for future generations, the IRS pointed out that abusive syndicated conservation easement transactions have been of concern for several years.

In listed syndicated conservation easement structures, promoters syndicate ownership interests in real property through partnerships, using promotional materials to suggest that prospective investors may be entitled to a share of a conservation easement contribution deduction that equals or exceeds two and one-half times the investment amount. The promoters obtain an appraisal that greatly inflates the value of the conservation easement, based on a fictional and unrealistic highest and best use of the property before it was encumbered with the easement. After the investors invest in the partnership, the partnership donates a conservation easement to a land trust. Investors in the partnership then claim a deduction based on an inflated value. According to the IRS, the investors typically claim charitable contribution deductions that grossly multiply their actual investment in the transaction and defy common sense.

The IRS is aware that some promoters of these abusive transactions have downplayed the significance of the string of recent court decisions holding in the government’s favor, arguing that their cases are somehow different or that those decisions might be reversed on appeal. These promoters ignore common sense and argue that the real dispute is about value, neglecting to explain how the reporting of short-term appreciation, often exceeding many multiples of reality, could possibly withstand judicial scrutiny. "Taxpayers should ignore this nonsense, take an objective look at their cases, and cut their losses," said IRS Chief Counsel Mike Desmond; "abusive transactions, like settlement offers, do not get better with time, and this is a good opportunity to get out," he added.

Incentive stock options (ISOs) give employees a "piece of the action" while allowing employers to attract workers at relatively inexpensive costs. However, before you accept that job offer, there are some intricate rules regarding the taxation of ISOs that you should understand.

ISOs give employees a "piece of the action" while allowing employers to attract workers at relatively inexpensive costs. However, before you accept that job offer, there are some intricate rules regarding the taxation of ISOs that you should understand.

How are ISOs taxed?

An incentive stock option is an option granted to you as an employee which gives you the right to purchase the stock of your employer without realizing income either when the option is granted or when it is exercised. You are first taxed when you sell or otherwise dispose of the option stock. You then have capital gain equal to the sale proceeds minus the option price, provided that the holding period requirement is met.

Note. The IRS has temporarily suspended collection of ISO alternative minimum tax (AMT) liabilities through September 30, 2008.

How long do I need to hold ISOs to get capital gain treatment?

To obtain favorable tax treatment, the stock acquired under an incentive stock option qualifies for favorable long-term capital gain tax treatment only if it is not disposed of before the later of two years from the date of the grant of the option, or one year from the date of the exercise of the option. If this holding period is not satisfied, the portion of the gain equal to the difference between the fair market value (FMV) of the stock at the time of exercise and the option price is taxed as compensation income rather than capital gain. In this case, you may be subject to the higher rate of income imposed on ordinary income.

For example, your employer granted you an incentive stock option on April 1, 2006, and you exercised the option on October 1, 2006, you must not sell the stock until April 1, 2008, to obtain favorable tax treatment (the later of two years from the date of the grant or one year from the date of exercise).

What key dates should I remember?

Because of the importance of receiving capital gain treatment, it is important that you keep in mind key dates such as the date of grant of the ISO and its date of exercise. These periods are measured from the date on which all acts necessary to grant the option or exercise the option have been completed. Therefore, the date of grant is treated as the date on which the board of directors or the stock option committee completes the corporate action which constitutes an offer of stock, rather than the date on which the option agreement is prepared. The date of exercise is the date on which the corporation receives notice of the exercise of the option and payment for the stock, rather than the date the shares of stock are actually transferred.

Will I be subject to alternative minimum tax?

The effect of the alternative minimum tax (AMT) on ISOs can amount to a potential trap for the unwary. This is because under the regular tax there is no tax until the stock is sold or otherwise disposed of. Under the AMT, however, the trap takes place when the ISO is exercised, since alternative minimum taxable income includes the difference between the FMV of the stock on the date the ISO is exercised and the price paid for the stock (the "ISO spread").

If you pay AMT, you are given a credit against regular income tax for the portion of the AMT attributable to ISOs and other tax preference items that result in deferral of income tax. The credit is taken in later years when no AMT is due, and may be taken to the extent that regular tax liability exceeds tentative minimum tax liability. The effect of this is that the AMT is a prepayment of tax, rather than an additional tax.

Since the AMT only applies if it is higher than your regular income tax, one strategy is to time the exercise of ISOs each year to come under the AMT exemption levels. Purely from a tax standpoint, the ideal situation is to exercise ISOs each year that would result in AMT equal to your regular tax. Of course, other factors, such as market conditions, financial needs, etc. may play a greater role in deciding when to exercise an option. If you pay high property tax or state income tax, you may find it more challenging to calculate the optimum exercise of ISOs in relation to the AMT, since both of these deductions are counted against their annual AMT exemption.

ISOs can be a nice additional employee benefit when considering a job offer. However, because the tax implications surrounding certain key trigger events related to ISOs can have a significant impact on your tax liability, we suggest that you contact the office for additional guidance.

Business travel expenses are not created equal - some special rules apply to certain types of expenditures. Before you pack your bags for your next business trip, make sure that you have planned ahead to optimize your business travel deductions.

Business travel expenses are not created equal - some special rules apply to certain types of expenditures. Before you pack your bags for your next business trip, make sure that you have planned ahead to optimize your business travel deductions.

The basic rule for the deductibility of business travel is relatively simple--travel expenses incurred while you are away from home in pursuit of a trade or business are deductible so long as they are not lavish or extravagant. Business travel can take many different forms, however--conventions, educational seminars, cruise ship meetings and foreign travel, in addition to the run-of-the-mill business trip--and each has its own special rules which you should know about prior to departure so that optimum use is made of the business travel deduction.

The basic rules

Taxpayers who travel away from their tax home on business may deduct the expenses they incur, including fares, meals, lodging, and incidental expenses, if they are not lavish or extravagant. A business trip is considered travel away from home if you may reasonably need sleep or rest to complete a round trip. Your tax home is generally your principal place of business or your residence if you are temporarily employed away from the area of your residence.

To be deductible, traveling expenses must be incurred in pursuit of an existing trade or business. If the expenses are in connection with acquiring a new business, they are not deductible. Of course, there is no rule that prohibits you from enjoying yourself or from pursuing some recreational activities during your travel, but the primary purpose of the trip must be related to the taxpayer's trade or business.

Travel expenses of your spouse, dependents or other individuals are only deductible if the person accompanying you is an employee of the company, the travel is for a bona fide business purpose, and the expenses are otherwise deductible.

Special rules apply

Because special rules may apply, the following types of business travel may require some additional planning in advance in order to maximize your business travel deduction:

Foreign travel

Foreign travel expenses are subject to special rules that are not applicable if the business trip is within the United States. If your travel overseas takes longer than a week, or if less than 75 percent of the time is spent on business, expenses are allocated between business and leisure activities on a day-to-day basis. Each day is either entirely a business day, or it is considered to be a nonbusiness day. A day counts as entirely for business if your principal activity on that day was in pursuit of your trade or business. Travel days are counted as business days, as are days when events beyond your control prevent the conducting of business. Saturdays, Sunday, legal holidays, and other reasonably necessary stand-by days also count as business days.

Educational travel

Although the Tax Code prohibits deducting expenses for travel as a form of education, a recent Tax Court decision allowed a schoolteacher to deduct her travel and tuition costs for two university courses overseas. The court decided that the reason for taking the courses went beyond mere travel and helped the teacher maintain and improve skills needed in her employment.

Conventions and seminars

If there is a sufficient relationship of the convention to your trade or business, expenses for both self-employed persons and employees to attend a convention in the United States may be deducted. A special rule prohibits the deduction of costs of attending seminars or conventions for investment purposes.

Cruises

Although the IRS does not look favorably on cruise ship conventions, a limited deduction is available (to a maximum of $2,000 annually) if you can satisfy some rigorous reporting requirements, and the cruise ship is of US registry, all ports of call are in the US or its possessions, and the meeting is directly related to your trade or business. Reporting requirements include written statements by both you and the officer of the sponsoring organization, containing information as to the number of hours of each day of the trip devoted to scheduled business activities, and a program of the activities of each day of the meeting.

Foreign conventions

While the rule for stateside conventions (and those in Canada, Mexico, a US possession, or the Trust Territory of the Pacific Islands) merely require that your business be related to the agenda of the convention, you are held to a higher standard for conventions held overseas. You must show that the meeting is directly related to the active conduct of your business and that it is as reasonable to be held overseas as it would have been to hold it in the US.

Stayovers

Sometimes costs can be decreased if you stay over at the out-of-town location on Saturday night, even though business was wrapped up on Friday. This occurs when, due to airline pricing policies, the additional lodging expense is more than offset by lower airfare. When this is the case, the additional meal and lodging expenses will still be deductible.

If you have any questions regarding the deductibility of business travel expenses or the related reporting requirements, please contact the office for more information and guidance.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break. The maximum amount of gain from the sale or exchange of a principal residence that may be excluded from income is generally $250,000 ($500,000 for joint filers).

Unfortunately, the $500,000/$250,000 exclusion has a few traps, including a "loophole" closer that reduces the homesale exclusion for periods of "nonqualifying use." Careful planning, however, can alleviate many of them. Here is a review of the more prominent problems that homeowners may experience with the homesale exclusion and some suggestions on how you might avoid them:

Reduced homesale exclusion. The Housing Assistance Tax Act of 2008 modifies the exclusion of gain from the sale of a principal residence, providing that gain from the sale of principal residence will no longer be excluded from income for periods that the home was not used as a principal residence. For example, if you used the residence as a vacation home prior to using it as a principal residence. These periods are referred to as "nonqualifying use." This income inclusion rule applies to home sales after December 31, 2008 and is based on nonqualified use periods beginning on or after January 1, 2009, under a generous transition rule. A specific formula is used to determine the amount of gain allocated to nonqualifying use periods.

Use and ownership. Moreover, in order to qualify for the $250,000/$500,000 exclusion, your home must be used and owned by you as your principal residence for at least 2 out of the last 5 years of ownership before sale. Moving into a new house early, or delaying the move, may cost you the right to exclude any and all gain on the home sale from tax.

Incapacitated taxpayers. If you become physically or mentally incapable of self-care, the rules provide that you are deemed to use a residence as a principal residence during the time in which you own the residence and reside in a licensed care facility (e.g., a nursing home), as long as at least a one-year period of use (under the regular rules) is already met. Moving in with an adult child, even if professional health care workers are hired, will not lower the use time period to one year since care is not in a "licensed care facility." In addition, some "assisted-living" arrangements may not qualify as well.

Pro-rata sales. Under an exception, a sale of a residence more frequently than once every two years is allowed, with a pro-rata allocation of the $500,000/$250,000 exclusion based on time, if the sale is by reason of a change in place of employment, health, or other unforeseen circumstances to be specified under pending IRS rules. Needless to say, it is very important that you make certain that you take steps to make sure that you qualify for this exception, because no tax break is otherwise allowed. For example, health in this circumstance does not require moving into a licensed care facility, but the extent of the health reason for moving must be substantiated.

Tax basis. Under the old rules, you were advised to keep receipts of any capital improvements made to your house so that the cost basis of your residence, for purposes of determining the amount of gain, may be computed properly. In a rapidly appreciating real estate market, you should continue to keep these receipts. Death or divorce may unexpectedly reduce the $500,000 exclusion of gain for joint returns to the $250,000 level reserved for single filers. Even if the $500,000 level is obtained, if you have held your home for years, you may find that the exclusion may fall short of covering all the gain realized unless receipts for improvements are added to provide for an increased basis when making this computation.

Some gain may be taxed. Even if you move into a new house that costs more than the selling price of the old home, a tax on gain will be due (usually 20%) to the extent the gain exceeds the $500,000/$250,000 exclusion. Under the old rules, no gain would have been due.

Home office deduction. The home office deduction may have a significant impact on your home sale exclusion. The gain on the portion of the home that has been written off for depreciation, utilities and other costs as an office at home may not be excluded upon the sale of the residence. One way around this trap is to cease home office use of the residence sufficiently before the sale to comply with the rule that all gain (except attributable to recaptured home office depreciation) is excluded to the extent the taxpayer has not used a home office for two out of the five years prior to sale.

Vacation homes. As mentioned, in order to qualify for the $250,000/$500,000 exclusion, the home must be used and owned by you or your spouse (in the case of a joint return) as your principal residence for at least 2 out of the last 5 years of ownership before sale. Because of this rule, some vacation homeowners who have seen their resort properties increase in value over the years are moving into these homes when they retire and living in them for the 2 years necessary before selling in order to take full advantage of the gain exclusion. For example, doing this on a vacation home that has increased $200,000 in value over the years can save you $40,000 in capital gains tax. However, keep in mind the reduced homesale exclusion for periods of nonqualifying use.

As you can see, there is more to the sale of residence gain exclusion than meets the eye. Before you make any decisions regarding buying or selling any real property, please consider contacting the office for additional information and guidance.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

In the ruling, the IRS determined that the sale of a home, in which an individual resided for many years but to which title was legally held by a family trust, did not qualify for the Tax Code's new capital gains exclusion on the sale of the house. The exclusion permits those who sell their personal residence anytime after May 6, 1997, to exclude up to $250,000 in capital gains ($500,000 for those filing joint returns). The IRS concluded that the individual's inability to control the assets of the trust prevented her from being deemed an owner of the trust for tax purposes.

Family trusts: A common estate planning tool

As part of an estate plan, an individual may place assets, such as a home, into a trust and name an income beneficiary or beneficiaries. The income beneficiary has rights to any income from the trust and may even have use of the assets but has no control to sell, mortgage or dispose of the assets of the trust. Only the trust's designated trustees have the power to make decisions related to the encumbrance or disposal of the trust's assets. When the asset is a personal residence, this type of trust allows for preferential estate tax treatment while the income beneficiary has the ability to continue living in the home.

IRS: "No Capital Gain Exclusion"

The IRS's stance is that, even though an individual may have enjoyed the use of a house for many years, if the house was in a family trust, ownership of the house would always be vested in the trust. Under the federal tax rules, a beneficiary of a trust may be deemed an owner of the trust if he or she has the power to reach and to take all of the trust's assets for his or her use. When a beneficiary is treated as an owner, a sale by the trust is equivalent to a sale by the beneficiary. However, when an income beneficiary has no control over the fate of the assets of the trust, the IRS has found that the beneficiary is not the owner of the trust and therefore would not qualify for the Tax Code's capital gains exclusion upon the sale of a residence held in such trust.

Planning for the smooth transition of your assets to your family upon death can be complicated and can have serious tax ramifications. Please contact the office for additional guidance in this area.

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

A. For most people, all interest paid on a home equity loan would be fully deductible as an itemized deduction on their personal tax returns. However, due to changes made to tax laws governing home mortgage interest deduction in 1987, there are limitations and special circumstances that must be considered when determining how much of your home mortgage interest expense is deductible.

Mortgages secured by your qualified home generally fall under one of three classifications for purposes of determining the home mortgage interest deduction: grandfathered debt, home acquisition debt, and home equity debt. Grandfathered debt is simply home mortgage debt taken out prior to October 14, 1987 (including subsequent refinancing of that debt). The other two types of mortgage debt are discussed below. A "qualified home" is your main or second home and, in addition to a house or condominium, can include any property with sleeping, cooking and toilet facilities (e.g., boat, trailer).

Home acquisition debt is a mortgage (including a refinanced loan) taken out after October 13, 1987 that is secured by a qualified home and where the proceeds were used to buy, build, or substantially improve that qualified home. "Substantial improvements" are home improvements that add to the value of your home, prolong the useful life of your home, or adapt your home to new uses.

In general, interest expense on home acquisition debt of up to $1 million ($500,000 if married filing separately) is fully deductible. Keep in mind, though, that to the extent that the mortgage debt exceeds the cost of the home plus any substantial improvements, your mortgage interest will be limited. Mortgage interest expense on this excess debt may be deductible as home equity debt (see below).

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to build a new addition to your home, your mortgage interest would be fully deductible.

Home equity debt is debt that is secured by your qualified home and that does not qualify as home acquisition debt. There are generally no limits on the use of the proceeds of this type of loan to retain interest deductibility.

The amount of mortgage debt that can be treated as home equity debt for purposes of the mortgage interest deduction is the smaller of a) $100,000 ($50,000 if married filing separately) or b) the total of each qualified home's fair market value (FMV) reduced by home acquisition debt & debt secured prior to October 14, 1987. Mortgage debt in excess of these limits would be treated as non-deductible personal interest.

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to pay off your credit cards (you really like to shop!), your mortgage interest deduction would be limited to the amount paid on only $100,000 of the home equity debt.

In addition to the above limitations, there are other circumstances that, if present, can affect your home equity debt interest expense deduction. Here are a few examples:

• You do not itemize your deductions;
• Your adjusted gross income (AGI) is over a certain amount;
• Part of your home is not a "qualified home"
• Your home is secured by a mortgage that was acquired (and/or subsequently refinanced) prior to October 14, 1987
• You used any part of the loan proceeds to invest in tax-exempt securities.

As illustrated above, determining your deduction for mortgage interest paid can be more complex than it appears. Before you obtain a home equity loan, please feel free to contact the office for advice on how it may affect your potential home mortgage interest deduction.

As a new business owner, you probably expect to incur many expenses before you even open the doors. What you might not know is how these starting up costs are handled for tax purposes. A little knowledge about how these costs will affect your (or your business') tax return can reduce any unexpected surprises when tax time comes around.

As a new business owner, you probably expect to incur many expenses before you even open the doors. What you might not know is how these starting up costs are handled for tax purposes. A little knowledge about how these costs will affect your (or your business') tax return can reduce any unexpected surprises when tax time comes around.

Starting a new business can be an exciting, although expensive, event that finds you, the small business owner, with a constantly open wallet. In most cases, all costs that you incur on behalf of your new company before you open the doors are capital expenses that increase the basis of your business. However, some of these pre-opening expenditures may be amortizable over a period of time if you choose. Pre-opening expenditures that are eligible for amortization will fall into one of two categories: start-up costs or organizational costs.

Start-up Costs

Start-up costs are certain costs associated with creating an active trade or business, investigating the creation or acquisition of an active trade or business, or purchasing an existing trade or business. If, before your business commences, you incur any cost that would normally be deductible as a business expense during the normal course of business, this would qualify as a start-up cost. Examples of typical start-up costs include attorney's fees, pre-opening advertising, fees paid for consultants, and travel costs. However, deductible interest taxes, and research and development (R&D) expenses are treated differently.

Start-up costs are amortized as a group on the business' tax return (or your own return on Schedule C, if you are a sole proprietor) over a period of no less than 60 months. The amortization period would begin in the month that your business began operations. In order to be able to claim the deduction for amortization related to start-up costs, a statement must be filed with the return for the first tax year you are in business by the due date for that return (plus extensions). However, both early (pre-opening) and late (not more than 6 months) submissions of the statement will be accepted by the IRS.

Organizational Costs

Organizational costs are those costs incurred associated with the organization of a corporation or partnership. If a cost is incurred before the commencement of business that is related to the creation of the entity, is chargeable to a capital account, and could be amortized over the life of the entity (if the entity had a fixed life), it would qualify as an organizational cost. Examples of organizational costs include attorney's fees, state incorporation fees, and accounting fees.

Organizational costs are amortized using the same method as start-up costs (see above), although it is not necessary to use the same amortization period for both. A similar statement must be completed and filed with the company's business tax return for the business' first tax year.

Before you decide which, if any, pre-opening expenditures related to your new business you'd like to treat as start-up or organizational costs, please contact our office for additional guidance.

In today's tight job market, small business owners are finding it increasingly difficult to keep good employees on board and content. A much overlooked employee benefit - employee achievement awards - can allow you to reward your best employees with tax-free income.

In today's tight job market, small business owners are finding it increasingly difficult to keep good employees on board and content. A much overlooked employee benefit - employee achievement awards - can allow you to reward your best employees with tax-free income.

What is an employee achievement award? As an employer, you may give your employees cash or other tangible personal property to reward them for achieving certain standards or milestones within the workplace. In order to qualify as an employee achievement award in the eyes of the IRS, an award must meet the following criteria:

• Amount limit: not to exceed $400 per employee for awards that are not "qualified plan awards," with the total for all awards not to exceed $1,600 (whether qualified or not). A qualified plan award is one that is awarded as part of an established plan that does not take into consideration compensation as to eligibility or benefits.
• Form of award: the award must be tangible personal property that is:
• Based upon length of service or safety achievement;
• Is given in a meaningful presentation; and
• Is not merely "disguised pay."

 Who can receive these awards?

Length-of-service award. In order to be eligible to receive an award based upon length of service with the employer, an employee must:

• Have worked for the employer for more than 5 years, or;
• Have not received a length-of-service award during the year of the award or in any of the prior 4 years.

Safety achievement award. In order to be eligible to receive an award based upon safety in the workplace, an employee must not be a manager, administrator, clerical or other professional employee. Also, if more than 10% of the employees are given the award, it will not qualify under this provision.

How much can I deduct? As an employer, you are entitled to deduct an amount given for employee achievement awards up to the amount limits specified above. This amount would be included on the "Other deductions" line of your company's tax return.

How much is taxable to the employee? As long as the award given does not exceed the amount limits specified above, the award will not be includible as wages to the employee. Any awards given on excess of the limits would be includible in the employee's wages.

While definitely not on the same level as stock options in a pre-IPO company as an employee retention tool, employee achievement awards are a nice way to reward your best employees with tax-free income. If you need more info regarding these types of awards, please feel free to contact the office.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Probably one of the more difficult decisions you will have to make as a consumer is whether to buy or lease your auto. Knowing the advantages and disadvantages of buying vs. leasing a new car or truck before you get to the car dealership can ease the decision-making process and may alleviate unpleasant surprises later.

Nearly one-third of all new vehicles (and up to 75% of all new luxury cars) are leased rather than purchased. But the decision to lease or buy must ultimately be made on an individual level, taking into consideration each person's facts and circumstances.

Buying

Advantages.

• You own the car at the end of the loan term.
• Lower insurance premiums.
• No mileage limitations.

Disadvantages.

• Higher upfront costs.
• Higher monthly payments.
• Buyer bears risk of future value decrease.

Leasing

Advantages.

• Lower upfront costs.
• Lower monthly payments.
• Lessor assumes risk of future value decrease.
• Greater purchasing power.
• Potential additional income tax benefits.
• Ease of disposition.

Disadvantages.

• You do not own the car at the end of the lease term, although you may have the option to purchase at that time.
• Higher insurance premiums.
• Potential early lease termination charges.
• Possible additional costs for abnormal wear & tear (determined by lessor).
• Extra charges for mileage in excess of mileage specified in your lease contract.

Before you make the decision whether to lease or buy your next vehicle, it makes sense to ask yourself the following questions:

How long do I plan to keep the vehicle? If you want to keep the car or truck longer than the term of the lease, you may be better off purchasing the vehicle as purchase contracts usually result in a lower overall cost of ownership.

How much am I going to drive the vehicle? If you are an outside salesperson and you drive 30,000 miles per year, any benefits you may have gained upfront by leasing will surely be lost in the end to excess mileage charges. Most lease contracts include mileage of between 12,000-15,000 per year - any miles driven in excess of the limit are subject to some pretty hefty charges.

How expensive of a vehicle do I want? If you can really only afford monthly payments on a Honda Civic but you've got your eye on a Lexus, you may want to consider leasing. Leasing usually results in lower upfront fees in the form of lower down payments and deferred sales tax, in addition to lower monthly payments. This combination can make it easier for you to get into the car of your dreams.

If you have any questions about the tax ramifications regarding buying vs. leasing an automobile or would like some additional information when making your decision, please contact the office.

Q. Last year I underwent a number of elective surgical procedures and would like to deduct the cost of these expensive procedures on my personal tax return. What are the criteria for medical expenses to be deductible? Do they have to exceed a certain dollar amount?

Q. Last year I underwent a number of elective surgical procedures and would like to deduct the cost of these expensive procedures on my personal tax return. What are the criteria for medical expenses to be deductible? Do they have to exceed a certain dollar amount?

A. While many medical expenses are clearly deductible, such as amounts paid for doctors/dentists, insurance premiums, prescription drugs, etc.., there are certain medical expenses that are not so easily identifiable as deductible and may require certain conditions be present to be considered deductible. Here are some examples of medical expenses that you should make sure you don't miss on this year's tax return:

Cosmetic Surgery. In general, you cannot include in medical expenses the amount you pay for unnecessary cosmetic surgery. "Unnecessary cosmetic surgery" is defined as any procedure that is directed at improving the patient's appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. Examples of these types of procedures include face-lifts, hair transplants, hair removal and liposuction. However, you can include in medical expenses the amount you pay for cosmetic surgery if it is necessary to improve a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease.

Stop Smoking Treatments. A new law change in 1999 means that you can now include in medical expenses amounts you paid for a program to stop smoking. Keep in mind, however, that you cannot include in medical expenses amounts you paid for drugs that do not require a prescription, such as nicotine gum or patches, that are designed to help stop smoking.

Alcoholism treatment. Medical expenses incurred in connection with an inpatient's treatment at a therapeutic center for alcohol addiction (including meals and lodging provided by the center during treatment) are deductible medical expenses. In addition, if you receive medical advice that states that you should attend meetings of an Alcoholics Anonymous Club for the treatment of a disease involving the excessive use of alcoholic liquors, you are entitled to deduct medical transportation expenses (at 10 cents per mile) for travel to the meetings.

Capital expenditures. Certain expenses you paid for special equipment installed in your home, or for improvements, may be deductible as medical expenses. To qualify, the main purpose of the expense is medical care for you, your spouse, or a dependent. The costs of permanent improvements that increase the value of the property may be partly included as a medical expense. These costs are deductible medical expenses to the extent that they exceed the increase in the value of the property. If the value of the property is not increased by the improvement, the entire cost is included as a medical expense.

Limit on deductibility. Unfortunately, the IRS has imposed a rather steep threshold for the deduction of medical expenses. Taxpayers can deduct only the amount of their medical and dental expenses that exceed 7.5% of their adjusted gross income.

If, as you are gathering your tax information, you have any questions about the potential deductibility of a medical expenditure, please contact our office and we will be happy to assist you.

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