IRS Draft Publication Includes Real Estate and Insurance Agents and Brokers as SSTBs

On January 7, 2019 the IRS issued a revised draft version of the publication that returns to the position taken in the proposed regulations. Click here to go to that story.

The draft copy of the §199A  section of Publication 535 released by the IRS on December 19, 2018, in describing what is a specified service trade or business has language in it that does not track what was found in the proposed regulations released in August.  The issue involves whether “services performed in the field of brokerage services” includes services performed by real estate agents, real estate brokers, insurance agents, etc. or is limited to the brokerage of financial products.

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Final Regulations for CPAR Audit Regime Released by the IRS

The IRS has issued the final version of regulations for the new centralized partnership audit regime (CPAR) that will apply to tax returns for partnership tax years beginning after December 31, 2017. This set of final regulations completes the regulations on CPAR. Separate sets of final regulations that deal with the election out of the CPAR regime and the partnership representative had previously been released.

The proposed regulations can be downloaded from the IRS website via the following link:

TD 9844 - Final CPAR Regulations

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Revenue Procedure Released to Deal with ADS Depreciation Issues for Electing Farm and Real Property Businesses and Section 179 Changes Found in TCJA

In Revenue Procedure 2019-08 the IRS gives information on the following items following the enactment of the Tax Cuts and Jobs Act:

  • Qualified real property under IRC §179;

  • Alternative depreciation system (ADS) depreciation of real property with the new 30 and 40 year lives; and

  • Handling the transition to ADS depreciation for certain property of electing farming and electing real property businesses.

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Rental Trade or Business Example in Blue Book: Does It Really Tell Us Anything?

The Blue Book released by the Joint Committee on Taxation contains an example on page 24 that is meant to illustrate what constitutes a trade or business for purposes of §199A using a rental as the basis for the example.  Given that one of the major concerns expressed about the application of §199A is when a rental qualifies for the deduction, the insertion of this example initially appears to be welcome news.

However, at least for now, it is not clear if the example found in the Blue Book clarifies matters or simply creates additional questions.

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IRS Announces Plans to Issue Regulations for Two Special Enforcement Matters Under CPAR

In Notice 2019-6 the IRS announced its intention to issue proposed regulations to deal with “special enforcement matters” under the centralized partnership audit regime (CPAR).  Special enforcement matters are defined at IRC §6241(11), a provision added by the Consolidated Appropriations Act of 2018 as part of the technical corrections to the CPAR partnership audit regime that was created by the Bipartisan Budget Act of 2015 and which will first be effective for partnership tax years beginning in 2018.

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S Corporation Providing Management Services to Marijuana Dispensary Found to Be Trafficking in Controlled Substances for §280E Purposes

A business does not have to have title to marijuana to be engaged in trafficking in controlled substances, triggering the denial of deductions under IRC §280E, the Tax Court ruled in Alternative Health Care Advocates et al. v. Commissioner, 151 TC No. 13.

IRC §280E bars deductions, other than those for the cost of sales, to businesses that traffic in items considered controlled substances by federal law.  The fact that certain states have legalized the sale of marijuana in some situations does not change that federal tax result.

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Rules Proposed to Implement Requirement to Treat Sale of Partnership Interests as Effectively Connected with US Trade or Business by Foreign Partners

Proposed regulations dealing with the sale of a partnership have been issued by the IRS (REG-113604-18) to implement changes made by Congress in the Tax Cuts and Jobs Act. Specifically, TCJA made the following changes to deal with foreign holders of partnership interests:

  • Requiring foreign partners to treat the sale of a partnership interest as “effectively connected” with a U.S. trade or business if a sale of the partnership’s assets would have created such effectively connected income (overturning the result in Grecian Mining v. Commissioner, 149 TC No. 3); and

  • Requiring the buyer of a partnership interest to withhold 10% of the purchase price unless the buyer certifies the buyer is not a foreign person.

  • These proposed regulations deal only with the first category of transactions--rules on withholding are not in this of regulations, though the preamble notes that Treasury and the IRS “intend to issue guidance under section 1446(f) expeditiously.”

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Joint Committee on Taxation Staff Releases Their Explanation of the Tax Cuts and Jobs Act (The Blue Book)

The Joint Committee on Taxation has released the General Explanation Of Public Law 115-97, better known as the Blue Book on TCJA (JCS-1-18).

The 457 page document contains the staff’s explanation of the provisions in last year’s Tax Cuts and Jobs Act.  Blue Books for prior laws have often been referenced and consulted by the IRS in developing guidance, as well as being referred to by advisers when dealing with matters not yet covered by IRS guidance.

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PMTA Holds Payments to Farmers Under MFP Program to Compensate for Tariff Issues is Taxable Income and Part of Self-Employment Income

The IRS has addressed the taxation of payments made to farmers under a trade aid package (the Market Facilitation Program or MFP) in PMTA 2018-021.  The MFP program gives direct payment to producers of certain crops that have been adversely affected by tariffs.

The memo deals with both the issue of whether such payments are part of gross income under IRC §61 and as self-employment income under IRC §1402.

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Final and Additional Proposed Regulations Under §199A Sent to OIRA for Review

The IRS has now sent final regulations under IRC §199A (RIN 1545-BO71) and a new set of proposed regulations (RIN 1545-BP12) under that section related to REIT dividends and registered investment companies (mutual funds) to the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget for review.  The proposed regulations were sent to OIRA on December 13, 2018, while the final regulations followed on December 14, 2018.

Neither set of regulations are marked as economically significant, so OIRA has 45 days to complete the review of the regulations.  That review must be completed before the regulations can be released.

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2019 Automobile Mileage Rates Announced by IRS

The IRS has released the 2019 automobile mileage numbers in Notice 2019-02.

The standard rate for transportation or travel expense is 58 cents per mile for business use in 2019.  The standard rate for 14 cents per mile for use of an automobile for providing gratuitous services to a charitable organization and 20 cents per mile for medical expenses.  The 20 cent rate would also apply to moving expenses under §217, though for most taxpayers such a deduction is not available for 2019.

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Documentation of Expenses Not Adequate to Allow Deductions

The experience of tax advisers over the years suggests that most often the key disputes in tax exams arise not so much over the arcane issues in the tax law as over the state of the taxpayer’s records to support the facts in the case.  The case of Dasent v. Commissioner, TC Memo 2018-202 is just such a case.  While the question of hobby loss does arise for a portion of the deductions (and the activity clearly met that test), the Court pointed out that even had that not been an issue, none of the taxpayers’ deductions could be allowed due to lack of adequate records.

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Certain Exempt Organizations Granted Waiver from Estimated Tax Penalties Arising from Parking Lot Tax

Additional relief, in the form of a waiver of penalties on underpayment of estimated taxes due on Form 990-T, has been given to certain tax-exempt organizations for 2018 in Notice 2018-100.  The guidance was issued on the same day as Notice 2018-99 which provided guidance on computing the amount of employee parking benefit that is to be treated as UBTI by the exempt organization.

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IRS Provides Temporary Guidance on TCJA Changes to Employer Providing Parking

In Notice 2018-99 the IRS has provided guidance to employers and tax-exempt organizations attempting to deal with provisions in the Tax Cuts and Jobs Act dealing with employer-provided parking.

As the Notice explains:

As amended by the Act, § 274(a)(4) generally disallows a deduction for expenses with respect to QTFs provided by taxpayers to their employees, and § 512(a)(7) generally provides that a tax-exempt organization’s UBTI is increased by the amount of the QTF expense that is nondeductible under § 274.

The notice provides guidance on computing the amount of disallowed deduction (for taxable entities) and UBTI (for tax-exempt organizations) to be recognized under this provision.

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IRS Provides Guidance on Deferral for §83(i) Stock, Allows Employers to Effectively Opt-Out of the Program

Notice 2018-97 provides guidance to taxpayers about issues related to IRC §81(i), a provision added by the Tax Cuts and Jobs Act that allows employees in certain situations to defer recognition of income when receiving stock or having an interest in such stock vest.

The Notice as meant to provide some additional clarity in the application of this provision for three areas:

  • The application of the requirement in section 83(i)(2)(C)(i)(II) that grants be made to not less than 80% of all employees who provide services to the corporation in the United States,

  • The application of federal income tax withholding to the deferred income related to the qualified stock, and

  • The ability of an employer to opt out of permitting employees to elect the deferred tax treatment even if the requirements under section 83(i) are otherwise met.

Image copyright 123rf.com/Rafał Olechowski

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IRS Releases Automatic Change Revenue Procedure for TCJA Revenue Conformity

The IRS has addressed how taxpayers will gain permission to change their methods of accounting to comply with changes made by Congress in the Tax Cuts and Jobs Act to IRC §451 (found at IRC §451(b)) that require a taxpayer with an “applicable financial statement” (AFS) who is recognizing revenue for tax purposes under the accrual basis using the all events test to treat the test as satisfied no later than when revenue is recognized in the AFS.  The guidance is found in Revenue Procedure 2018-60.

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