Final regulations clarify the definition of "real property" that qualifies for a like-kind exchange, including incidental personal property. Under the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), like-kind exchanges occurring after 2017 are limited to real property used in a trade or business or for investment.

Final regulations clarify the definition of "real property" that qualifies for a like-kind exchange, including incidental personal property. Under the Tax Cuts and Jobs Act (TCJA, P.L. 115-97), like-kind exchanges occurring after 2017 are limited to real property used in a trade or business or for investment.

The final regulations largely adopt regulations that were proposed in June ( NPRM REG-117589-18). However, they also:

• add a " state or local law" test to define real property; and
• reject the “purpose and use” test in the proposed regulations.

In addition, the final regulations classify cooperative housing corporation stock and land development rights as real property. The final regulations also provide that a license, permit, or other similar right is generally real property if it is (i) solely for the use, enjoyment, or occupation of land or an inherently permanent structure; and (ii) in the nature of a leasehold, an easement, or a similar right.

General Definition
Under the final regulations, property is classified as "real property" for like-kind exchange purposes if, on the date it is transferred in the exchange, the property is real property under the law of the state or local jurisdiction in which it is located. The proposed regulations had limited this “state or local law” test to shares in a mutual ditch, reservoir, or irrigation company.

However, the final regulations also clarify that real property that was ineligible for a like-kind exchange before the TCJA remains ineligible. For example, intangible assets that could not be like-kind property before the TCJA (such as stocks, securities, and partnership interests) remain ineligible regardless of how they are characterized under state or local law.

Accordingly, under the final regulations, property is real property if it is:

• classified as real property under state or local law;
• specifically listed as real property in the final regulations; or
• considered real property based on all of the facts and circumstances, under factors provided in the regulations.

These tests mean that property that is not real property under state or local law might still be real property for like-kind exchange purposes if it satisfies the second or third test.

Types of Real Property
Under both the proposed and final regulations, real property for a like-kind exchange is:

• land and improvements to land;
• unsevered crops and other natural products of land; and
• water and air space superjacent to land.

Under both the proposed and final regulations, improvements to land include inherently permanent structures, and the structural components of inherently permanent structures. Each distinct asset must be analyzed separately to determine if it is land, an inherently permanent structure, or a structural component of an inherently permanent structure. The regulations identify several specific items, assets and systems as distinct assets, and provide factors for identifying other distinct assets.

The final regulations also:

• incorporate the language provided in Reg. §1.856-10(d)(2)(i) to provide additional clarity regarding the meaning of "permanently affixed;"
• modify the example in the proposed regulations concerning offshore drilling platforms; and
• clarify that the distinct asset rule applies only to determine whether property is real property, but does not affect the application of the three-property rule for identifying properties in a deferred exchange.

"Purpose or Use" Test
The proposed regulations would have imposed a "purpose or use" test on both tangible and intangible property. Under this test, neither tangible nor intangible property was real property if it contributed to the production of income unrelated to the use or occupancy of space.

The final regulations eliminate the purpose and use test for both tangible and intangible property. Consequently, tangible property is generally an inherently permanent structure—and, thus, real property—if it is permanently affixed to real property and will ordinarily remain affixed for an indefinite period of time. A structural component likewise is real property if it is integrated into an inherently permanent structure. Accordingly, items of machinery and equipment are real property if they comprise an inherently permanent structure or a structural component, or if they are real property under the state or local law test—irrespective of the purpose or use of the items or whether they contribute to the production of income.

Similarly, whether intangible property produces or contributes to the production of income is not considered in determining whether intangible property is real property for like-kind exchange purposes. However, the purpose of the intangible property remains relevant to the determination of whether the property is real property.

Incidental Personal Property
The incidental property rule in the proposed regulations provided that, for exchanges involving a qualified intermediary, personal property that is incidental to replacement real property (incidental personal property) is disregarded in determining whether a taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money or non-like-kind property held by the qualified intermediary are expressly limited as provided in Reg. §1.1031(k)-1(g)(6).

Personal property is incidental to real property acquired in an exchange if (i) in standard commercial transactions, the personal property is typically transferred together with the real property, and (ii) the aggregate fair market value of the incidental personal property transferred with the real property does not exceed 15 percent of the aggregate fair market value of the replacement real property (15-percent limitation).

This final regulations adopt these rules with some minor modifications to improve clarity and readability. For example, the final regulations clarify that the receipt of incidental personal property results in taxable gain; and the 15-percent limitation compares the value of all of the incidental properties to the value of all of the replacement real properties acquired in the same exchange.

Effective Dates
The final regulations apply to exchanges beginning after the date they are published as final in the Federal Register. However, a taxpayer may also rely on the proposed regulations published in the Federal Register on June 12, 2020, if followed consistently and in their entirety, for exchanges of real property beginning after December 31, 2017, and before the publication date of the final regulations. In addition, conforming changes to the bonus depreciation rules apply to tax years beginning after the final regulations are published.

The IRS has released rulings concerning deductions for eligible Paycheck Protection Program (PPP) loan expenses.

The IRS has released rulings concerning deductions for eligible Paycheck Protection Program (PPP) loan expenses. The rulings:

• deny a deduction if the taxpayer has not yet applied for PPP loan forgiveness, but expects the loan to be forgiven; and
• provide a safe harbor for deducting expenses if PPP loan forgiveness is denied or the taxpayer does not apply for forgiveness.

Background
In response to the COVID-19 (coronavirus) crisis, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) expanded Section 7(a) of the Small Business Act for certain loans made from February 15, 2020, through August 8, 2020 (PPP loans). An eligible PPP loan recipient may have the debt on a covered loan forgiven, and the cancelled debt will be excluded from gross income. To prevent double tax benefits, under Reg. §1.265-1, taxpayers cannot deduct expenses allocable to income that is either wholly excluded from gross income or wholly exempt from tax.

The IRS previously determined that businesses whose PPP loans are forgiven cannot deduct business expenses paid for by the loan ( Notice 2020-32, I.R.B. 2020-21, 837). The new guidance expands on the previous guidance, but provides a safe harbor for taxpayers whose loans are not forgiven.

No Business Deduction
In Rev. Rul. 2020-27, the IRS amplifies guidance in Notice 2020-32. A taxpayer that received a covered PPP loan and paid or incurred certain otherwise deductible expenses may not deduct those expenses in the tax year in which the expenses were paid or incurred if, at the end of the tax year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period. This is the case even if the taxpayer has not applied for forgiveness by the end of the tax year.

Safe Harbor
In Rev. Proc. 2020-51, the IRS provides a safe harbor allowing taxpayers to claim a deduction in the tax year beginning or ending in 2020 for certain otherwise deductible eligible expenses if:

• the eligible expenses are paid or incurred during the taxpayer’s 2020 tax year;
• the taxpayer receives a PPP covered loan that, at the end of the taxpayer’s 2020 tax year, the taxpayer expects to be forgiven in a subsequent tax year; and
• in a subsequent tax year, the taxpayer’s request for forgiveness of the covered loan is denied, in whole or in part, or the taxpayer decides never to request forgiveness of the covered loan.

A taxpayer may be able to deduct some or all of the eligible expenses on, as applicable:

• a timely (including extensions) original income tax return or information return for the 2020 tax year;
• an amended return or an administrative adjustment request (AAR) under Code Sec. 6227 for the 2020 tax year; or
• a timely (including extensions) original income tax return or information return for the subsequent tax year.

Applying Safe Harbor
To apply the safe harbor, a taxpayer attaches a statement titled "Revenue Procedure 2020-51 Statement" to the return on which the taxpayer deducts the expenses. The statement must include:

• the taxpayer’s name, address, and social security number or employer identification number;
• a statement specifying whether the taxpayer is an eligible taxpayer under either section 3.01 or section 3.02 of Revenue Procedure 2020-51;
• a statement that the taxpayer is applying section 4.01 or section 4.02 of Revenue Procedure 2020-51;
• the amount and date of disbursement of the taxpayer’s covered PPP loan;
• the total amount of covered loan forgiveness that the taxpayer was denied or decided to no longer seek;
• the date the taxpayer was denied or decided to no longer seek covered loan forgiveness; and
• the total amount of eligible expenses and non-deducted eligible expenses that are reported on the return.

The IRS has issued final regulations under Code Sec. 274 relating to the elimination of the employer deduction of for transportation and commuting fringe benefits by the Tax Cuts and Jobs Act ( P.L. 115-97), effective for amounts paid or incurred after December 31, 2017. The final regulations address the disallowance of a deduction for the expense of any qualified transportation fringe (QTF) provided to an employee of the taxpayer. Guidance and methodologies are provided to determine the amount of QTF parking expenses that is nondeductible. The final regulations also address the disallowance of the deduction for expenses of transportation and commuting between an employee’s residence and place of employment.

The IRS has issued final regulations under Code Sec. 274 relating to the elimination of the employer deduction of for transportation and commuting fringe benefits by the Tax Cuts and Jobs Act ( P.L. 115-97), effective for amounts paid or incurred after December 31, 2017. The final regulations address the disallowance of a deduction for the expense of any qualified transportation fringe (QTF) provided to an employee of the taxpayer. Guidance and methodologies are provided to determine the amount of QTF parking expenses that is nondeductible. The final regulations also address the disallowance of the deduction for expenses of transportation and commuting between an employee’s residence and place of employment.

The final regulations adopt earlier proposed regulations with a few minor modifications in response to public comments ( REG-119307-19). Pending issuance of these final regulations, taxpayers had been allowed to apply to proposed regulations or guidance issued in Notice 2018-99, I.R.B. 2018-52, 1067. Notice 2018-99 is obsoleted on the publication date of the final regulations.

The final regulations clarify an exception for parking spaces made available to the general public to provide that parking spaces used to park vehicles owned by members of the general public while the vehicle awaits repair or service are treated as provided to the general public.

The category of parking spaces for inventory or which are otherwise unusable by employees is clarified to provide that such spaces may also not be usable by the general public. In addition, taxpayers will be allowed to use any reasonable method to determine the number of inventory/unusable spaces in a parking facility.

The definition of "peak demand period" for purposes of determining the primary use of a parking facility is modified to cover situations where a taxpayer is affected by a federally declared disaster.

The final regulations also provide that taxpayers using the cost per parking space methodology for determining the disallowance for parking facilities may calculate the cost per space on a monthly basis.

Effective Date
The final regulations apply to tax years beginning on or after the date of publication in the Federal Register. However, taxpayers can choose to apply the regulations to tax years ending after December 31, 2019.

As part of a series of reminders, the IRS has urged taxpayers get ready for the upcoming tax filing season. A special page ( https://www.irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes), updated and available on the IRS website, outlines steps taxpayers can take now to make tax filing easier in 2021.

As part of a series of reminders, the IRS has urged taxpayers get ready for the upcoming tax filing season. A special page ( https://www.irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes), updated and available on the IRS website, outlines steps taxpayers can take now to make tax filing easier in 2021.

Taxpayers receiving substantial amounts of non-wage income like self-employment income, investment income, taxable Social Security benefits and, in some instances, pension and annuity income, should make quarterly estimated tax payments. The last payment for 2020 is due on January 15, 2021. Payment options can be found at IRS.gov/payments. For more information, the IRS encourages taxpayers to review Pub. 5348, Get Ready to File, and Pub. 5349, Year-Round Tax Planning is for Everyone.

Income
Most income is taxable, so taxpayers should gather income documents such as Forms W-2 from employers, Forms 1099 from banks and other payers, and records of virtual currencies or other income. Other income includes unemployment income, refund interest and income from the gig economy.

Forms and Notices
Beginning in 2020, individuals may receive Form 1099-NEC, Nonemployee Compensation, rather than Form 1099-MISC, Miscellaneous Income, if they performed certain services for and received payments from a business. The IRS recommends reviewing the Instructions for Form 1099-MISC and Form 1099-NEC to ensure clients are filing the appropriate form and are aware of this change.

Taxpayers may also need Notice 1444, Economic Impact Payment, which shows how much of a payment they received in 2020. This amount is needed to calculate any Recovery Rebate Credit they may be eligible for when they file their federal income tax return in 2021. People who did not receive an Economic Impact Payment in 2020 may qualify for the Recovery Rebate Credit when they file their 2020 taxes in 2021.

Additional Information
To see information from the most recently filed tax return and recent payments, taxpayers can sign up to view account information online. Taxpayers should notify the IRS of address changes and notify the Social Security Administration of a legal name change to avoid delays in tax return processing.

This year marks the 5th Annual National Tax Security Awareness Week-a collaboration by the IRS, state tax agencies and the tax industry. The IRS and the Security Summit partners have issued warnings to all taxpayers and tax professionals to beware of scams and identity theft schemes by criminals taking advantage of the combination of holiday shopping, the approaching tax season and coronavirus concerns. The 5th Annual National Tax Security Awareness Week coincided with Cyber Monday, the traditional start of the online holiday shopping season.

This year marks the 5th Annual National Tax Security Awareness Week-a collaboration by the IRS, state tax agencies and the tax industry. The IRS and the Security Summit partners have issued warnings to all taxpayers and tax professionals to beware of scams and identity theft schemes by criminals taking advantage of the combination of holiday shopping, the approaching tax season and coronavirus concerns. The 5th Annual National Tax Security Awareness Week coincided with Cyber Monday, the traditional start of the online holiday shopping season.

The following are a few basic steps which taxpayers and tax professionals should remember during the holidays and as the 2021 tax season approaches:

• use an updated security software for computers and mobile phones;
• the purchased anti-virus software must have a feature to stop malware and a firewall that can prevent intrusions;
• don't open links or attachments on suspicious emails because this year, fraud scams related to COVID-19 and the Economic Impact Payment are common;
• use strong and unique passwords for online accounts;
• use multi-factor authentication whenever possible which prevents thieves from easily hacking accounts;
• shop at sites where the web address begins with "https" and look for the "padlock" icon in the browser window;
• don't shop on unsecured public Wi-Fi in places like a mall;
• secure home Wi-Fis with a password;
• back up files on computers and mobile phones; and
• consider creating a virtual private network to securely connect to your workplace if working from home.

In addition, taxpayers can check out security recommendations for their specific mobile phone by reviewing the Federal Communications Commission's Smartphone Security Checker. The Federal Bureau of Investigation has issued warnings about fraud and scams related to COVID-19 schemes, anti-body testing, healthcare fraud, cryptocurrency fraud and others. COVID-related fraud complaints can be filed at the National Center for Disaster Fraud. Moreover, the Federal Trade Commission also has issued alerts about fraudulent emails claiming to be from the Centers for Disease Control or the World Health Organization. Taxpayers can keep atop the latest scam information and report COVID-related scams at www.FTC.gov/coronavirus.

The IRS has issued proposed regulations for the centralized partnership audit regime...

NPRM REG-123652-18

The IRS has issued proposed regulations for the centralized partnership audit regime that:

• clarify that a partnership with a QSub partner is not eligible to elect out of the centralized audit regime;
• add three new types of “special enforcement matters” and modify existing rules;
• modify existing guidance and regulations on push out elections and imputed adjustments; and
• clarify rules on partnerships that cease to exist.

The regulations are generally proposed to apply to partnership tax years ending after November 20, 2020, and to examinations and investigations beginning after the date the regs are finalized. However, the new special enforcement matters category for partnership-related items underlying non-partnership-related items is proposed to apply to partnership tax years beginning after December 20, 2018. In addition, the IRS and a partner could agree to apply any part of the proposed regulations governing special enforcement matters to any tax year of the partner that corresponds to a partnership tax year that is subject to the centralized partnership audit regime.

Centralized Audit Regime
The Bipartisan Budget Act of 2015 ( P.L. 114-74) replaced the Tax Equity and Fiscal Responsibility Act (TEFRA) ( P.L. 97-248) partnership procedures with a centralized partnership audit regime for making partnership adjustments and tax determinations, assessments and collections at the partnership level. These changes were further amended by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) ( P.L. 114-113), and the Tax Technical Corrections Act of 2018 (TTCA) ( P.L. 115-141). The centralized audit regime, as amended, generally applies to returns filed for partnership tax years beginning after December 31, 2017.

Election Out
A partnership with no more than 100 partners may generally elect out of the centralized audit regime if all of the partners are eligible partners. As predicted in Notice 2019-06, I.R.B. 2019-03, 353, the proposed regulations would provide that a qualified subchapter S subsidiary (QSub) is not an eligible partner; thus, a partnership with a QSub partner could not elect out of the centralized audit regime.

Special Enforcement Matters
The IRS may exempt “special enforcement matters” from the centralized audit regime. There are currently six categories of special enforcement matters:

• failures to comply with the requirements for a partnership-partner or S corporation partner to furnish statements or compute and pay an imputed underpayment;
• assessments relating to termination assessments of income tax or jeopardy assessments of income, estate, gift, and certain excise taxes;
• criminal investigations;
• indirect methods of proof of income;
• foreign partners or partnerships;
• other matters identified in IRS regulations.

The proposed regs would add three new types of special enforcement matters:

• partnership-related items underlying non-partnership-related items;
• controlled partnerships and extensions of the partner’s period of limitations; and
• penalties and taxes imposed on the partnership under chapter 1.

The proposed regs would also require the IRS to provide written notice of most special enforcement matters to taxpayers to whom the adjustments are being made.

The proposed regs would clarify that the IRS could adjust partnership-level items for a partner or indirect partner without regard to the centralized audit regime if the adjustment relates to termination and jeopardy assessments, if the partner is under criminal investigation, or if the adjustment is based on an indirect method of proof of income.

However, the proposed regs would also provide that the special enforcement matter rules would not apply to the extent the partner could demonstrate that adjustments to partnership-related items in the deficiency or an adjustment by the IRS were:

• previously taken into account under the centralized audit regime by the person being examined; or
• included in an imputed underpayment paid by a partnership (or pass-through partner) for any tax year in which the partner was a reviewed year partner or indirect partner, but only if the amount included in the deficiency or adjustment exceeds the amount reported by the partnership to the partner that was either reported by the partner or indirect partner or is otherwise included in the deficiency or adjustment determined by the IRS.

Push Out Election, Imputed Underpayments
The partnership adjustment rules generally do not apply to a partnership that makes a "push out" election to push the adjustment out to the partners. However, the partnership must pay any chapter 1 taxes, penalties, additions to tax, and additional amounts or the amount of any adjustment to an imputed underpayment. Thus, there must be a mechanism for including these amounts in the imputed underpayment and accounting for these amounts.

In calculating an imputed underpayment, the proposed regs would generally include any adjustments to the partnership’s chapter 1 liabilities in the credit grouping and treat them similarly to credit adjustments. Adjustments that do not result in an imputed underpayment generally could increase or decrease non-separately stated income or loss, as appropriate, depending on whether the adjustment is to an item of income or loss. The proposed regs would also treat a decrease in a chapter 1 liability as a negative adjustment that normally does not result in an imputed underpayment if: (1) the net negative adjustment is to a credit, unless the IRS determines to have it offset the imputed underpayment; or (2) the imputed underpayment is zero or less than zero.

Under existing regs for calculating an imputed underpayment, an adjustment to a non-income item that is related to, or results from, an adjustment to an item of income, gain, loss, deduction, or credit is generally treated as zero, unless the IRS determines that the adjustment should be included in the imputed underpayment. The proposed regs would clarify this rule and extend it to persons other than the IRS. Thus, a partnership that files an administrative adjustment request (AAR) could treat an adjustment to a non-income item as zero if the adjustment is related to, and the effect is reflected in, an adjustment to an item of income, gain, loss, deduction, or credit (unless the IRS subsequently determines in an AAR examination that both adjustments should be included in the calculation of the imputed underpayment).

A partnership would take into account adjustments to non-income items in the adjustment year by adjusting the item on its adjustment year return to be consistent with the adjustment. This would apply only to the extent the item would appear on the adjustment year return without regard to the adjustment. If the item already appeared on the partnership’s adjustment year return as a non-income item, or appeared as a non-income item on any return of the partnership for a tax year between the reviewed year and the adjustment year, the partnership does not create a new item on the partnership’s adjustment year return.

A passthrough partner that is paying an amount as part of an amended return submitted as part of a request to modify an imputed underpayment would take into account any adjustments that do not result in an imputed underpayment in the partners’ tax year that includes the date the payment is made. This provision, however, would not apply if no payment is made by the partnership because no payment is required.

Partnership Ceases to Exist
If a partnership ceases to exist before the partnership adjustments take effect, the adjustments are taken into account by the former partners of the partnership. The IRS may assess a former partner for that partner’s proportionate share of any amounts owed by the partnership under the centralized partnership audit regime. The proposed regs would clarify that a partnership adjustment takes effect when the adjustments become finally determined; that is, when the partnership and IRS enter into a settlement agreement regarding the adjustment; or, for adjustments reflected in an AAR, when the AAR is filed. The proposed regs would also make conforming changes to existing regs:

• A partnership ceases to exist if the IRS determines that the partnership does not have the ability to pay in full any amount that the partnership may become liable for under the centralized partnership audit regime.
• Existing regs that describe when the IRS will not determine that a partnership ceases to exist would be removed.
• Statements must be furnished to the former partners and filed with the IRS no later than 60 days after the later of the date the IRS notifies the partnership that it has ceased to exist or the date the adjustments take effect.

The proposed regs would also modify the definition of "former partners" to be partners of the partnership during the last tax year for which a partnership return or AAR was filed, or the most recent persons determined to be the partners in a final determination, such as a final court decision, defaulted notice of final partnership adjustment (FPA), or settlement agreement.

Comments Requested
Comments are requested on all aspects of the proposed regulations by January 22, 2021. The IRS strongly encourages commenters to submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-123652-18). Comments submitted on paper will be considered to the extent practicable.

The IRS has issued final regulations with guidance on how a tax-exempt organization can determine whether it has more than one unrelated trade or business, how it should identify its separate trades and businesses, and how to separately calculate unrelated business taxable income (UBTI) for each trade or business – often referred to as "silo" rules. Since 2018, under provisions of the Tax Cuts and Jobs Act (TCJA), the loss from one unrelated trade or business may not offset the income from another, separate trade or business. Congress did not provide detailed methods of determining when unrelated businesses are "separate" for purposes of calculating UBTI.

The IRS has issued final regulations with guidance on how a tax-exempt organization can determine whether it has more than one unrelated trade or business, how it should identify its separate trades and businesses, and how to separately calculate unrelated business taxable income (UBTI) for each trade or business – often referred to as "silo" rules. Since 2018, under provisions of the Tax Cuts and Jobs Act (TCJA), the loss from one unrelated trade or business may not offset the income from another, separate trade or business. Congress did not provide detailed methods of determining when unrelated businesses are "separate" for purposes of calculating UBTI.

On April 24, 2020, the IRS published a notice of proposed rulemaking ( REG-106864-18) that proposed guidance on how an exempt organization determines if it has more than one unrelated trade or business and, if so, how the exempt organization calculates UBTI under Code Sec. 512(a)(6). The final regulations substantially adopt the proposed regulations issued earlier this year, with modifications.

Separate Trades or Businesses
The proposed regulations suggested using the North American Industry Classification System (NAICS) six-digit codes for determining what constitutes separate trades or businesses. Notice 2018-67, I.R.B. 2018-36, 409, permitted tax-exempt organizations to rely on these codes. The first two digits of the code designate the economic sector of the business. The proposed guidance provided that organizations could make that determination using just the first two digits of the code, which divides businesses into 20 categories, for this purpose.

The proposed regulations provided that, once an organization has identified a separate unrelated trade or business using a particular NAICS two-digit code, the it could only change the two-digit code describing that separate unrelated trade or business if two specific requirements were met. The final regulations remove the restriction on changing NAICS two-digit codes, and instead require an exempt organization that changes the identification of a separate unrelated trade or business to report the change in the tax year of the change in accordance with forms and instructions.

QPIs
For exempt organizations, the activities of a partnership are generally considered the activities of the exempt organization partners. Code Sec. 512(c) provides that if a trade or business regularly carried on by a partnership of which an exempt organization is a member is an unrelated trade or business with respect to such organization, that organization must include its share of the gross income of the partnership in UBTI.

The proposed regulations provided that an exempt organization’s partnership interest is a "qualifying partnership interest" (QPI) if it meets the requirements of the de minimis test by directly or indirectly holding no more than two percent of the profits interest and no more than two percent of the capital interest. For administrative convenience, the de minimis test allows certain partnership investments to be treated as an investment activity and aggregated with other investment activities. Additionally, the proposed regulations permitted the aggregation of any QPI with all other QPIs, resulting in an aggregate group of QPIs.

Once an organization designates a partnership interest as a QPI (in accordance with forms and instructions), it cannot thereafter identify the trades or businesses conducted by the partnership that are unrelated trades or businesses with respect to the exempt organization using NAICS two-digit codes unless and until the partnership interest is no longer a QPI.

A change in an exempt organization’s percentage interest in a partnership that is due entirely to the actions of other partners may present significant difficulties for the exempt organization. Requiring the interest to be removed from the exempt organization’s investment activities in one year but potentially included as a QPI in the next would create further administrative difficulty. Therefore, the final regulations adopt a grace period that permits a partnership interest to be treated as meeting the requirements of the de minimis test or the participation test, respectively, in the exempt organization’s prior tax year if certain requirements are met. This grace period will allow an exempt organization to treat such interest as a QPI in the tax year that such change occurs, but the organization will need to reduce its percentage interest before the end of the following tax year to meet the requirements of either the de minimis test or the participation test in that succeeding tax year for the partnership interest to remain a QPI.

The IRS has modified Rev. Proc. 2007-32, I.R.B. 2007-22, 1322, to provide that the term of a Gaming Industry Tip Compliance Agreement (GITCA) is generally five years, and the renewal term of a GITCA is extended from three years to a term of up to five years. A GITCA executed under Rev. Proc. 2003-35, 2003-1 CB 919 and Rev. Proc. 2007-32 will remain in effect until the expiration date set forth in that agreement, unless modified by the renewal of a GITCA under section 4.04 of Rev. Proc. 2007-32 (as modified by section 3 of this revenue procedure).

The IRS has modified Rev. Proc. 2007-32, I.R.B. 2007-22, 1322, to provide that the term of a Gaming Industry Tip Compliance Agreement (GITCA) is generally five years, and the renewal term of a GITCA is extended from three years to a term of up to five years. A GITCA executed under Rev. Proc. 2003-35, 2003-1 CB 919 and Rev. Proc. 2007-32 will remain in effect until the expiration date set forth in that agreement, unless modified by the renewal of a GITCA under section 4.04 of Rev. Proc. 2007-32 (as modified by section 3 of this revenue procedure).

The modified provisions generally provide as follows:

• In general, a GITCA shall be for a term of five years. For new properties and properties that do not have a prior agreement with the IRS, however, the initial term of the agreement may be for a shorter period.
• A GITCA may be renewed for additional terms of up to five years, in accordance with Section IX of the model GITCA. Beginning not later than six months before the termination date of a GITCA, the IRS and the employer must begin discussions as to any appropriate revisions to the agreement, including any appropriate revisions to the tip rates described in Section VIII of the model GITCA. If the IRS and the employer have not reached final agreement on the terms and conditions of a renewal agreement, the parties may mutually agree to extend the existing agreement for an appropriate time to finalize and execute a renewal agreement.

Effective Date
This revenue procedure is effective November 23, 2020.

Final regulations issued by the Treasury and IRS coordinate the extraordinary disposition rule that applies with respect to the Code Sec. 245A dividends received deduction and the disqualified basis rule under the Code Sec. 951A global intangible low-taxed income (GILTI) regime. Information reporting rules are also finalized.

Final regulations issued by the Treasury and IRS coordinate the extraordinary disposition rule that applies with respect to the Code Sec. 245A dividends received deduction and the disqualified basis rule under the Code Sec. 951A global intangible low-taxed income (GILTI) regime. Information reporting rules are also finalized.

Extraordinary Disposition Rule and GILTI Disqualified Basis Rule
The extraordinary disposition rule (EDR) in Reg. §1.245A-5 and the GILTI disqualified basis rule (DBR) in Reg. §1.951A-2(c)(5) both address the disqualified period that results from the differences between dates for which the transition tax under Code Sec. 965 and the GILTI rules apply. GILTI applies to calendar year controlled foreign corporations (CFCs) on January 1, 2018. A fiscal year CFC may have a period from January 1, 2018, until the beginning of its first tax year in 2018 (the disqualified period) in which it can generate income subject to neither the transition tax under Code Sec. 965 nor GILTI.

The extraordinary disposition rule limits the ability to claim the Code Sec. 245A deduction for certain earnings and profits generated during the disqualified period. Specifically, Reg. §1.245A-5 provides that the deduction is limited for dividends paid out of an extraordinary disposition account. Final regulations issued under GILTI address fair market basis generated as a result of assets transferred to related CFCs during the disqualified period (disqualified basis). Reg. §1.951A-2(c)(5) allocates deductions or losses attributable to disqualified basis to residual CFC income, such as income other than tested income, subpart F income, or effectively connected taxable income. As a result, the deductions or losses will not reduce the CFC’s income subject to U.S. tax.

Coordination Rules
The coordination rules are necessary to prevent excess taxation of a Code Sec. 245A shareholder. Excess taxation can occur because the earnings and profits subject to the extraordinary disposition rule and the basis to which the disqualified basis rule applies are generally a function of a single amount of gain.

Under the coordination rules, to the extent that the Code Sec. 245A deduction is limited with respect to distributions out of an extraordinary disposition account, a corresponding amount of disqualified basis attributable to the property that generated that extraordinary disposition account through an extraordinary disposition is converted to basis that is not subject to the disqualified basis rule. The rule is referred to as the disqualified basis (DQB) reduction rule.

A prior extraordinary disposition amount is also covered under this rule. A prior extraordinary disposition amount generally represents the extraordinary disposition of earnings and profits that have become subject to U.S. tax as to a Code Sec. 245A shareholder other than by direct application of the extraordinary disposition rule (e.g., inclusions as a result of investment in U.S. property under Code Sec. 956).

Separate coordination rules are provided, depending upon whether the application of the rule is in a simple or complex case.

Reporting Requirements
Every U.S. shareholder of a CFC that holds an item of property that has disqualified basis during an annual accounting period and files Form 5471 for that period must report information about the items of property with disqualified basis held by the CFC during the CFC’s accounting period, as required by Form 5471 and its instructions.

Additionally, information must be reported about the reduction to an extraordinary disposition account made pursuant to the regulations and reductions made to an item of specified property’s disqualified basis pursuant to the regulations during the corporation’s accounting period, as required by Form 5471 and its instructions.

Applicability Dates
The regulations apply to tax years of foreign corporations beginning on or after the date the regulations are published in the Federal Register, and to tax years of Code Sec. 245A shareholders in which or with which such tax years end. Taxpayers may choose to apply the regulations to years before the regulations apply.

During economic downturns, many people often look for ways to supplement their regular employment compensation. Or, you may be engaging in an activity - such as gambling or selling items on an online auction - that is actually earning you income: taxable income. Many individuals may not understand the tax consequences of, and reporting requirements for, earning these types of miscellaneous income. This article discusses how you report certain types of miscellaneous income.

Reporting your miscellaneous taxable income

For most people, gambling winnings and hobby income are uncommon types of taxable income. Gambling winnings and hobby income, as well as prizes and awards, represent "miscellaneous income" and are reported on Line 21 of your Form 1040 as "other income."

Hobby income

Hobbies are generally considered under the tax law as activities that are not pursued "for profit." However, the tax law provides that if your hobby shows a profit in at least three of the last five tax years, including the current year, you are assumed to be trying to make money. However, you can rebut the assumption -- that you are not out to run a profitable business even if you regularly have losses -- with evidence to the contrary. Just because you love what you are doing in a sideline business does not mean it's a hobby for tax law purposes. In fact, one secret to business success is often enjoying your work. Profits you receive from an activity that is a hobby and not a for-profit business are reported as "other income" on Line 21 of your Form 1040.

Hobby losses and expenses

You cannot deduct your hobby expenses in excess of income you derived from the hobby, and you can only deduct qualifying expenses if you itemize your deductions. Expenses that you incurred in generating hobby income are generally deductible as miscellaneous itemized deductions, subject to the two-percent floor, on Schedule A. If you incurred losses in connection with your hobby activities, you may generally be able to deduct these "hobby losses" but only to the extent of income produced by the activity.

However, some expenses that are deductible whether or not they are incurred in connection with a hobby (such as taxes, interest and casualty losses) are deductible even if they exceed hobby income. These expenses, however, will reduce the amount of your hobby income against which your hobby expenses can be offset. Your hobby expenses then offset the reduced income in the following order:

1. Operating expenses, generally;

2. Depreciation and other basis adjustment items.

As mentioned above, your itemized deduction for hobby expenses is subject to the two-percent floor on miscellaneous itemized deductions.

Gambling winnings

Gambling winnings, whether legal or illegal, are included in your gross income. If you have winnings from a lottery, raffle, or other types of gambling activities, you must report the full amount of your winnings on Line 21 of your Form 1040 as "other income." The taxable gains are the amount by which your winnings exceed the amount you wagered. If any taxes were withheld from your winnings, you should receive a Form W-2G showing the total paid to you in Box 1, and the amount of income taxes withheld in Box 2. You need to include the amount in Box 2 in the amount of taxes paid on Line 59 of your 1040.

Gambling losses

You can deduct your gambling losses as an itemized deduction for the year on Schedule A (Form 1040), line 28. However, you cannot deduct gambling losses that exceed your winnings. Thus, you can deduct losses from gambling up to the amount of your gambling winnings. You cannot reduce your gambling winnings by your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. Therefore, your records should show your winnings separately from your losses.

You can reduce your gambling winnings by your wagering losses regardless of whether the underlying transactions are legal or illegal. Moreover, gambling losses may be offset against all gains arising out of wagering transactions, and not merely against gambling winnings. However, gambling losses can only be used to offset gambling gains during the same year.

Moreover, you cannot use your gambling losses to reduce taxable income from non-gambling sources, and they cannot be used as a carryover or carryback to reduce gambling income from other years. For example, the value of complimentary goods you might receive from a casino as an inducement to gamble are gains from which gambling losses can be deducted.

Casinos, lotteries and other payers of gambling winnings of $600 or more ($1,200 for bingo or slot machines and $1,500 for keno) report the winnings on Form W-2G, Certain Gambling Winnings.

If you have any questions about tax and reporting requirements in connection with hobby activities and other sources of income, please call our office.

The saver's credit is a retirement savings tax credit that can save eligible individuals up to $1,000 in taxes just for contributing up to $2,000 to their retirement account. The saver's credit is an additional tax benefit on top of any other benefits available for your retirement contribution. It is a nonrefundable personal credit. Therefore, like other nonrefundable credits, it can be claimed against your combined regular tax liability and alternative minimum tax (AMT) liability.

Who qualifies for the saver's credit

To qualify for the credit, you must be 18 years old (as of the close of the tax year of the contribution), not a full-time student, and not claimed as a dependent on another's return. The calculation of the credit amount depends on a percentage of your adjusted gross income (AGI).

The credit can be claimed for contributions or deferrals made to a number of retirement plans, including: traditional and Roth IRAs (other then rollover contributions), voluntary "after-tax" employee contributions to Section 403(b) annuities and qualified retirement plans, qualified cash or deferred arrangements, including elective contributions made to 401(k) plans, tax sheltered annuities, SIMPLE plans, simplified employee pensions (SEPs), and eligible deferred compensation plans of governmental employers.

Determining your credit amount

IRS Form 8880, Credit for Qualified Retirement Savings Contributions, is used to calculate the amount of the saver's credit, which is then reported on Line 51 of Form 1040. The credit is determined as a percentage of your "qualifying contribution." A taxpayer's qualifying contribution is limited to $2,000 per year. The percent varies depending on your adjusted gross income (AGI).

For 2009, the credit is 50 percent of the maximum $2,000 ceiling for married couples filing jointly with a combined AGI of $33,000 or less. For example, if each spouse makes the maximum $2,000 contribution for the credit, for a total of $4,000, they can claim a total saver's credit of $2,000 ($4,000 x 50 percent) on their joint return). If AGI for 2009 is above $33,000 but not over $36,000, the credit is 20 percent of qualifying contributions ($800 in the above example: $4,000 x 20 percent). If AGI for 2009 is above $36,000 but not over $55,500, the credit is 10 percent of qualifying contributions.

For single taxpayers, if AGI for 2009 is $16,500 or less, the percentage is 50 percent. If AGI for 2009 is above $16,500 but not over $18,000, the credit is 20 percent of qualifying contributions. If AGI for 2009 is above $18,000 but not over $27,750, the credit is 10 percent of qualifying contributions. For 2009, the credit is phased out when AGI exceeds $55,000 for joint return filers, $41,625 for heads of households, and $27,750 for single and married filing separately.

Contribution reductions

The amount of contributions to be taken into account in determining the credit, however, must be reduced by any distributions from such qualified retirement plans over a "test period." The test period includes the current tax year, two preceding tax years, and the following tax year up to the due date of the return including extensions. A qualifying contribution is also reduced by nontaxable distributions received from Roth IRAs during the testing period (unless you roll them over). The contribution reduction rule even applies to "special" distributions, such as those taken to pay first-time homebuyer expenses or higher education costs.

Exceptions apply for certain distributions, such as trustee-to-trustee transfers or rollover distributions to other qualified retirement accounts (for example, a rollover from a traditional IRA to a Roth IRA).

Example. Jenny contributes $2,500 to her 401(k) during Year 4, but took a $1,000 taxable IRA withdrawal during Year 2. Her qualifying contribution for purposes of computing her saver's credit for Year 4 is $1,500 ($2,500-$1,000).

The saver's credit is available in addition to other benefits you receive contributing to a retirement plan. For example, if you make a $1,000 deductible contribution to a traditional IRA, you may also qualify to take the saver's credit for that contribution. In fact, since your deduction for the IRA contribution reduces AGI, you may even qualify for a higher credit percentage.

A consequence of the economic downturn for many investors has been significant losses on their investments in retirement accounts, including traditional and Roth individual retirement accounts (IRAs). This article discusses when and how taxpayers can deduct losses suffered in Roth IRAs and traditional IRAs ...and when no deduction will be allowed.

Traditional IRAs

Losses on investments held in a traditional IRA, funded only by contributions that you deducted when you made them, are never deductible. Even when you cash out the IRA after retirement, losses cannot be deducted. The theory behind this rule is that you already received a tax benefit in your deduction for making contributions and any loss lowers the amount of taxable income you must realize when you make retirement withdrawals. The technical explanation is that you are presumed to have a zero basis in your account.

On the other hand, if you make nondeductible traditional IRA contributions, and liquidate all of the investments in your traditional IRA, a loss can be recognized if the amounts distributed are less than the remaining unrecovered basis in the traditional IRA. You claim a loss in a traditional IRA on Schedule A, Form 1040, as a miscellaneous itemized deduction subject to the two percent AGI floor.

Example. During 2008, you made $2,000 in nondeductible contributions to a traditional IRA. Your basis in the IRA at the end of 2008 is $2,000. During 2008, the IRA earned $400 in dividend income and you withdrew $600 from the account. As a result, at the end of 2008 the value of your IRA was $1,800 ($2,000 contributed plus $400 dividends minus $600 withdrawal). You compute and report the taxable portion of your $600 withdrawal and your remaining basis on Form 8606, Nondeductible IRA.

In 2009, the year you retired, your IRA lost $500 in value. At the end of 2009, your IRA balance was $1,300 ($1,800 balance at the end of 2008 minus the $500 loss). Your remaining basis at that time in your IRA is $1,500 ($2,000 nondeductible contributions minus the $500 basis in the prior withdrawal). You withdraw the $1,300 balance remaining in the IRA. You can claim a loss of $200 (your $1,500 basis minus the $1,300 withdrawn) on Form 1040, Schedule A. The allowable loss is further subject to the two percent adjusted gross income (AGI) floor on miscellaneous itemized deductions.

If you made significant nondeductible contributions to an IRA over the last few years, and may be considering withdrawing the entire balance in all of your traditional IRAs before the end of the year in order to recognize a loss, keep in mind doing so will mean losing the opportunity to defer gain if the value of your investments in the accounts increases. Those withdrawn amounts cannot be recontributed at a later date.

Roth IRA losses

When you experience losses on Roth IRA investments, you can only recognize the loss for income tax purposes, if and when all the amounts in the Roth IRA accounts have been distributed and the total distributions are less than your basis (e.g. regular and conversion contributions).

To report a loss in a Roth IRA, all the investments held in your Roth IRA (but not traditional IRAs) must be liquidated. Moreover, the loss is an ordinary loss for income tax purposes, not a capital loss, and can only be claimed as a miscellaneous itemized deduction subject to the two percent of AGI floor that applies to miscellaneous itemized deductions on Form 1040, Schedule A.

Since all Roth IRAs must be completely liquidated to generate a loss deduction, it generally provides only a small comfort to investments gone sour. Closing all your Roth IRAs generally forgoes future appreciation on that amount.

You may have done some spring cleaning and found that you have a lot of clothes that you no longer wear or want, and would like to donate to charity. Used clothing that you want to donate to charity and take a charitable deduction for, however, is subject to a few rules and requirements.

Under IRS guidelines, clothing, furniture, and other household items must be in good used condition or better, to be deductible. Shirts with stains or pants with frayed hems just won't cut it. Furthermore, if the item(s) of used clothing are not in good used condition or better, and you wish to deduct more than $500 for a single piece of clothing, the IRS requires a professional appraisal.

For donations of less than $250, you must obtain a receipt from the charity, reflecting the donor's name, date and location of the contribution, and a reasonably detailed description of the donation. It is your responsibility to obtain this written acknowledgement of your donation.

Used clothing contributions worth more than $500

If you are deducting more than $500 with respect to one piece of used clothing you donate, you must file Form 8283, Noncash Charitable Contributions, with the IRS. For donated items of used clothing worth more than $500 each, you must attach a qualified appraisal report is to your tax return. The Form 8283 asks you to include information such as the date you acquired the item(s) and how you acquired the item(s) (for example, were the clothes a holiday gift or did you buy the items at the store).

Determining the fair market value of used clothing

You may also need to include the method you used to determine the value of the used clothing. According to the IRS, the valuation of used clothing does not necessarily lend itself to the use of fixed formulas or methods. Typically, the value of used clothing that you donate, is going to be much less than you when first paid for the item. A rule of thumb, is that for items such as used clothing, fair market value is generally the price at which buyers of used items pay for used clothing in consignment or thrift stores, such as the Salvation Army.

To substantiate your deduction, ask for a receipt from the donor that attests to the fact that the clothing you donated with in good, used condition, or better. Moreover, you may want to take pictures of the clothing.

If you need have questions about valuing and substantiating your charitable donations, please contact our office.

Employers commonly use per-diem allowance arrangements to reimburse employees for business expenses incurred while traveling away from home on business. Each year, the IRS publishes per-diem rates for travel within the continental U.S. The per-diem rates for meals, lodging and incidental expenses can be used instead of using your actual expenses. There are two approved methods for substantiating your per-diem expenses, including the "high-low" method (found in IRS Publication 1542). This article is intended to help you calculate your per-diem travel expenses under the "high-low" method.

What is required under a per-diem plan?

Per diems require only that your employee substantiate the time, place, and business purpose of these expenses. When you use the "high-low" method for calculating the per-diem rate allowance, your expenses under this method will be deemed substantiated as long as it does not exceed IRS-established federal per diem rates for two categories:

1. Lodging; and

2. Meals.

The federal per-diem rates for these two categories are listed in IRS Publication 1542.

The high-low method

As mentioned, one of the two approved methods for using the per-diem rates is the "high-low" method. The high-low method is a simplified method for figuring your lodging, meals and incidental expenses. This method requires employers to use only two per-diem rates to reimburse employee travel expenses--one for high-cost locations and one for low-cost locations. For 2009, the per-diem rate for travel to a "high-cost" locality is $296 ($198 for lodging and $58 for meals and incidental expenses). The 2009 per-diem rate for travel to "low-cost" areas is $158 ($113 for lodging and $45 for meals and incidental expenses).

Under the high-low method, there are a significant number of localities (published n Publication 1542) that qualify for a "high" 2009 per diem rate of $296. Any locality not listed as "high" is automatically considered "low cost" and qualifies for a per diem rate of $158. The federal per-diem rates are deemed substantiated as long as they do not exceed the high or low cost set by the IRS for the area.

While the past year has not been stellar for most investors, the tax law in many instances can step in to help salvage some of your losses by offsetting both present and future taxable gains and other income. Knowing how net capital gains and losses are computed, and how carryover capital losses may be used to maximum tax advantage, should form an important part of an investor's portfolio management program during these challenging times.

Net capital losses

Capital assets yield short-term gains or losses if the holding period is one year or less, and long-term gains or losses if the holding period exceeds one year. The excess of net long-term gains over net short-term losses is net capital gain.

Short-term capital losses, including short-term capital loss carryovers, are applied first against short-term capital gains. If the losses exceed the gains the net short-term capital loss is applied first against any net long-term capital gain from the 28-percent group (collectibles), then against the 25-percent group (recapture property), and last against the 15- (or zero) percent group. Long-term capital losses are similarly netted and then applied against the most highly taxed net gains that a taxpayer has.

If an investor's capital losses exceed capital gains for the year, he or she may offset losses against ordinary income to the extent of the lesser of: the excess capital loss; or $3,000 ($1,500 for married persons filing separate returns). Although several bills have been introduced to raise these dollar levels, which have not been adjusted for inflation for decades, none has yet to see the light of day.

Carryovers

Individuals may carry net capital losses to future tax years but not back to prior years. There is no limit on the number of years to which net capital losses may be carried over as there is with corporate taxpayers. Short-term and long-term capital losses are carried forward and retain their character. Capital loss carryovers that originate in several years are applied in the order in which incurred.

Dividend offsets. While qualified dividends are taxed at the net capital gains rate, they do not take part in the general computation of net capital gains and, therefore, are not reduced by capital losses, either in the same year or in carried forward years. Although your overall portfolio may have experienced a loss for the year, you must still pay tax on your dividend income.

If you need any advice on how to structure your portfolio over the next year to take advantage of current losses while protecting future gains from as much income tax as possible, please do not hesitate to call this office.