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.

Since passage of the Affordable Care Act, several key requirements for employers have been delayed, including reporting of health coverage offered to employees, known as Code Sec. 6056 reporting. As 2015 nears, and the prospects of further delay appear unlikely, employers and the IRS are preparing for the filing of these new information returns.

Since passage of the Affordable Care Act, several key requirements for employers have been delayed, including reporting of health coverage offered to employees, known as Code Sec. 6056 reporting. As 2015 nears, and the prospects of further delay appear unlikely, employers and the IRS are preparing for the filing of these new information returns.

Three related provisions

Three provisions of the Affordable Care Act are closely related: the employer mandate for applicable large employers (ALEs), the Code Sec. 36B premium assistance tax credit and Code Sec. 6056 reporting. To administer the employer mandate and the Code Sec. 36 credit, the IRS must receive information from ALEs, such as the type of health coverage offered, if any, by the ALE, the number of employees, and the cost of coverage.

Who must report?

Not all employers must report under Code Sec. 6056. The most important exception is for employers with fewer than 50 full-time employees, including full-time equivalent employees. These smaller employers are exempt—at all times—from Code Sec. 6056 reporting and the employer mandate.

For 2015, there is also a temporary exemption for some ALEs from the employer mandate only. ALEs are employers that employ on average at least 50 full-time employees, including full-time equivalents but fewer than 100 full-time employees including full-time equivalents. However, mid-size employers must file Code Sec. 6056 information returns for 2015. All other ALEs are subject to the employer mandate for 2015 as well as Code Sec. 6056.

What must be reported?

The IRS has posted draft forms for Code Sec. 6056 reporting on its website: Form 1094-C Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. Draft Instructions for these forms are expected to be released in the near future.

ALEs generally must report:

• The employer's name, address, and employer identification number;
• The calendar year for which information is being reported;
• A certification as to whether the employer offered to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan;
• The number, address and Social Security/taxpayer identification number of all full-time employees;
• The number of full-time employees eligible for coverage under the employer's plan; and
• The employee's share of the lowest cost monthly premium for self-only coverage providing minimum value offered to that full-time employee.

Under IRS regulations, Code Sec. 6056 reporting is optional for 2014. Reporting for 2015 is required. Information returns must be filed no later than March 1, 2016 (February 28, 2016, being a Sunday), or March 31, 2016, if filed electronically.

Simplified method

The IRS has provided ALEs with simplified methods of reporting. Employers that provide a "qualifying offer" to any of their full-time employees may be eligible as are employers that offer coverage to a certain percentage of employees. For more details about the simplified method, please contact our office.

Employers that self-insure

The Affordable Care Act also requires every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs, and other entities that provide minimum essential coverage to file information returns. This is known as "Code Sec. 6055 reporting." The IRS has posted draft versions of Form 1094-B, Transmittal of Health Coverage Information Returns, and Form 1095-B, Health Coverage on its website.

Employers that self-insure have a streamlined way to report for purposes of Code Sec. 6055 reporting and Code Sec. 6056 reporting. The top half of Form 1095-C includes information needed for Code Sec. 6056 reporting; the bottom half includes information needed for Code Sec. 6055 reporting.

If you have any questions about Code Sec. 6056 reporting, please contact our office.

Taxpayers that plan to operate a business have a variety of choices. A single individual can operate as a C corporation, an S corporation, a limited liability company (LLC), or a sole proprietorship. Two or more individuals can form a partnership, a corporation (C or S), or an LLC.

Taxpayers that plan to operate a business have a variety of choices. A single individual can operate as a C corporation, an S corporation, a limited liability company (LLC), or a sole proprietorship. Two or more individuals can form a partnership, a corporation (C or S), or an LLC.

Nontax considerations

State law and nontax considerations are an important consideration in choosing the form of the business and may play a decisive role. A general partner of a partnership has unlimited liability for the debts of the business. This can be modified by using a limited partnership (LP), which must have at least one general partner and at least one limited partner. The general partner still have unlimited liability, but a limited partner's liability is limited to its contribution to the partnership. A corporation has limited liability; shareholders generally are not responsible for the liabilities of the corporation beyond their contributions to the entity.

Federal tax considerations

At the same time, it is crucial to consider federal tax requirements and consequences when choosing the form of business entity. A primary federal tax consideration is avoiding a double layer of tax on business income. This can be accomplished by operating as a passthrough entity, such as a partnership or S corporation. Income is not taxed at the entity level. It passes through to partners and shareholders and is taxed at their rates.

In contrast, C corporations are taxable entities. Furthermore, when a C corporation pays a dividend to its shareholders, this generally is taxable to the shareholder. It must be noted that income of a passthrough entity is allocable and taxable to its owners, whether or not the income is actually distributed to the partner or shareholder. Dividends are not taxed unless there is an actual distribution.

While a partnership is organized under state law, an S corporation is a creature of the federal tax system. The S corporation is a regular corporation for state law purposes.

Advantages of partnerships

Unlike an S corporation shareholder, anyone or any entity can be a partner. S corporations are limited to 100 shareholders; only certain individuals, estates and trusts are eligible to be shareholders. C corporations and nonresident aliens cannot be shareholders of an S corporation.

S corporations are limited to a single class of stock; income and losses must be allocated on the same basis to each shareholder. Having only one class of stock may affect the corporation's ability to raise capital. A partnership can have different classes of partners and has more flexibility for allocating income and losses to different types of partners.

Partnership liabilities can increase a partner's basis in the partnership, offsetting distributions of cash and reducing their taxation. The increased basis allowed partners to use losses generated by the partnership. Liabilities of an S corporation do not create stock basis; separate bases in stock and debt must be calculated. This lack of basis may limit the use of losses generated by the S corporation.

Contributions of appreciated property by a partner to the partnership generally are not taxable, even if the partner is not part of a group controlling the partnership. Contributions by a shareholder to a corporation are tax-free only if the shareholders are part of a group controlling 80 percent of the corporation after the contribution. However, a partnership must follow special allocation rules for handling built-in gain on contributed property, whereas S corporations do not have special allocation rules in this circumstance.

Conclusion

In general, a partnership offers more flexibility than an S corporation in the treatment of taxes. However, S corporation shareholders do have limited legal liability, while general partners are not insulated from the partnership's debts and liabilities.

Taxpayers who are self-employed must pay self-employment tax on their income from self-employment. The self-employment tax applies in lieu of Federal Insurance Contributions Act (FICA) taxes paid by employees and employers on compensation from employment. Like FICA taxes, the self-employment tax consists of taxes collected for Social Security and for Medicare (hospital insurance or HI).

Taxpayers who are self-employed must pay self-employment tax on their income from self-employment. The self-employment tax applies in lieu of Federal Insurance Contributions Act (FICA) taxes paid by employees and employers on compensation from employment. Like FICA taxes, the self-employment tax consists of taxes collected for Social Security and for Medicare (hospital insurance or HI).

The self-employment tax is levied and collected as part of the income tax. The tax must be taken into account in determining an individual's estimated taxes. The self-employed taxpayer is responsible for the self-employment tax, in effect paying both the employer's and the employee's share of the tax. The tax is calculated on Schedule SE, filed with the individual's income tax return, and is then reported on the Form 1040.

Self-Employment Tax Rate

The self-employment tax rate is 15.3 percent of self-employment income. This is the same overall percentage that applies to an employee's compensation. The rate combines the 12.4 percent Social Security tax and the 2.9 percent Medicare tax. Self-employed individuals can deduct one-half of the self-employment tax. (For 2011 and 2012, the Social Security tax rate was reduced from 12.4 to 10.4 percent.) If the individual's net earnings from self-employment are less than $400 (or $100 for a church employee), the individual does not owe self-employment tax.

Like FICA taxes, the 12.4 percent Social Security tax only applies to earning up to a specified threshold. For 2013, this threshold was $113,700; for 2014, the threshold is $117,000. There is no ceiling for applying the 2.9 percent Medicare tax.

Self-Employment

The tax applies to net earnings from self-employment. This is the taxpayer's gross income for the year from operating a trade or business, minus the deductions allowable to the trade or business, plus the taxpayer's distributive share of income or loss from a partnership.

A person is self-employed if he or she carries on a trade or business as a sole proprietor or independent contractor. A general partner of a partnership that carries on a trade or business is also considered to be self-employed. Self-employment does not include the performance of services by an employee. However, an employee who also carries on a separate business part-time can be self-employed with respect to the business.

Additional Medicare Tax

Effective for 2013 and subsequent years, both employees and self-employed individuals must pay an additional 0.9 percent Medicare tax if their FICA wages or self-employment income exceeds specified thresholds $250,000 for joint filers; $125,000 for married filing separately; and $200,000 for all other taxpayers. This tax is determined on Form 8959.

Code Sec. 162 permits a business to deduct its ordinary and necessary expenses for carrying on the business. However, Code Sec. 274 restricts the deduction of entertainment expenses incurred for business by disallowing expenses of entertainment activities and entertainment facilities. Many expenses are totally disallowed; other amounts, if allowed under Code Sec. 274, are limited to 50 percent of the expense.

The income tax regulations define entertainment as any activity of a type generally considered to be entertainment, amusement, or recreation, such as entertaining at night clubs, lounges, theaters, country clubs, golf and athletic clubs, and sports events, as well as hunting, fishing, vacation and similar trips. There are special rules for the costs of facilities used to entertain the customer, such as a boat or a country club membership. Dues or fees for any social, athletic or sporting club or organization are treated as items involving facilities.

Deduction allowed

Expenses are allowed if the expense was either "directly related" to the active conduct of the taxpayer’s trade or business, or "associated with" the conduct of the trade or business. An activity is "associated with" business if the activity directly precedes or follows a substantial and bona fide business discussion.

Entertainment expenses are not directly related to the business if the activity occurred under circumstances with little or no possibility of engaging in the active conduct of the trade or business. These circumstances include an activity where the distractions are substantial, such as a meeting or discussion at a night club, theater, or sporting event. However, taking a customer to a meal at a restaurant or for drinks at a bar can be considered conducive to a business discussion, if there are no substantial distractions to a discussion.

Substantial business discussion

For expenses that are either directly related to or associated with business, the taxpayer must establish that the he or she conducted a substantial and bona fide business discussion with the customer. The IRS has said that there is no specified length for a discussion to be substantial; all facts and circumstances will be considered. The discussion is substantial if the active conduct of the business was the principal character of the combined business and entertainment activity, but it is not necessary that more time be devoted to business than to entertainment.

For an activity that is associated with, the discussion can directly precede or follow the activity. For a discussion to be directly before or after the activity, it generally must be on the same day as the activity. However, facts and circumstances may allow the entertainment and the discussion to be on consecutive days, for example if the customer is from out of town.

Season tickets

The special rules for facilities do not apply to season tickets. Instead, the taxpayer must allocate the cost of the season tickets to each separate entertainment event. The amount deductible is limited to the face value of the ticket. For a "skybox" or other area leased and used exclusively by the taxpayer and guests, the amount deductible is limited to the face value of non-luxury seats for the area covered by the lease.

Under these rules, it appears that the deductible costs of baseball season tickets must be determined separately for each baseball game. Attendance at a baseball game would involve a "distracting" activity that is not conducive to a business discussion, so the cost of the game would not be directly related to the conduct of the trade or business. However, attendance at a game before or after the conduct of a substantial business discussion could qualify as being associated with the business; in these circumstances, the cost of the event would be deductible.

If the taxpayer provided food to the customer at the baseball game, the cost of the food would be deductible as part of the cost of the event. Some "luxury" seats include food provided by the baseball team to the ticket user. It appears that the taxpayer would have to determine the fair market value of the ticket and the food separately, although the costs of food actually provided to the customer may still be deductible.

In January, the U.S. Tax Court threw a curve ball in many retirement planning strategies. The court held that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer has. The court found that the one-year limitation under Code Sec. 408(d)(3)(B) is not specific to any single IRA owned by an individual but instead applies to all IRAs owned by a taxpayer. The court's decision was a departure from a long-time understanding of IRS rules and publications and, for several weeks after, it was unclear what approach the IRS would take. Now, the IRS has announced that it will follow the court's decision and revise its rules and publications. Everyone contemplating an IRA rollover needs to be aware of this important development.

Rollovers

Individuals have traditionally enjoyed flexibility in moving their retirement savings from one type of retirement plan to another type of plan. A rollover is a transfer of a distribution received from an IRA or other retirement plan by the recipient to another IRA or type of retirement plan owned by the same recipient. A rollover has important tax considerations. The amount distributed is not included in the recipient's income if the distribution is transferred to an eligible arrangement within 60 days after it is received. In certain cases, the 60-day period may be extended by the IRS.

Generally, only the owner of the IRA may roll over an amount. A surviving spouse who receives a distribution after the death of the account owner can make rollovers to the same extent as the account owner could have. There are also special rules for Roth IRAs and other retirement arrangements.

Tax Court case

In Bobrow, TC Memo. 2014-21, a married couple received distributions from more than one IRA in 2008. The couple claimed that they could make more than one tax-free rollover. The Tax Court disagreed.

The court found that Code Sec. 408(d)(3)(B) limits the frequency with which a taxpayer may make a nontaxable rollover contribution. The one-year limitation is not specific to any single IRA a taxpayer has but instead applies to all of the taxpayer's IRAs. If Congress had intended to allow individuals to take nontaxable distributions from multiple IRAs per year, the court found that Code Sec. 408(d)(3)(B) would have been worded differently.

Immediately after the decision, many benefits professionals pointed out that the IRS's rules and publications appeared to be contrary to the court's decision. In particular, many taxpayers noted that IRS Publication 590, Individual Retirement Plans, seemed to say that multiple rollovers were permissible if taken from different accounts.

IRS action

The IRS intends to amend the existing rules and revise Publication 590 to clarify that it will adopt the court's decision. Additionally, many IRA trustees, the IRS explained, may need time to make changes to reflect Bobrow. Therefore, in a relief measure, the IRS will not apply the Tax Court's decision to any rollover that involves an IRA distribution occurring before January 1, 2015.

Trustee-to-trustee transfers

A rollover must be distinguished from a trustee-to-trustee transfer. The Tax Court explained in its opinion that individuals who maintain more than one IRA may make multiple direct rollovers from the trustee of one IRA to the trustee of another IRA without triggering the one-year limit under Code Sec. 408(d)(3)(B). Transferring funds directly between trustees, the court found, does not result in a distribution within the meaning of Code Sec. 408(d)(3)(A). Since the funds are not within the direct control and use of the participant, they are not considered to be rollovers.

Planning

The court's decision and the IRS's action may impact your retirement planning. Keep in mind also that trustee-to-trustee transfers are not affected by the court's decision, which leaves some flexibility intact for planning. If you have any questions about IRA rollovers, please contact our office.

One of the most complex, if not the most complex, provisions of the Patient Protection and Affordable Care Act is the employer shared responsibility requirement (the so-called "employer mandate") and related reporting of health insurance coverage. Since passage of the Affordable Care Act in 2010, the Obama administration has twice delayed the employer mandate and reporting. The employer mandate and reporting will generally apply to applicable large employers (ALE) starting in 2015 and to mid-size employers starting in 2016. Employers with fewer than 50 employees, have never been required, and continue to be exempt, from the employer mandate and reporting.

Employer mandate

The employer mandate under Code Sec. 4980H and employer reporting under Code Sec. 6056 are very connected. Code Sec. 4980H generally provides that an ALE is required to pay a penalty if it fails to offer minimum essential coverage and any full-time employee receives cost-sharing or the Code Sec. 36B premium assistance tax credit. An ALE would also pay a penalty if it offers coverage and any full-time employee receives cost-sharing or the Code Sec. 36B credit.

To receive the Code Sec. 36B credit, an individual must have obtained coverage through an Affordable Care Act Marketplace. The Marketplaces will report the names of individuals who receive the credit to the IRS. ALEs must report the terms and conditions of health care coverage provided to employees (This is known as Code Sec. 6056 reporting). The IRS will use all of this information to determine if the ALE must pay a penalty.

ALEs

Only ALEs are subject to the employer mandate and must report health insurance coverage under Code Sec. 6056. Employers with fewer than 50 employees are never subject to the employer mandate and do not have to report coverage under Code Sec. 6056.

In February, the Obama administration announced important transition rules for the employer mandate that affects Code Sec. 6056 reporting. The Obama administration limited the employer mandate in 2015 to employers with 100 or more full-time employees. ALEs with fewer than 100 full-time employees will be subject to the employer mandate starting in 2016. At all times, employers with fewer than 50 full-time employees are exempt from the employer mandate and Code Sec. 6056 reporting.

Reporting

The IRS has issued regulations describing how ALEs will report health insurance coverage. The IRS has not yet issued any of the forms that ALEs will use but has advised that ALEs generally will report the requisite information to the agency electronically.

ALEs also must provide statements to employees. The statements will describe, among other things, the coverage provided to the employee.

30-Hour Threshold

A fundamental question for the employer mandate and Code Sec. 6056 reporting is who is a full-time employee. Since passage of the Affordable Care Act, the IRS and other federal agencies have issued much guidance to answer this question. The answer is extremely technical and there are many exceptions but generally a full-time employee means, with respect to any month, an employee who is employed on average at least 30 hours of service per week. The IRS has designed two methods for determining full-time employee status: the monthly measurement method and the look-back measurement method. However, special rules apply to seasonal workers, student employees, volunteers, individuals who work on-call, and many more. If you have any questions about who is a full-time employee, please contact our office.

Form W-2 reporting

The Affordable Care Act also requires employers to disclose the aggregate cost of employer-provided health coverage on an employee's Form W-2. This requirement is separate from the employer mandate and Code Sec. 6056 reporting. The reporting of health insurance costs on Form W-2 is for informational purposes only. It does not affect an employee's tax liability or an employer's liability for the employer mandate.

Shortly after the Affordable Care Act was passed, the IRS provided transition relief to small employers that remains in effect today. An employer is not subject the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. Special rules apply to multiemployer plans, health reimbursement arrangements, and many more.

Please contact our office if you have any questions about ALEs, the employer mandate or Code Sec. 6056 reporting.

The IRS's final "repair" regulations became effective January 1, 2014. The regulations provide a massive revision to the rules on capitalizing and deducting costs incurred with respect to tangible property. The regulations apply to amounts paid to acquire, produce or improve tangible property; every business is affected, especially those with significant fixed assets.

The IRS's final "repair" regulations became effective January 1, 2014. The regulations provide a massive revision to the rules on capitalizing and deducting costs incurred with respect to tangible property. The regulations apply to amounts paid to acquire, produce or improve tangible property; every business is affected, especially those with significant fixed assets.

Required and elective changes

There is a lot of work ahead for most taxpayers to comply with the new rules. There are three categories of changes under the regulations:

• Changes that are required and are retroactive, with full adjustments under Code Sec. 481(a), in effect applying the regulations to previous years;
• Required changes with modified or prospective Code Sec. 481(a) adjustment beginning in 2014; and
• Elective changes that do not require any adjustments under Code Sec. 481.

Required changes with full adjustments include unit of property changes, deducting repairs (including the routine maintenance safe harbor), deducting dealer expenses that facilitate the sale of property, the optional method for rotable spare parts, capitalizing improvements and capitalizing certain acquisition or production costs. Elective changes can include capitalizing repair and maintenance costs of they are capitalized for financial accounting purposes.

Rev. Proc. 2014-16

The IRS issued Rev. Proc. 2014-16, granting automatic consent to taxpayers to change their accounting methods to comply with the final regulations. Rev. Proc. 2014-16 applies to all the significant provisions in the final regulations, such as repairs and improvements; materials and supplies, including rotable and temporary spare parts; and costs that have to be capitalized as improvements. Rev. Proc. 2014-16 supersedes Rev. Proc. 2012-19, which applied to changes made under the temporary and proposed repair regulations issued at the end of 2011.

There are 14 automatic method changes provided by Rev. Proc. 2014-16 for the repair regulations. Taxpayers may file for automatic consent on a single Form 3115, even if they are making changes in more than area. The normal scope limitations on changing accounting methods do not apply to a taxpayer making one or more changes for any tax year beginning before January 1, 2015. Scope changes would normally apply if the taxpayer is under examination, is in the final year of a trade or business, or is changing the same accounting method it changed in the previous five years.

Filing deadlines

For past years, taxpayers can apply the 2011 proposed and temporary (TD 9564) regulations or the 2013 final regulations to either 2012 or 2013, and can do this on a section-by-section basis. Taxpayers that decide to apply the final or temporary regulations to 2013 must file for an automatic change of accounting method (Form 3115) by September 15, 2014. Taxpayers applying the regulations to 2014 must file for an automatic change by September 15, 2015. (Both dates apply to calendar-year taxpayers.) The government has indicated it is unlikely to postpone the effective date of the regulations.

Dispositions

Rev. Proc. 2014-16 does not apply to dispositions of tangible property. The government issued reproposed regulations in this area (NPRM REG-110732-13). Although these regulations may not be finalized until later in 2014, the IRS expects to issue Rev. Proc. 2014-17 before then to allow taxpayers to make automatic accounting method changes under the proposed regulations. The procedure will provide some relief by allowing taxpayers to revoke general asset account elections that they made under the temporary regulations. No comments were submitted on these proposed regulations; it is likely the final regulations will not have any significant changes.