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The Senate has approved a bipartisan IRS reform bill, which now heads to President Trump’s desk. Trump is expected to sign the bill into law.

The reworked Taxpayer First Act ( HR 3151) cleared the Senate on the evening of June 13. The revamped measure had been approved unanimously in the House on June 10.

"After years of good-faith, bipartisan work, our IRS reforms are finally going to become law," House Ways and Means Committee Chairman Richard Neal, D-Mass., and ranking member Kevin Brady, R-Tex., said in a joint statement. "In this historic legislation, we focused on putting taxpayers first."

Likewise, Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, praised the passage of the bipartisan, bicameral IRS reform bill. "It’s a big first step toward strengthening taxpayer protections and turning the IRS into the customer service organization it ought to be," Grassley said in a statement. "I look forward to President Trump signing it into law so the IRS can begin implementing long overdue reforms that will put taxpayers first," he added.

Reworked Bill

The reworked IRS reform bill, originally introduced in the last Congress, was revised earlier in June after the House passed a prior version in April. However, the original House-approved Taxpayer First bill (HR 1957) was deemed doomed in the Senate by May because of recent controversy surrounding the IRS’s Free File program. Thus, the provision codifying the Free File program was stripped from the original bill; the measure was reintroduced as HR 3151. It then quickly cleared each chamber.

Service Improvements

Generally, the Taxpayer First Act aims to reform the IRS for the first time in 20 years to better meet the needs of taxpayers. It requires the IRS to develop a comprehensive customer service strategy, as well as a plan to redesign its structure, modernize its technology, and enhance its cyber security. In addition, the new law will:

waive the application fee for an offer in compromise (OIC) by a low-income taxpayer;
clarify information available about low-income taxpayer clinics (LITCs);
codify the Volunteer Income Tax Assistance (VITA) Program;
require notice regarding the closure of taxpayer assistance centers (TACs);
improve the IRS whistleblower program; and
modify the private debt collection program.

Identity Protection

The legislation includes a number of provisions to help protect taxpayers from tax ID theft and improve taxpayer interaction with the IRS should they become a victim. For example, the IRS must provide a single point of contact for victims of identity theft, notification of suspected identity theft, and guidelines for stolen identity refund fraud cases.

The IRS is required to expand its current program that allows victims of tax ID theft to obtain a personalized PIN. Any individual must be allowed to request an identity protection personal identification number (IP PIN) to confirm a taxpayer’s identity on tax returns.

Electronic Filing

The IRS reform bill directly impacts taxpayers and other persons by reducing the threshold for filing electronically from 250 or more returns during the year. The threshold is 100 or more returns for 2021, and 10 or more return after 2021. The IRS can waive the e-file requirement for tax return preparers in areas with limited internet access.

COMMENT

The e-filing threshold for a partnership with 100 or fewer partners remains unchanged before 2022. The threshold is 150 returns for 2019, 100 returns for 2020, and 50 returns for 2021.

E-filing requirements are also extended to all tax-exempt organizations that file returns or statements, regardless of amount of assets, gross receipts, or number of returns to be filed. In addition, the IRS is directed to develop an internet portal to allow taxpayers to file series Form 1099, similar to the portal used to file series Form W-2 with the Social Security Administration.

Other Electronic Services

To help increase the use of electronic services, the IRS must publish within six months uniform standards for accepting electronic signatures on requests for disclosure of taxpayer information (Forms 2848, 4506-T, and 8821). It must also limit the redisclosure of return information by a designee to only those expressly consented to by the taxpayer.

The new law increases the penalty for improper disclosure or use of information by return preparers. It also puts new limits on access to returns and return information by non-IRS employees.

Overall, the IRS must develop procedures to authenticate users of its suite of electronic services, to prevent tax refund fraud. Included in these services, the IRS must develop an automated version of its Income Verification Express Service (IVES) for third-parties.

Planning Note: The legislation also allows the IRS to accept credit and debit card payments for the payment of taxes directly, as opposed to through a third party. In addition, the IRS must establish procedures for taxpayers to report misdirected deposits of refunds.

Other Changes

Additional changes made by the Taxpayer First Act include:

clarifying procedures for equitable relief from joint liability;
establish new safeguards on the seizure of funds believed to be structured to avoid the $10,000 financial reporting requirement; and
modify procedures for the issuance of summons and notice of third party contacts by the IRS.

To help pay for these changes, the minimum penalty for failure to file returns is increased after 2019 to the lesser of $330 (indexed for inflation) or 100 percent of the amount required to be shown on the return.

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Taxpayers may rely on two new pieces of IRS guidance for applying the Code Sec. 199A deduction to cooperatives and their patrons:

Proposed regulations provide detailed rules for coop patrons and specified cooperatives to calculate the deduction.
A proposed revenue procedure provides three methods for specified cooperatives to calculate W-2 wages.

199A Deduction for Cooperatives and Patrons

The 199A deduction, also known as the pass-through deduction or the QBI deduction, generally allows individuals, estates and trusts to deduct up to 20 percent of their qualified business income (QBI) from sole proprietorships and pass-through entities. Since most coops are C corporations, they cannot claim the deduction. However, their members may receive patronage dividends that are included in QBI.

Despite these general rules, certain agricultural or horticultural coops, known as "specified cooperatives," can claim their own version of the a deduction under Code Sec. 199A(g). A specified coop can also pass through any portion of this deduction by making qualified payments to its patrons. The patrons must reduce their own QBI accordingly.

For specified coops, the 199A(g) deduction retains many of the rules that governed the Code Sec. 199 domestic production activities deduction before it was repealed at the end of 2017. For example, the 199A(g) deduction is based on the specified coop’s domestic production gross receipts (DPGR) and qualified production activities income (QPAI), rather than its QBI.

Sec. 199A Deduction for Coop Patrons in General

Under the proposed regulations, any coop patron’s QBI may include patronage dividends and an exempt coop’s non-patronage dividends that:

are related to the patron’s trade or business,
are qualified items of income, gain, deduction or loss at the coop level,
are not from a specified service trade or business (SSTB), and
are properly reported to the patron.

The proposed regulations provide detailed rules for how coops must report the required information to their patrons. However, the coop does not report any W-2 wages or unadjusted basis in qualified property immediately after acquisition (UBIA). The W-2/UBIA limit that can reduce QBI for higher-income taxpayers is calculated only at the patron level.

Sec. 199A(g) Deduction for Specified Cooperatives

Code Sec. 199A(g) allows specified coops to claim a 199A deduction and pass through any portion of it by making qualified payments to its members. However, as mentioned above, a specified coop’s deduction is largely based on the pre-2018 domestic production activities deduction (DPAD). This means that the 199A(g) deduction for specified coops is effectively separate from the general Code Sec. 199A(a) deduction for other taxpayers.

Since specified coop patrons might be able to claim both the general 199A(a) deduction and the passed-through portion of the coop’s 199A(a) deduction, they must reduce their 199A(a)deduction by nine percent of QBI (or if less, 50 percent of W-2 wages) that is allocable to the qualified payments from the specified coop.

The proposed regulations offer a safe harbor that patrons can use to calculate this reduction. The patron allocates aggregate business expenses and W-2 wages between qualified payments and other gross receipts by ratably apportioning them based on the ratio of qualified payments to total gross receipts in QBI.

The proposed regulations also define several terms that are relevant to the 199A(g) deduction for specified coops, including:

Patron,
Specified cooperative,
Agricultural or horticultural products (though the IRS is also considering broader definitions), and
In whole or significant part.

Sec. 199A(g) Deduction and DPAD

The proposed regulations also provide four steps to determine the amount of a specified coop’s 199A(g) deduction. A specified coop that is not tax-exempt must:

separate patronage and non-patronage gross receipts and related deductions;
identify patronage gross receipts that qualify as DPGR,
use the patronage DPGR from step (3) to calculate QPAI, and
calculate the 199A(g) deduction, which is generally nine percent of the lesser of QPAI from step (4), or taxable income

These last three steps are virtually identical to the pre-2018 DPAD rules.

A tax-exempt specified coop calculates two separate 199A(g) deductions: one based on gross receipts and related deductions from patronage sources, and one based on those items from non-patronage sources.

The proposed regulations also apply DPAD-types rules to:

determine the coop’s DPGR,
reduce a specified coop’s 199A(g) deduction to reflect oil-related QPAI, and
pass through the deduction to patrons.

In addition, the proposed regulations provide special rules for partnerships and expanded affiliated groups (EAGs).

Specified Coops and W-2 Wages

Although the proposed regulations treat the 199A(g) deduction as largely independent from the general 199A(a) deduction, both deductions generally use the same rules for W-2 wages. However, under the proposed regulations, W-2 wages for the 199A(g) deduction cannot include wages paid with respect to employment in Puerto Rico.

As mentioned above, a wages/UBIA limit may reduce the 199A deduction for higher-income taxpayers. A proposed revenue procedure provides three methods for calculating W-2 wages for purposes of the 199A(g) deduction:

unmodified Box method
modified Box 1 method
tracking wages method.

These methods are largely identical to the methods provided in Rev. Proc. 2019-11, but are intended to better reflect changes that may be made in the underlying Form W-2, Wage and Tax Statement.

Effective Dates for 199A Proposed Regulations and Revenue Procedure

The regulations are proposed to apply to tax years beginning after the date they are published as final. However, taxpayers may apply them in their entirely before that date.

The notice of the proposed revenue procedure is effective on June 18, 2019. Specified cooperatives may rely on the proposed procedure before it is published in its final form.

IRS Invites Comments on Proposed Rules for Sec. 199A

The IRS requests comments on the proposed regulations and the proposed revenue procedure. In particular, the IRS invites comments on the following elements:

A coop’s reporting of W-2 wages and UBIA,
The safe harbor for coop patrons,
Definitions,
A specified coop’s separation of patronage and non-patronage income,
DPGR treatment of minor assembly and contract work, and
W-2 wages and Puerto Rico.

Comments are due by August 19, 2019. They may be mailed or hand-delivered to the IRS, or submitted electronically via the Federal eRulemaking Portal at www.regulations.gov. Comments on the proposed regs should reference "IRS REG-118425-18" and comments on the proposed revenue procedure should reference "Notice 2019-27".

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The IRS has issued final regulations that require taxpayers to reduce the amount any charitable contribution deduction by the amount of any state and local tax (SALT) credit they receive or expect to receive in return. The rules are aimed at preventing taxpayers from getting around the SALT deduction limits. A safe harbor has also been provided to certain individuals to treat any disallowed charitable contribution deduction under this rule as a deductible payment of taxes under Code Sec. 164. The final regulations and the safe harbor apply to charitable contribution payments made after August 27, 2018.

SALT Limit

An individual’s itemized deduction of SALT taxes is limited to $10,000 ($5,000 if married filing separately) for tax years beginning after 2017. Some states and local governments have adopted laws that allowed individuals to receive a state tax credit for contributions to certain charitable funds. These laws are aimed at getting around the SALT deduction limit by creating a charitable deduction for federal income tax purposes. Regardless of state and local law, however, federal law controls when determining charitable deductions for federal income tax purposes.

Return Benefit

The final regulations generally adopt the rule in proposal regulations ( NPRM REG-112176-18) that the receipt of a SALT credit for a charitable contribution is the receipt of a return benefit (quid pro quo benefit). If a taxpayer makes a payment or transfers property to Code Sec. 170(c) entity, he or she must reduce any charitable contribution deduction for federal income tax purposes if he or she receives or expects to receive a SALT credit in return. A taxpayer is generally is not required to reduce the charitable deduction on account of its receipt of state or local tax deductions. However, the taxpayer must reduce its charitable deduction if it receives or expects to receive state or local tax deductions in excess of the taxpayer’s payment or the fair market value of property transferred.

De Minimis Exception

The final regulations retain the de minimis exception that a taxpayer’s charitable deduction is not reduced if the SALT credits received as a return benefit do not exceed 15 percent of the taxpayer’s charitable payment. The 15-percent exception applies only if the sum of the taxpayer SALT credit received or excepted to receive does not exceed 15 percent of the taxpayer’s payment or of the fair market value of the property transferred.

Safe Harbor

The IRS has also issued Notice 2019-12 providing a safe harbor for certain individuals if any portion of a charitable contribution deduction disallowed due to the receipt of a SALT credit. Under the safe harbor, any disallowed portion of the charitable deduction may be treated as the payment of SALT taxes for the purposes of deducting taxes under Code Sec. 164.

Eligible taxpayers can use the safe harbor to determine their SALT deduction on their tax-year 2018 return. Those who have already filed may be able to claim a greater SALT deduction by filing an amended return if they have not already claimed the $10,000 maximum amount ($5,000 if married filing separately).

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Final regulations address the global intangible low-taxed income (GILTI) provisions of Code Sec. 951A. The final regulations retain the basic approach and structure of the proposed regulations published on October 10, 2018. The final regulations address open questions and comments received on the proposed regulations.

Final regulations on the foreign tax credit also adopt proposed regulations published December 7, 2018. These rules were issued to ensure that the applicability dates coincide with the applicability dates of the Code sections to which they relate. The final foreign tax credit regulations also retain the basic structure and approach of the proposed regulations.

Also, a number of provisions were substantially revised.

Domestic Partnerships

The final regulations treat a domestic partnership as an entity for purposes of determining whether a U.S. person is a U.S. shareholder and whether a foreign corporation is a controlled foreign corporation (CFC). But the final rules treat a domestic partnership as an aggregate for purposes of determining whether and to what extent a partner of a domestic partnership has a GILTI inclusion.

Transfers During Qualified Period

The final regulations allow taxpayers to make an election that eliminates disqualified basis in property, by reducing a commensurate amount of adjusted basis in the property for all purposes of the Code.

Specified Tangible Property

A CFC may elect to use its non-ADS depreciation method for property acquired before enactment of the GILTI rules. A special rule requires depreciation of the salvage value: the portion of the basis in the property that would not be fully depreciated under the non-ADS depreciation method.

Anti-Abuse Rule

Under a "per se" rule in the proposed regulations, property was deemed to be held for the principal purpose of reducing a GILTI inclusion if held by the CFC for less than a 12-month period. The final regulations convert the per se rule to a rebuttable presumption. Under a second presumption, property held for more than 36 months is not subject to the rule. A safe harbor applies for certain transfers.

Foreign Tax Credit

The foreign tax credit proposed regulations contained a rule for determining the adjusted basis of the stock of the foreign corporation for purposes of allocating expenses to stock of certain foreign corporations. The final regulations provide that a taxpayer should not have an adjusted basis below zero in stock of a foreign corporation. A taxpayer’s adjusted basis may be reduced below zero as a result of an adjustment for earnings and profits deficits, as long as the adjustment for earnings and profits increased the adjusted basis of the foreign corporation above zero.

Applicability of Final Regs

The final GILTI regulations generally apply to tax years of foreign corporations beginning after December 31, 2017, and to tax years of U.S. shareholders in which or with which such tax years of foreign corporations end.

Proposed Regulations

The Treasury Department and the IRS also issued proposed regulations on the treatment of domestic partnerships for determining amounts included in their partners' gross incomes under Code Sec. 951 with respect to CFCs owned by the partnership, and the GILTI treatment of gross income that is subject to a high rate of foreign tax under Code Sec. 951A.

The proposed regulations would affect U.S. persons that own stock of foreign corporations through domestic partnerships and U.S. shareholders of foreign corporations. The Treasury Department and the IRS request timely comments on all aspects of the proposed rules. A public hearing will be scheduled if requested in writing by any person that timely submits written comments.

Aggregate Treatment Adopted

To be consistent with the treatment of domestic partnerships under Code Sec. 951A, Treasury and the IRS determined that a domestic partnership should also generally be treated as an aggregate of its partners in determining stock owned under Code Sec. 958(a) for Code Sec. 951 purposes.

Expansion to Exclude Other High-Taxed Income

Treasury and the IRS also determined that the GILTI high tax exclusion should be expanded (on an elective basis) to include certain high-taxed income even if that income would not otherwise be foreign base company income (FBCI) or insurance income. Further, taxpayers should be allowed to elect to apply the Code Sec. 954(b)(4) exception (the "GILTI high tax exclusion") for certain classes of income that are subject to high foreign taxes.

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Newly issued temporary regulations limit the application of the Code Sec. 245A participation dividends received deduction (the participation DRD) and the Code Sec. 954(c)(6) exception in certain situations that present an opportunity for tax avoidance. The temporary regulations also provide related information reporting rules under Code Sec. 6038.

Participation Exemption Regime

The transition to the participation exemption system introduced by the Tax Cuts and Jobs Act, P.L. 115-97 (the Act) is effected through several interlocking provisions – Code Secs. 245A, 951A, and 965. All three provisions have different effective dates so there are periods in which some but not all of them apply. The participation exemption system operates alongside the subpart F regime.

Code Sec. 245A generally allows a domestic corporation a 100-percent dividends received deduction (a participation DRD) for the foreign-source portion of a dividend received after December 31, 2017, from a specified 10 percent-owned foreign corporation (an SFC). Generally, only earnings that are not taxed under the subpart F or the global intangible low-taxed income (GILTI) regime can, upon distribution, give rise to a dividend eligible for the participation DRD. Distribution of earnings and profits that is taxed under the subpart F or GILTI regime is a distribution of previously taxed earnings and profits (PTEP) that is not treated as a dividend and cannot qualify for the participation DRD. The participation DRD applies to distributions made after December 31, 2017.

The participation DRD does not apply to untaxed earnings of U.S. shareholders as of December 31, 2017. Instead, such earnings are subject to a transition tax under Code Sec. 965. For fiscal year CFCs, there is a gap period during which certain of their earnings may escape taxation.

Code Sec. 951A (the GILTI regime) taxes a U.S. shareholder on its global intangible low-taxed income, or GILTI, with respect to its CFCs at a reduced rate. The GILTI regime applies in the first tax year of a CFC beginning after December 31, 2017.

Code Sec. 954 generally provides that a dividend received by a CFC is included in the CFC’s foreign personal holding company income (FPHCI). Under Code Sec. 954(c)(6), however, a dividend received by a CFC from a related CFC is not included in the CFC’s FPHCI if certain requirements are satisfied (the section 954(c)(6) exception).

Scope of the Temporary Regulations

The temporary regulations limit the availability of the participation DRD and the section 954(c)(6) exception in specific and narrow cases where the deduction or exception, respectively, effectively eliminates subpart F income or GILTI from the U.S. tax system. Specifically, the temporary regulations address transactions that have the effect of avoiding tax under Code Sec. 965, 951A, or 951by inappropriately converting income that should have been subject to U.S. tax into nontaxed income. The temporary regulations also include information reporting rules under Code Sec. 6038 to facilitate administration of certain rules in the temporary regulations. The temporary regulations do not include general rules relating to dividends eligible for the participation DRD since those rules will be included in separate guidance.

Overview of the Temporary Regulations

Code Secs. 245A, 951A, and 965 generally act to tax foreign source income equivalently across taxpayers and sources so long as a U.S. shareholder owns the same amount of stock of a calendar year CFC throughout the CFC’s entire tax year. However, deviations from this condition potentially allow taxpayers to avoid tax by claiming a participation DRD in situations where otherwise identical income would be subject to U.S. tax. The following two situations may present such an opportunity for tax avoidance: (1) a U.S. corporation is the shareholder of a fiscal year CFC during 2018, or (2) a CFC pays a dividend and experiences a direct or indirect change in ownership during a tax year. The temporary regulations limit the application of the participation DRD in these situations.

With respect to the first situation, described above, as a result of a gap in the effective dates of these related international tax provisions, the difference between calendar year and fiscal year CFCs is significant and presents the potential for substantial tax avoidance when utilized to artificially generate earnings and profits in non-ordinary course transactions between related parties.

The temporary regulations refer to the portion of a dividend attributable to earnings and profits arising from such a transaction during this period as an "extraordinary disposition amount." An extraordinary disposition amount consists of certain earnings and profits resulting from transactions between related parties during the disqualified period. Although the period during which extraordinary dispositions may have occurred has passed, the regulations will potentially apply to any distributions of the associated earnings and profits after 2017.

In the second situation, described above, the participation DRD could facilitate the avoidance of the subpart F and GILTI regimes by allowing a U.S. shareholder to transfer, before the end of a CFC’s tax year, stock of the CFC to a new shareholder who will not be taxed on the CFC’s subpart F income or tested income.

The earnings and profits representing the portion of a dividend of a CFC attributable to subpart F income or tested income that, absent a transfer of the CFC stock pursuant to an extraordinary reduction, would have been subject to the subpart F or GILTI regimes are referred to as an "extraordinary reduction amount" in the temporary regulations. An extraordinary reduction amount consists of certain earnings and profits generated during a CFC’s tax year beginning after 2017 in which a domestic corporate U.S. shareholder reduces its ownership of the CFC by certain threshold amounts (e.g., a decrease in ownership of more than 10 percent). For this purpose, "certain earnings and profits" refers to income generally subject to inclusion under the subpart F or GILTI regimes.

Results similar to the ones described in the context of extraordinary disposition amounts and extraordinary reduction amounts can be achieved using the exemption from subpart F income under Code Sec. 954(c)(6) and lower-tier CFC dividends to upper-tier CFCs. Thus, the temporary regulations limit the application of the section 954(c)(6) exception in order to prevent similar results in circumstances in which a lower-tier CFC pays a dividend to another CFC, instead of directly to a U.S. shareholder.

Operation of the Temporary Rules

The temporary regulations do not permit the participation DRD for the portions of dividends made by CFCs that are attributable to ineligible amounts, which comprise extraordinary reduction amounts and 50 percent of any extraordinary disposition amounts.

To accomplish this, the temporary regulations disallow a deduction for transactions that have the effect of avoiding tax under Code Sec. 965, 951A, or 951. The extraordinary disposition rules accomplish this by denying the participation DRD for a narrowly and objectively defined class of earnings and profits generated by transactions undertaken in the disqualified period in circumstances that raise abuse concerns.

The extraordinary reduction rules accomplish this by denying the participation DRD for certain earnings distributed in the same year as reductions in ownership of CFC stock by a controlling Code Sec. 245A shareholder. The temporary regulations contain similar rules with respect to the section 954(c)(6) exception.

Information Reporting under Code Sec. 6038

Ineligible amounts, tiered extraordinary disposition amounts, and tiered extraordinary reduction amounts must be reported on the appropriate information reporting form in accordance with Code Sec. 6038. A transition rule mandates that taxpayers report the required information on the first return filed following the issuance of revised forms, instructions, or other guidance with respect to reporting such information. The transition rule also requires a corporation to report the information with respect to a predecessor corporation.

Applicability Dates

The rules in the temporary regulations relating to eligibility of distributions for the participation DRD apply to distributions occurring after December 31, 2017. The rules in the temporary regulations relating to the eligibility of dividends for the section 954(c)(6) exception also apply to distributions occurring after December 31, 2017, subject to a transition rule.

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Final regulations reduce the Code Sec. 956 amount for certain domestic corporations that own stock in controlled foreign corporations (CFCs). The regulations are intended to ensure that Code Sec. 956 is applied consistently with the participation exemption system under Code Sec. 245A.

Subpart F Rules

Under the subpart F rules, U.S. shareholders of a CFC are currently taxed on their pro rata shares of the CFC’s subpart F income without regard to whether the income is distributed to the shareholders ( Code Sec. 951(a)). Subpart F income generally includes passive income and other income that is readily movable from one taxing jurisdiction to another ( Code Sec. 952). A U.S. shareholder is a U.S. person (e.g., individual citizen, domestic corporation, etc.) that owns or is treated as owning 10 percent or more of the voting power or value of a foreign corporation ( Code Sec. 951(b)).

The U.S. shareholders of a CFC are taxed on their pro rata share of the CFC’s earnings that are invested in U.S. property during the tax year and not distributed or otherwise taxed (the "section 956 amount"). U.S. shareholders are effectively taxed on foreign source earnings brought back into the United States, on the theory that the returned earnings are substantially the same as a dividend. This rule is intended to create symmetry by taxing effective repatriations of earnings in the same manner as actual repatriations of earnings are taxed.

Participation DRD

The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) added Code Sec. 245A, which allows a 100-percent participation exemption deduction—a participation dividends-received deduction (DRD)—for the foreign-source portion of dividends received from a specified 10-percent owned foreign corporation by a domestic corporation that is a U.S. shareholder of the foreign corporation. A specified 10-percent owned foreign corporation is any foreign corporation (other than certain passive foreign investment companies) in which a domestic corporation is a U.S. shareholder.

However, a domestic corporation cannot claim a participation DRD for a dividend on any share of the foreign corporation’s stock:

that the domestic corporation holds for 365 days or less during the 731-day period that begins on the date that is 365 days before the date when the share becomes ex-dividend with respect to the dividend; or
to the extent the domestic corporation is obligated to make related payments on positions in substantially similar or related property ( Code Sec. 246(c)).

Under the TCJA, a Code Sec. 956 inclusion is not eligible for the DRD because it is not a dividend.

Tax Treatment Symmetry

The participation exemption system has made the current broad application of Code Sec. 956 to corporate U.S. shareholders inconsistent with the Code section’s purposes and the scope of the transactions it is meant to address. In response, the regulations:

exclude corporate U.S. shareholders from the application of Code Sec. 956 to the extent necessary to maintain symmetry between the taxation of actual repatriations and the taxation of effective repatriations, so that neither an actual dividend to a corporate U.S. shareholder nor the shareholder’s Code Sec. 956 amount will result in additional U.S. tax; and
reduce the Code Sec. 956 amount otherwise determined regarding a U.S. shareholder for a CFC’s tax year ( "tentative Section 956 amount") to the extent that the shareholder would be allowed a participation DRD had the shareholder received a distribution from the CFC equal to the tentative Code Sec. 956 amount (the "hypothetical distribution").

The regulations include an ordering rule to address the previously taxed earnings and profits (PTEP) rules in Code Sec. 959. Under the ordering rule, the hypothetical distribution is treated as:

first attributable to earnings and profits (E&P) described in Code Sec. 959(c)(2) (amounts attributable to subpart F inclusions); and
then attributable to E&P described in Code Sec. 959(c)(3) (all other E&P).

The regulations also address the tentative section 956 amount with respect to domestic partnerships. The regulations provide that the tentative section 956 amount with respect to a domestic partnership is reduced to the extent that one or more of the domestic corporate partners would be entitled to a participation DRD if:

the partnership received the amount as a distribution; and
the remaining amount of the inclusion under Code Sec. 956 is allocated to the partners in the same proportion as net income would result to partners upon a hypothetical distribution.

Applicability Date

The regulations will apply to tax years of CFCs beginning on or after July 22, 2019, and to tax years of U.S. shareholders in which or with which such tax years of CFCs end.

The regulations may be applied to tax years of CFCs beginning after December 31, 2017, and to tax years of U.S. shareholders in which or with which such tax years of CFCs end, provided the rules are applied consistently by the taxpayer and U.S. related persons.

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Final rules allow employers to use health reimbursement arrangements (HRAs) to reimburse employees for the purchase individual insurance coverage, including coverage on an Affordable Care Act Exchange. The rules also allow "excepted benefit HRAs," which would not have to be integrated with any coverage. The rules generally apply for plan years starting on or after January 1, 2020.

HRA Use Expanded

The final rules expand the use of HRAs by:

allowing integration of an HRA with individual health insurance coverage and thereby satisfy the Affordable Care Act’s annual dollar limit and preventive care cost sharing requirements;
creating "excepted benefit HRAs" limited in amount and to the types of coverage for which premiums may be reimbursed;
providing new premium tax credit eligibility rules for individuals who are offered an HRA integrated with individual health insurance coverage;
clarifying that individual health insurance coverage, the premiums of which are reimbursed by an HRA or qualified small employer HRA (QSEHRA), does not become part of an ERISA plan when certain conditions are met; and
adding new special enrollment for the individual market for individuals who gain access to HRAs integrated with individual health insurance coverage or who are provided a QSEHRA.

The final regulations add conditions on individual coverage HRAs intended to prevent a negative impact on the individual market.

Integration With Individual Coverage

Almost any employer can satisfy Affordable Care Act reimbursement requirements by having employees buy their own individual coverage. An employers may integrate an HRA with individual health coverage only if:

participants and dependents are actually enrolled in individual health insurance coverage (though not coverage that consists solely of excepted benefits) for each month they are covered by the HRA;
coverage is offered to a class of employees to whom a traditional group health plan is not offered;
coverage is offered on the same terms in amount and conditions to all employees within each class (though certain variations based on age are allowed);
an opt out option is provided for individuals who prefer Affordable Care Act Exchange coverage, but would not be eligible for the premium tax credit if enrolled in an employer health plan such as an HRA; and
substantiation and notice requirements are met.

To guard against adverse selection, the final rules add a minimum class size requirement that will apply to certain classes of employees in certain instances. Classes of employees may include full-time employees; part-time employees; seasonal employees; employees who are included in a unit of employees covered by a collective bargaining agreement in which the plan sponsor participates; employees who have not satisfied a waiting period for coverage; employees who have not attained age 25 prior to the beginning of the plan year; nonresident aliens with no U.S.-based income; employees whose primary site of employment is in the same rating area; and groups combining any of these classes of employee.

Excepted Benefit HRAs

An employer that wants to offer an HRA that is not integrated with non-HRA group coverage, Medicare, TRICARE, or individual health insurance coverage may do so as an excepted benefit. As excepted benefits, these HRAs would not be subject to the employer group plan rules, including the market reforms under the Affordable Care Act. An excepted benefit HRA:

must not be an integral part of the plan;
must provide benefits that are limited in amount ($1,800 per year, adjusted for inflation after 2020);
cannot provide reimbursement for premiums for certain health insurance coverage; and
must be made available under the same terms to all similarly situated individuals.

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Final regulations provide requirements that a person must satisfy to become and remain a certified professional employer organization (CPEO), as well as the CPEO’s federal employment tax liabilities and other obligations.

CPEOs

Some employers contract with PEOs to complete and file tax returns, pay and withhold employment taxes on wages paid to employees, or provide other employee benefits. Code Sec. 3511 and Code Sec. 7705 provide certification requirements for PEOs, and codify the employment tax consequences of being CPEO.

For federal employment tax purposes, a CPEO is generally treated as the employer of any individual who is:

performing services for a customer of the CPEO; and
covered by a contract between the CPEO and the customer.

Employer treatment applies only to remuneration paid to the covered employee by the CPEO. If an individual covered by a CPEO contract performs services for a customer at a work site that meets certain coverage requirements, only the CPEO is treated as the employer for federal employment tax purposes for remuneration its pays to that work site employee.

A person must apply to the IRS to become a CPEO, and the IRS must certify that the person meets certain requirements. A CPEO must:

meet tax status and background requirements;
meet bond, financial review, and quarterly reporting requirements; and
notify the IRS of any change that materially affects the continuing accuracy of information it has provided to the IRS.

The Treasury Secretary can suspend or revoke CPEO certification if the person does not satisfy certain agreements or applicable requirements.

Final Regs

The final regulations adopt and amend proposed regulations published in 2016 ( NPRM REG-127561-15), and reflect and address certain interim guidance ( Rev. Proc. 2016-33, 2016-25 I.R.B. 1034; Notice 2016-49, 2016-34 I.R.B. 265; Rev. Proc. 2017-14, 2017-3 I.R.B. 426). In finalizing the regulations, the IRS reviewed and analyzed a variety of issues affecting CPEOs, including:

maintaining a separate annual FICA tax and FUTA tax wage base and withholding threshold for each customer for which a covered employee performs services during a calendar year;
the treatment of tax credits, including the addition of the employer credit for paid family and medical leave and certain employee retention credits to the list of specified credits that apply to the CPEO customer and not the CPEO;
the treatment of self-employed individuals under the CPEO rules;
CPEO reporting to the IRS, such as reporting the commencement or termination of CPEO contracts and service agreements;
the meaning of key terms such as "responsible individuals" (certain owners, officers, and other persons of the CPEO), "work site," and "work site employee";
the CPEO application process, including when an applicant may reapply for certification;
CPEO "suitability" requirements, including domestic disregarded entity and sole proprietorship certification, fingerprint cards and background checks, and the waiver of confidentiality and privilege;
working capital requirements, including a limited exception to the positive working capital requirement;
bond requirements, including a provision that the IRS Commissioner may provide exceptions to the rule that a CPEO must meet the bond requirements without posting collateral; and
maintaining employee records.

Applicability

The final regulations are effective on May 28, 2019.

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Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

A. In order to accurately calculate the gain or loss realized on assets you sell, it is important that you keep track of the bases of all of your assets, including stock. However, when it comes to stock--especially lots of stock bought and sold at different times-- it may seem a bit tricky. Fortunately, the rules related to determining the basis of stock sold make the task more manageable.

In general, the basis of stock sold will be determined under one of the following methods: first-in, first-out (FIFO) or specific identification. However, securities held in mutual funds and received as a result as a corporate reorganization may be handled differently.

First-in, first-out (FIFO)

In general, if you buy identical shares of stock at different prices or on different dates and then you sell only part of the stock, your basis and holding period of the shares sold are determined on a first-in first-out (FIFO) basis, based upon the acquisition date of the securities. However, if specific shares sold are adequately identified by the delivery of certificates, by a broker having custody of them, or by a trustee or executor, the basis will be determined by the specific identification method (see below).

The acquisition date for purpose of applying the FIFO method follows the rules for holding period. For example, the acquisition date of securities received by gift takes into account the donor's holding period, and securities received in an estate distribution includes the holding period of the executor or trustee.

Margin accounts. If your shares are held in a margin account, they are considered sold in the order in which they were purchased, rather than the order in which they were placed in the account.

Stock splits or dividends. If you receive shares as a result of a stock split or tax-free stock dividend, they must be allocated among the original lots to which they relate, with the basis of the original shares allocated between the new shares and the old shares based on their fair market values.

Stock rights. If you acquire additional shares by exercising stock rights, your new shares are treated as a separate lot and your basis in them is equal to the amount paid plus the basis of the stock rights.

Multiple contracts. Shares acquired on the same day under several contracts entered into at different times to purchase stock when issued are deemed acquired for the FIFO rule in the same order as the contracts were entered into.

Specific identification

When you are able to identify the securities to be sold, and do so, FIFO will not apply to your basis allocation. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee (usually by CUSP number). Thus, if you have records showing the cost and holding period of securities represented by separate certificates, you can often better control the amount of gain or loss realized by selecting the certificates to be transferred. But be careful: delivery of the wrong certificates is binding, despite your intention to transfer securities from a different lot.

Example: You hold 1000 shares of IBM. You purchased 400 shares (actually 100 shares that split twice) in 2000 for $8,000 (net brokerage commissions). You bought 400 more shares in 2005 at $18,000; and 200 more in early 2007 for $16,000. You want to sell 300 shares now when its value is down to $50 per share. If you do not specify to your broker before the trade to sell the 200 shares purchased in 2007 and 100 shares from the 2005 lot, you will realize $9,000 in long term capital gains instead of $500 in long-term capital gain and a $6,000 short-term capital loss.

Mutual funds

If you own shares in a mutual fund, you may elect to determine the basis of stock sold or transferred from your accounts by using one of two average cost methods: either the double-category method or the single-category method. An election to use one of the average basis methods for mutual fund shares must be made on either a timely filed income tax return or the first late return for the first tax year to which the election is to apply. Different methods may be used for accounts in different regulated investment companies.

Securities received in reorganization

An exception to the FIFO rule applies to securities received in reorganization (such as a merger) and not adequately identified. These securities are given an average basis, computed by dividing the aggregate basis of the securities surrendered in the exchange by the number of shares received in the exchange. If securities in the same corporation are received in the exchange, however, they are divided into lots corresponding with those of the securities surrendered and the FIFO principle is applied, in the absence of adequate identification on a later disposition.

As illustrated in an example above, there can be negative tax effects from the misidentification of stock sold. If you are uncertain how to properly identify stock sold, please contact the office for further guidance.

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An attractive benefit package is crucial to attract and retain talented workers. However, the expense of such packages can be cost-prohibitive to a small business. Establishing a tax-advantaged cafeteria plan can be an innovative way to provide employees with additional benefits without significantly adding to the cost of your overall benefit program.

Rising healthcare costs affect small businesses

If you are like most employers today, you have been dealing with the sting of rising prices for health benefits for some time. As a matter of economic survival, many small businesses have had to pass on at least some of the cost of providing health, dental and prescription benefits to their employees. As the prices continue to rise to fund these benefits, employees have been required to pay an increasing share of these costs. Establishing a cafeteria plan can be a way to make this problem more palatable for your employees at relatively little cost to your business.

Cafeteria plans defined

Technically, a cafeteria plan is a program through which you can offer your employees a choice between two or more "qualified benefits" and cash. The plan must be set forth in a written document and it can only be offered to employees. Depending on what you want to accomplish through a cafeteria plan, the plan can vary from being extremely simple (e.g., premium conversion plans) to being somewhat more complex as more features are added (e.g. flexible spending accounts).

Premium conversion plans: Popular and simple

A very simple type of cafeteria plan that is very popular among small to mid-size employers is sometimes referred to as a "premium conversion" plan. Establishment of a premium conversion plan would not require you to provide any significant additional funding for benefits other than what you are currently spending.

Here's how it works: through the structure of a cafeteria plan, you can offer your employees the ability to use pre-tax dollars to pay the portion of premiums you require them to contribute for their health, dental, and prescription benefits (including the cost of dependent benefits). Using pre-tax dollars to pay for their portion of health care premiums saves your employees money and will result in more net dollars in their paychecks. It may seem surprising, but your employees will appreciate even this small dollar-saving benefit.

With a premium conversion plan, the only costs to you as an employer is the expense of hiring an attorney or other benefits professional to draft a cafeteria plan document for you and the expense of making the small adjustment to your system of payroll deductions so that the employees' portion of the health benefit premiums is deducted from their gross pay rather than their after-tax pay.

Flexible spending accounts

Another benefit that can be made available under a cafeteria plan is a flexible spending account option. These accounts permit employees to have a specific amount withheld from each paycheck and set aside to be used for reimbursement of medical expenses not covered by the group health insurance plan or to be used to cover dependent care expenses. Keep in mind, however, that if you want to establish flexible spending accounts through a cafeteria plan, it will involve more ongoing administrative expense on your part than a simple premium conversion cafeteria plan.

Additional options

You also may want to offer your employees a cafeteria plan which provides them a set dollar value that each employee can take either as additional salary or choose to spend on a variety of benefits, e.g., health insurance, dental coverage, dependent care, or retirement plan contributions. With this type of plan, all benefits other than additional salary are not taxable to the employee. This type of plan can provide desirable flexibility to your employees, but will also cost more to establish and administer.

As you make the determination regarding what type of benefit program you would like to offer your employees, there are many other options that should be taken into consideration. If you require additional guidance, please contact the office for a consultation.

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While one of the most important keys to financial success of any business is its ability to properly manage its cash flow, few businesses devote adequate attention to this process. By continually monitoring your business cycle, and making some basic decisions up-front, the amount of time you spend managing this part of your business can be significantly reduced.

Manage your cash before it manages you

Why do you need to manage your cash flow? Is it needed to help manage the day-to-day operations, obtain financing for a new project, or to acquire new equipment? Do you plan on presenting it to your banker to secure better financing terms or provide for future solvency? Are you seeking additional investors to help you expand into new markets? While all of these can be valid reasons for keeping on top of your cash flow situation, one of the main reasons to manage it is so it does not manage you. You should know when your business would be cash poor so you can better plan for short term operating loans. Similarly, when it has excess cash, it can be invested temporarily to maximize your return. If you do not do this, your cash flow situation will dictate when you can afford to advertise, when you can expand your business, when you can take on more sales, etc. as opposed to you making those timing decisions.

Once you have determined why cash flow management is important to your business, the next step is to get into action. In order to effectively manage your cash flow situation, you need to forecast your cash flows and once done, develop and implement a cash flow plan.

Step 1: Forecast Your Cash Flows

Forecasting your cash flow is the first step in the process of effectively managing your cash flow. How often you will need to prepare cash flow projections and what intervals to use (i.e. annually with monthly intervals or monthly with daily intervals) will depend on the nature of your business.

Be realistic. A realistic approach to forecasting your cash flows will produce more dependable and effective results. Analyze your operations to know your historical results as well as your projected assumptions. All cash flow from operations, investing activities and financing activities should be considered.

Consider your cash inflows and outflows. Your business' cash inflows would include such items as accounts receivable collection, along with unusual and nonrecurring items such as tax refunds, proceeds from a sale of equipment, etc.… Normal cash outflows include recurring items such as purchasing and accounts payable, payroll, loan payments, etc. along with nonrecurring items such as estimated tax payments, bonuses, equipment purchases and others.

Project your cash flow. Once you have determined the appropriate interval for your business (let's assume monthly), you would take the cash at the beginning of the month, add the cash inflows and subtract the cash outflows. This will give you a projected end of month cash balance. Now repeat this for the next 11 months (if your forecast was based on an annual cycle). You now have a cash flow forecast. When you study this, you may notice some months with large cash balances and other months with little, or even negative, cash balances.

Step 2: Develop a Cash Flow Plan

The goal here is to alter the forecasted cash flows into planned cash flows. By doing this, you can smooth out the peaks and valleys and turn your forecast into a manageable plan.

Invest excess cash. For those months with excess cash, you should have automatic investment alternatives set up with your financial institution. Depending on the length of time you have an excess cash situation, you can have a nightly sweep whereby your funds are invested in government bonds or repurchase agreements. Longer periods of excess cash will require more sophisticated alternatives, such as certificates of deposit. The size of the business, along with its cycle, will determine the investment alternatives to choose.

Plan for cash shortages. For the months with little or negative cash, you can first try to adjust these shortages by reviewing your collection policies to find ways to accelerate cash inflows. You can also look at your vendors' terms to consider possible ways to defer your payables. You should always err on the side of conservatism when making these changes. After this exercise, if you are still in a cash poor situation, determine sources of additional financing. You will appear more organized to lending institutions if this can be arranged before the problem arises.

By first forecasting, and then planning your cash flows, you can take advantage of many unique business opportunities, and avoid the pitfalls of unplanned cash shortages. Taking a step towards controlling your cash flow will keep you from having your cash flow take control of you.

If you have any questions about how you can better manage your business' cash flow, please contact the office for a consultation.

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Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

In the event of a business owner's demise or retirement, the absence of a good business succession plan can endanger the financial stability of his business as well as the financial security of his family. With no plan to follow, many families are forced to scramble to outsiders to provide capital and acquire management expertise.

Here are some ideas to consider when you decided to begin the process of developing your business' succession plan:

Start today. Succession planning for the family-owned business is particularly difficult because not only does the founder have to address his own mortality, but he must also address issues that are specific to the family-owned business such as sibling rivalry, marital situations, and other family interactions. For these and other reasons, succession planning is easy to put off. But do you and your family a favor by starting the process as soon as possible to ensure a smooth, stress-free transition from one generation to the next.

Look at succession as a process. In the ideal situation, management succession would not take place at any one time in response to an event such as the death, disability or retirement of the founder, but would be a gradual process implemented over several years. Successful succession planning should include the planning, selection and preparation of the next generation of managers; a transition in management responsibility; gradual decrease in the role of the previous managers; and finally discontinuation of any input by the previous managers.

Choose needs over desires. Your foremost consideration should be the needs of the business rather than the desires of family members. Determine what the goals of the business are and what individual has the leadership skills and drive to reach them. Consider bringing in competent outside advisors and/or mediators to resolve any conflicts that may arise as a result of the business decisions you must make.

Be honest. Be honest in your appraisal of each family member's strengths and weaknesses. Whomever you choose as your successor (or part of the next management team), it is critical that a plan is developed early enough so these individuals can benefit from your (and the existing management team's) experience and knowledge.

Other considerations

A business succession plan should not only address management succession, but transfer of ownership and estate planning issues as well. Buy-sell agreements, stock gifting, trusts, and wills all have their place in the succession process and should be discussed with your professional advisors for integration into the plan.

Developing a sound business succession plan is a big step towards ensuring that your successful family-owned business doesn't become just another statistic. Please contact the office for more information and a consultation regarding how you should proceed with your business' succession plan.

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If you use your home computer for business purposes, knowing that you can deduct some or all of its costs can help ease the pain of the large initial and ongoing cash outlays. However, there are some tricky IRS rules that you should consider before taking - or forgoing - a deduction for home computer costs.

Although the cost of computers and peripheral equipment has dropped significantly over the past year, a tax deduction for all or part of the expense can still help lower the bottom-line price tag of this major purchase. But despite both the widespread use of computers and the temptation to somehow "write them off" on a tax return, the IRS has remained surprisingly quiet. Rather than release any direct guidance on the issue, the IRS has chosen to rely on old rules that were established before the recent computer revolution. As a result, the business use of your home computer will need to fall within these standard rules if you want to take any related deductions.

Business reason must be present

In order to claim a deduction for your home computer and any peripheral equipment, you will need to prove that the expense occurred in connection with an active business - just as you would for any other business expense. An active business for purposes of a business expense related to a home computer will usually arise from one of two types of business activities: as a self-employed sole proprietor of an independently-run profit-making business; or as an employee doing work from home. Deductions from both types of activities are handled differently on an individual's income tax return and there are separate conditions that must be met for either scenario.

Self-employed person. In order for you as a self-employed person to deduct computer-related costs on Schedule C - whether for a home-based computer or one in a separate business location - it is required that your expenses relate to a profit-motivated business versus a "hobby". In the eyes of the IRS, a business will be deemed a hobby if there is no profit motive and the "business" is half-heartedly pursued simply to write off items or achieve some other personal purpose. If your Schedule C business shows a net loss year after year, you may be considerably more likely to have the IRS audit your return to inspect whether your purported business is actually legitimate under the tax law.

Employee. A miscellaneous itemized deduction on Schedule A is allowed for computer costs that are directly related to the "job" of being an employee. In order to claim a deduction for computer-related expenses as an employee, you must show a legitimate reason related to your employment for regularly using a computer at home. The availability of a computer in the office, the ability for you to keep your job without the home computer, the lack of telecommuting policy at work, or the lack of proof that your computer is used regularly for office work will make it more difficult to convince the IRS that a legitimate business reason exists for the deduction.

Some taxpayers have succeeded in writing off the expense of a computer as an educational expense related to business. For you to succeed in this deduction, you must carefully document that the education is undertaken to maintain or improve skills required in your current business or employment, or to meet specific educational requirements set by your employer. Computer expenses related to education that qualifies you for a new trade or business is not deductible.

Note to employees: computer-related business expenses taken as a miscellaneous itemized deduction are deductible only to the extent that your total miscellaneous itemized deductions exceed 2 percent of your adjusted gross income. For many taxpayers, a good strategy is to "bunch" purchases of computer equipment all in one year so that more of the cost will rise above the 2 percent floor.

Other IRS considerations

Aside from applying the general rules discussed above for a for-profit business and miscellaneous itemized deductions to determine if you are able to deduct business-related computer costs, the IRS is likely to dust off other standard tax principles in evaluating whether your computer expense write off is acceptable:

Depreciation. Business items that have a useful life beyond the current tax year generally must be written off, or depreciated, over its useful life. As technological equipment, computer equipment is assumed to have a 5-year life. Accelerated depreciation of those 5 years is allowed for all but "listed property" (see, below). An exception to the mandatory 5-year write off involves items that qualify for "Section 179" expensing (see below). Keep in mind that only the cost associated with the business-use portion of your computer can be expensed.

Section 179 deduction. Section 179 expensing allows you to deduct each year up to $250,000 in 2009 of the cost of otherwise depreciable business equipment, including computers. As with depreciation, keep in mind that only the cost associated with the business-use portion of your computer can be expensed.

"Listed property" exception. A "listed property" exception will deny Section 179 expensing if a home computer is used only 50% or less for business purposes. If so, you must depreciate the computer evenly over 5 years. For example, if the business-use portion of a $10,000 computer is 80%, then $8,000 of its cost qualifies for direct expensing. If 45% is used for business, no part of the cost may be immediately expensed.

Recordkeeping. Since most home computers are "listed property", listed property substantiation rules apply. These rules require you to keep a contemporaneous log every time you use your computer to prove the percentage of your business use.

Internet connectivity. If you use a modem to connect your computer to the Internet, keep in mind that the first phone line to a home office is not deductible, even on a pro-rated basis. A second line, however, may be written off as a business expense. If you connect via DSL or incur other Internet-only access service costs, be aware that the IRS has not taken a position here but some experts predict that the IRS eventually may consider the potential for personal Internet use to compromise such a deduction.

Computer software. Computer software generally may be amortized using the straight-line method over a 36-month period if the costs are separately stated from the hardware.

Computer repairs. Repairs that don't upgrade the useful life of the machine may be deducted immediately. However, making significant system enhancements, such as adding additional memory, would generally need to be added to basis and capitalized.

If you have any questions regarding writing off the business-related costs associated with your home computer, please contact the office for a consultation.

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If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

Like-kind exchanges: The basics

The tax law permits you to exchange property that you use in your business or property that you hold for investment purposes with the same type of property held by another business or investor. These transactions are referred to as "like-kind" exchanges and, if done properly, can save your business from paying the taxes that normally would be due in the year of sale of the appreciated property.

Instead of an immediate tax on any appreciation in the year of sale, a like-kind exchange allows the appreciated value of the property you're transferring to be rolled into the working asset that you'll be receiving in the exchange. Mixed cash and property sales, multi-party exchanges, and time-delayed exchanges are all possible under this tax break.

What property qualifies?

In order to qualify as a tax-free like-kind exchange, the following conditions must be met:

The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
Most securities and instruments of indebtedness or interest are not eligible. The property must not be stocks, bonds, notes, chooses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, you can have a nontaxable exchange of corporate stocks in certain circumstances.
There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property is a trade of like property.

Examples:
Like property:
An apartment house for a store building
A panel truck for a pickup truck
Not like property:
A piece of machinery for a store building
Real estate in the U.S. for real estate outside the U.S.

The property being received must be identified by a specified date. The property to be received must be identified within 45 days after the date you transfer the property given up in trade.
The property being received must be received by a specified date.The property to be received must be received by the earlier of:
1. The 180th day after the date on which you transfer the property given up in trade, or
2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

Dealing with "boot" received

If you successfully make a straight asset-for-asset exchange, as discussed earlier, you will not pay any immediate tax with respect to the transaction. The property you acquire gets the same tax "basis" (your cost for tax purposes) as the property you gave up. In some circumstances, when you are attempting to make a like-kind exchange, the properties are not always going to be of precisely the same value. Many times, cash or other property is included in the deal. This cash or other property is referred to as "boot." If boot is present in an exchange, you will be required to recognize some of your taxable gain, but only up to the amount of boot you receive in the transaction.

Example:

XYZ Office Supply Co. exchanges its business real estate with a basis of $200,000 and valued at $240,000 for the ABC Restaurant's business real estate valued at $220,000. ABC also gives XYZ $35,000 in cash. XYZ receives property with a total value of $255,000 for an asset with a basis of $200,000. XYZ's gain on the exchange is $55,000, but it only has to report $35,000 on its tax return - the amount of cash or "boot" XYZ received. Note: If no cash changed hands, XYZ would not report any gain or loss on its tax return.

Using like-kind exchanges in your business

There are several different ways that like-kind exchanges can be used in your business and there are, likewise, a number of different ways these exchanges can be structured. Here are a couple of examples:

Multi-party exchanges. If you know another business owner or investor that has a piece of property that you would like to acquire, and he or she only wants to dispose of the property in a like-kind exchange, you can still make a deal even if you do not own a suitable property to exchange. The tax rules permit you to enter into a contract with another business owner that provides that you are going to receive the property that he or she has available in exchange for a property to be identified in the future. This type of multi-party transaction can also be arranged through a qualified intermediary with unknown third (or even fourth) parties.

Multiple property exchanges. Under the like-kind exchange rules, you are not limited in the number of properties that can be involved in an exchange. However, the recognized gain and basis of property is computed differently for multiple property exchanges than for single property-for-property exchanges.

Trade-ins. You could also structure a business to business trade-in of machinery, equipment, or vehicles as a like-kind exchange.

There are many ways that you can advantageously use the like-kind exchange rules when considering disposing of appreciated business assets. However, since the rules are complicated and careful planning is critical, please contact the office for assistance with structuring this type of transaction.

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Starting your own small business can be hectic - yet fun and personally fulfilling. As you work towards opening the doors, don't let the onerous task of keeping the books rain on your parade. With a little planning upfront and a promise to "keep it simple", you can get an effective system up and running in no time.

Starting your own small business can be hectic - but also personally fulfilling. As you work towards opening the doors, don't let the onerous task of keeping the books rain on your parade. With a little planning upfront, you can get an effective system up and running quickly.

The IRS requires all businesses to keep adequate books and records but accurate financial records can be used by the small business owner in many other ways. Good records can help you monitor the progress of your business, prepare financial statements, prepare your tax returns, and support items on your tax returns. The key to accurate and useful records is to implement a good bookkeeping system.

The most important thing that you as a busy business owner should remember when planning your bookkeeping system is that simple is better. Bookkeeping should not interfere with the daily operations of your business or impede the progress of your business' goals in any way.

Decisions, decisions....

Probably the hardest part about bookkeeping for any small business is getting started. There are so many decisions to make that the business owner may seem overwhelmed. Single or double entry? Manual or computerized system? Should I try to do it myself or hire a bookkeeper?

Here are some good questions to ask yourself as you are making some very important upfront decisions:

Single or double entry (manual bookkeeping systems). While a single entry system can be simple and straightforward (especially when you are just starting out a small business), a double entry system has built-in checks and balances that can help assure accuracy and control.

Manual or computerized. Will a manual system quickly become overwhelmed with the expected volume of transactions from your business? Will your efforts be less if a certain element of your transactions were automated? If you plan on doing your books yourself, do you have the time/patience to learn a new software program?

Self-prepare or outsource. How much time will you or your employees have to allocate to recordkeeping activities each day? Do you have any accounting experience or at least a good head for numbers? Does your budget allow for the additional expense of an outside bookkeeper? If outsourcing was an option, would it make sense to outsource some of it and do some yourself (e.g. use a payroll processing service but do your own daily transaction input and bank reconciliation)?

As you sit down to make these fundamental decisions regarding your bookkeeping system, here are a few things to keep in mind:

Be realistic. Be honest with yourself and realistic about the amount of time and energy you will be able to devote to the bookkeeping task. As a new small business owner, you will be pulled in a hundred different directions - make sure that you take on only as much of the bookkeeping task as you feel you can do without making yourself crazy.

Do your homework. Before you commit to any bookkeeping decision, it makes sense to find out what resources are available and at what cost. For example, you may find out that having your payroll processed by an outside company costs much less than you imagined or that a bookkeeping software package you thought was difficult is actually very straightforward. An informed decision is a good decision.

Ask for references and recommendations. Other successful small business owners have a wealth of knowledge surrounding all aspects of running a business, including bookkeeping. Ask them about their experiences with recordkeeping and find out what has (and what has not) worked for their companies. If they know of a good, reasonably priced bookkeeper or they've had a good experience with a software package, take notes.

See the forest for the trees. Translation: Give the minutia only as much attention as it needs and concentrate on the big picture of your business' finances. Implementing a bookkeeping system - on your own or with outside help - that is simple and reliable will give you the opportunity to step back and evaluate how effectively your business is operating.

There are many important decisions to make when you start your own business, including ones that seem mundane - such as recordkeeping - but that can have a significant impact on your ability to successfully operate your business. Before you make any of these decisions, we encourage you to contact the office for a consultation.

Once you have decided on the type of bookkeeping system to use for your new business, you will also be faced with several other accounting and tax related decisions. Whether to use the cash or accrual method of accounting, for example, although not always a matter of choice, is an important decision that must be carefully considered by the new business owner.

Generally, there are two methods of accounting used by small businesses - cash and accrual. The basic difference between the two methods is the timing of how income and expenses are recorded. Your method of accounting is chosen when you file your first tax return. If you ever wish to change your accounting method after that, you'll need to file for IRS approval, which can be a time-consuming process.

While no single accounting method is required of all taxpayers, you must use a system that clearly shows your income and expenses, and maintain records that will enable you to file a correct return. If you do not consistently use an accounting method that clearly shows your income, your income will be figured under the method that, in the opinion of the IRS, clearly shows your income.

Cash method

Most small businesses use the cash basis method of accounting, which is based on real time cash flow. Under the cash method, income is recorded when it is received, and expenses are reported when they are paid. For example, if you receive a check in the mail, it becomes a cash receipt (and is recorded as income). Likewise, when you pay a bill, you record the payment as an expense. The word "cash" is not meant literally - it also covers payments by check, credit card, etc.

Accrual method

Under the accrual method, you record income when it is earned, not necessarily when it is received. Likewise, you record your expenses when the obligation arises, not necessarily when you pay the bills. In short, the accrual method of accounting matches revenue and expenses when they occur whether or not any cash changes hands. For example, suppose you're hired as a consultant and complete a job on December 29^th, but you haven't been paid for it. You would still recognize all expenses you incurred in relation to that engagement regardless of whether you've been paid yet or not. Both the income and the expenses are recorded for that year, even if payment is received and bills are paid the following January.

Businesses are required to use the accrual method of accounting in several instances, including:

If the business has inventory.
If the business is a C corporation with gross annual sales exceeding $5 million (with certain exceptions for personal service companies, sole proprietorships, farming businesses, and a few others).

If you operate two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. The businesses are considered separate and distinct if books and records are maintained for each business. If you use the accounting methods to create or shift profits or losses between the businesses (for example, through inventory adjustments, sales, purchases, or expenses) so that income is not clearly reflected, the businesses will not be considered separate and distinct.

Other methods of accounting

In addition to the cash and accrual methods of accounting, there are other ways that your business can account for your income and expenses (e.g., hybrid, long-term contract). These methods are beyond the scope of this article but may be available for your business.

As stated previously, you choose your method of accounting when you file your first tax return. Because there are advantages and disadvantages to each of the accounting methods, it is important that you make the right decision. If you need assistance in determining the best accounting method for your business, please contact the office.

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

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

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

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

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

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

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

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

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

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

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

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

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Q. A large portion of my portfolio is invested in Internet stocks and with the recent market downturn, I've accumulated some substantial losses on certain stocks. Although I think these stocks will eventually turn around, I'd love to use some of those losses to offset gains from other stocks I'd like to sell. From a tax standpoint, can I sell stock at a loss and then turn around and immediately buy it back?

A. If only it were that simple. The transaction you are proposing is considered a "wash sale" in the eyes of the IRS. A wash sale is the sale of a security (e.g., stock or bond) at a loss where the taxpayer turns around and buys back substantially the same security within 30 days. With the wash sale rules, the IRS seeks to eliminate the ability to deduct current losses on these types of transactions, and instead allows a basis adjustment to the new security purchased, in effect deferring the recognition of the earlier loss.

Example: You sell 1,000 shares of Dotcom Co. stock at a loss of $2,000. Next week, you buy another 1,000 shares of the same company's stock for $5,000. Instead of allowing the deduction of the $2,000 on your return, the wash sale rules say you must instead adjust the basis of your newest purchase to $7,000. When you go to sell the stock later at say $10,000, instead of having a $5,000 gain ($10,000 sales price minus $5,000 purchase price), your gain would only be $3,000 ($10,000 sales price minus $7,000 adjusted basis).

So how do you avoid the wash sale rules? Keep good track of the purchase and sale dates of your securities. If you do feel the need to reinvest in a similar investment vehicle, make sure that some element of the new security is different enough to avoid the "substantially similar" rule (e.g., if you sell a stock mutual fund, you can purchase another type of stock mutual fund.) As always, please contact the office if you need further clarification of the wash sale rules.

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

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

Family trusts: A common estate planning tool

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

IRS: "No Capital Gain Exclusion"

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

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

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

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

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

Home Acquisition Debt

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

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

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

Home Equity Debt

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

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

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

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

You do not itemize your deductions;

Your adjusted gross income (AGI) is over a certain amount;

Part of your home is not a "qualified home"

Your home is secured by a mortgage that was acquired (and/or subsequently refinanced) prior to October 14, 1987

You used any part of the loan proceeds to invest in tax-exempt securities.

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

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

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

Start-up Costs

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

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

Organizational Costs

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

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

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

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Q. My wife and I are both retired and are what you might call "social gamblers". We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

Q. My wife and I are both retired and are what you might call "social gamblers." We like to play bingo and buy lottery tickets, and take an occasional trip to Las Vegas to play the slot machines. Are we required to report all of our winnings on our tax return? Can we deduct our losses?

A. The technical answers to your questions are "yes" and "maybe," respectively. However, does it make much practical sense to report your $50 jackpot from the Sunday afternoon bingo game at the church? Probably not. In most circumstances, the taxpayer's cumulative gambling losses far exceed any winnings he may have had.

Here are the technical rules regarding reporting gambling winnings and losses:

Gambling winnings are taxable income and should be reported on your income tax return. In addition to cash winnings, you are required to report the fair market value (FMV) of all non-cash prizes you receive. For the most part, you are on the honor system when it comes to reporting small winnings to the IRS. Large payouts, on the other hand, will most likely be accompanied by IRS Form W-2G and a substantial amount will be deducted for withholding. Gambling winnings should be reported as "Other income" on the front page of Form 1040.

Gambling losses may only be included on your tax return if you itemize your deductions and then they are only deductible up to the amount of your gambling winnings. If you do itemize, those losses would be included as a miscellaneous itemized deduction not subject to the 2% of adjusted gross income (AGI) limit on Form 1040, Schedule A. However, keep in mind that if your AGI exceeds a certain amount, your total itemized deductions may be limited, reducing the likelihood of a direct offset of gambling income and losses.

Once you've tallied up your winnings and losses and reported them on your tax return, how do you substantiate your gambling income and deductions to the IRS? Here are some guidelines offered by the IRS that will help you in the event that your gambling claims are ever questioned:

Keep a log or a journal. The IRS suggests entering all of your gambling activities in a small diary or journal - you may want to consider one that can be carried with you when you frequent gambling establishments. Here is the information you should keep track of:

Date and type of specific wager or wagering activity;

Name of gambling establishment;

Address or location of gambling establishment;

Name(s) of other person(s) present with you at gambling establishment; and,

Amount(s) won or lost.

Retain documentation. As with any item of income or deduction claimed on your return, the IRS requires adequate documentation be kept to substantiate the amount claimed. Acceptable documentation to substantiate gambling winnings and losses can come in many different forms, depending on what type of activity you are engaging in. Examples include lottery tickets, canceled checks, wagering tickets, credit records, bank withdrawals and statements of actual winnings or payment slips provided by the gaming establishment.

Although it may seem difficult to keep track of your gambling activity at the time, it is obvious that keeping good records can benefit you if you ever "hit the jackpot". If you have any further questions on this matter, please contact the office for assistance.

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California State Senate Bill 542 was passed during the 1999-2000 legislative session and signed into law. This law requires businesses and government entities to report specified information to the Employment Development Department (EDD) on independent contractors.

Any business or government entity (defined as a "service-recipient") that is required to file a federal Form 1099-MISC for services performed by an independent contractor (defined as a "service-provider") must report. A service-recipient means any individual, person, corporation, association, or partnership, or agent thereof, doing business in this State, deriving trade or business income from sources within this State, or in any manner in the course of trade or business subject to the laws of this State.

An independent contractor is defined as an individual who is not an employee of the business or government entity for California purposes and who receives compensation or executes a contract for services performed for that business or government entity either in or outside of California.

The information you provide to EDD will increase child support collection by helping to locate parents who are delinquent in their child support obligations.

You must report to EDD within twenty (20) days of EITHER making payments totaling $600 or more OR entering into a contract for $600 or more with an independent contractor in any calendar year, whichever is earlier.

You are required to provide the following information that applies.

Business or government entity's (service-recipient): Federal employer identification number California employer account number Social security number Business name, address, and telephone number

Independent contractor's (service-provider): First name, middle initial, and last name Social security number Address Start date of contract Amount of contract (including cents) Contract expiration date Ongoing contract (check box if applicable)

Report independent contractor information on the Report of Independent Contractors form (DE 542). To obtain forms and/or information, call (916) 657-0529. You may also contact your local Employment Tax Customer Service Office listed in your local telephone directory in the State Government section under "Employment Development Department" or access our Internet site at www.edd.ca.gov. For magnetic media filing, please call (916) 651-6945.

The reports should be sent to the following address:

Employment Development Department PO Box 997350 MIC 99 Sacramento CA 95899-7350

Fax: (916) 255-3211

For further assistance, the EDD may be contacted at their toll-free number 1-888-745-3886.

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