The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.

The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.

PPP Loans
The CARES Act expanded the Small Business Administration’s (SBA’s) existing Section 7(a) loan program to include certain PPP loans. The PPP is made available from the SBA to provide small businesses with loans to help pay payroll costs, mortgages, rent, and utilities during the COVID-19 (coronavirus) crisis. All payments of principal, interest, and fees under the loans are deferred for at least 6 months. The loans are also forgiven for amounts payroll costs, mortgage or rent obligations, and certain utility payments incurred between February 15 and June 30. The loans are 100 percent guaranteed by the SBA.

Deductions Prohibited
If the SBA forgives a taxpayer’s PPP loan pursuant to Act. Sec. 1106(b) of the CARES Act, the amount of the loan is excluded from gross income. Under Reg. §1.265-1 taxpayers cannot deduct expenses that are allocable to income that is either wholly excluded from gross income or wholly exempt from the taxes. This rule exists in order to prevent double tax benefits. Thus, the IRS has determined that taxpayers who have their PPP loans forgiven may not deduct any business or interest expenses related to the income associated with the loan.

Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.

Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.

Additionally, SBA is expected to issue regulations and guidance to assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities, according to Treasury.

Measures included in the application and instructions intended to reduce compliance burdens and simplify the process for borrowers include:

• options to calculate payroll costs using an "alternative payroll covered period" that aligns with borrowers’ regular payroll cycles;
• flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan;
• step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness;
• borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30; and
• the addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.

Eligible individuals who are not otherwise required to file federal income tax returns for 2019 may use a new simplified return filing procedure to make sure they receive the Economic Impact Payments (EIPs) provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136).

Eligible individuals who are not otherwise required to file federal income tax returns for 2019 may use a new simplified return filing procedure to make sure they receive the Economic Impact Payments (EIPs) provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136).

Alternatively, these eligible individuals may use the "Non-Filers: Enter Payment Info Here" tool, available at www.irs.gov/coronavirus to submit the information the IRS needs to issue their payments.

EIPs and Recovery Rebate Credit
The CARES Act provides a fully refundable Recovery Rebate Credit for the 2020 tax year. However, the IRS is making EIPs during 2020 to refund the credit in advance, based on 2019 or 2018 information. Most individuals are eligible for the credit, except for nonresident aliens and individuals who qualify as another taxpayer’s dependent.

The maximum credit is $1,200 for each eligible individual, plus $500 for each qualifying child. There is no minimum income requirement, but the credit is phased out for higher-income individuals. Eligible individuals and qualifying children generally must have valid Social Security numbers.

Taxpayers who filed 2019 or 2018 returns automatically receive their Economic Payments. If the taxpayer identified an account for direct deposit of a refund, the Economic Impact Payment is direct deposited into the same account. Otherwise, the IRS mails a paper check to the taxpayer’s last known address.

Nonfilers who received Social Security and railroad retirement, survivor or disability benefits before 2020 also receive EIPs based on their Forms SSA-1099 or Form RRB-1099 via direct deposit or paper checks, in the same way they receive their benefits. Recipients of supplemental security income (SSI) or Veterans Administration Compensation and Pension (C&P) benefits also automatically receive EIPs in the same way they receive their benefits. These nonfilers may use the "Non-Filers: Enter Payment Info Here" tool to provide information about their qualifying children so that they also receive the $500 additional credit.

Other nonfilers who are not required to file returns, such as people with income below the filing threshold, may use the "Non-Filers: Enter Payment Info Here" tool to provide basic information that allows the IRS to calculate and issue their EIPs.

Simplified Filing Procedures
Rather than using the "Non-Filers: Enter Payment Info Here" tool, a simplified return filer may use a simplified procedure to file a paper or electronic return for 2019 on Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors. A simplified return filer is an eligible individual who:

• has not filed a federal income tax return for 2019;
• is not required to file a return for 2019, and
• has the required identification number.

Simplified returns are due by October 15, 2020. The IRS urges these individuals to file electronically to speed receipt of their payments.

Simplified Return Information
The simplified return should include only the following information:

• "EIP2020" written on the form;
• the individual’s filing status as of the end of tax year 2019;
• required identification information, including name, mailing address, and SSN for the individual (and spouse on a joint return);
• information regarding each dependent who was under the age of 17 at the end of tax year 2019; and
• the filer’s signature, using an IP PIN if applicable.

Generally lines 1 through 24 of the return are left blank, even if the values for these lines are in fact not zero, except as values are required for electronic returns.

The IRS will compute the Economic Impact Payment based on this information. The IRS will not challenge the accuracy of the items of income that are properly reported under these procedures.

To encourage businesses that have experienced an economic hardship due to COVID-19 to keep employees on their payroll, the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) has provided several new credits for employers, including a new employee retention credit. The IRS has issued a fact sheet summarizing a few key points about the new credit.

To encourage businesses that have experienced an economic hardship due to COVID-19 to keep employees on their payroll, the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) has provided several new credits for employers, including a new employee retention credit. The IRS has issued a fact sheet summarizing a few key points about the new credit.

Certain employers can claim the credit for wages paid after March 12, 2020, and before January 1, 2021. This includes tax-exempt organizations, employers with suspended operations due to a government order related to COVID-19, and those that have experienced a significant decline in gross receipts. The credit amount is 50 percent of up to $10,000 in qualified wages paid to an employee. This means that an employer’s maximum credit for qualified wages paid to any employee is $5,000.

Qualified wages include the cost of employer-provided health care, but not the amount of qualified sick leave wages or family leave wages for which the employer received tax credits under the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127). Qualified wages vary based on the average number of the employer’s full-time employees in 2019:

• If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not.
• If the employer had more than 100 employees on average in 2019, the credit is allowed only for wages paid to employees for time they did not work.

In each case, the wages that qualify are those paid for a calendar quarter in which the employer experiences an economic hardship.

To claim the credit, employers must report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return, beginning with the second quarter of 2020. If an employer does not have enough federal employment taxes to cover the amount of the credit (after they have deferred deposits of employer Social Security taxes), it may request an advance payment of the credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19, to the IRS.

The IRS has more information on the credit at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act and https://www.irs.gov/coronavirus-tax-relief-and-economic-impact-payments.

The Treasury Department and the IRS have provided tax relief to certain individuals and businesses affected by travel disruptions arising from the coronavirus (COVID-19) emergency.

The Treasury Department and the IRS have provided tax relief to certain individuals and businesses affected by travel disruptions arising from the coronavirus (COVID-19) emergency. Under the guidance:

• up to 60 consecutive calendar days of U.S. presence that are presumed to arise from COVID-19 travel disruptions will not be counted for determining U.S. tax residency under Code Sec. 7701(b), or determining whether an individual qualifies for tax treaty benefits for income from personal services performed in the United States;
• for certain U.S. citizens and residents, qualification for gross income exclusion of foreign earned income under Code Sec. 911 will not be impacted by days spent away from a foreign country due to the COVID-19 emergency; and
• certain U.S. business activities by a nonresident alien or foreign corporation will not be counted for determining whether the individual or entity is engaged in a U.S. trade or business or has a U.S. permanent establishment.

COVID-19 Medical Condition Travel Exception
Travel and related disruptions resulting from the COVID-19 emergency may cause foreign individuals who did not anticipate meeting the “substantial presence test” under Code Sec. 7701(b)(3) to become U.S. residents for federal tax purposes during 2020, and may impact an individual’s qualifications for certain treaty benefits. To address this, Rev. Proc. 2020-20 allows certain foreign individuals to claim a COVID-19 Medical Condition Travel Exception to becoming U.S. residents, and provides similar relief for determining whether an individual (whether or not an eligible for the medical travel exception) qualifies for U.S. income tax treaty benefits for income from dependent personal services performed in the United States.

An individual can claim a COVID-19 Medical Condition Travel Exception if he or she:

• was not a U.S. resident at the close of the 2019 tax year;
• is not a lawful permanent resident at any point in 2020;
• is present in the United States on each day of his or her COVID-19 Emergency Period; and
• does not become a U.S. resident in 2020 due to days of presence in the United States outside of the individual’s COVID-19 Emergency Period.

The COVID-19 Emergency Period is a period of up to 60 consecutive calendar days selected by an individual, starting on or after February 1, 2020, and on or before April 1, 2020, during which he or she is physically present in the United States on each day.

An eligible individual who intended to leave the United States during his or her COVID-19 Emergency Period but could not leave due to COVID-19 emergency travel disruptions can exclude up to 60 calendar days of presence in the United States for the substantial presence test. The COVID-19 emergency will be considered a medical condition that kept the individual from leaving the United States on each day during his or her COVID-19 Emergency Period, and will not be treated as a pre-existing medical condition.

Further, any days of presence during an individual’s COVID-19 Emergency Period on which he or she was unable to leave the United States due to COVID-19 emergency travel disruptions will not be counted in determining his or her eligibility for treaty benefits for income from employment or performing other dependent personal services within the United States.

The guidance provides details on claiming a COVID-19 Medical Condition Travel Exception and an exemption from income withholding under a U.S. income tax treaty.

Foreign Earned Income Exclusion Relief
Rev. Proc. 2020-27 provides a waiver for certain individuals who failed to meet the eligibility requirements of Code Sec. 911(d)(1) for the foreign earned income exclusion because adverse conditions in a foreign country kept the individual from meeting the requirements during 2019 and 2020. The COVID-19 emergency is an adverse condition that precluded the normal conduct of business in:

• the People’s Republic of China (excluding the Special Administrative Regions of Hong Kong and Macau (China)) as of December 1, 2019; and
• any other foreign country, as of February 1, 2020.

The covered period ends on July 15, 2020, unless the Treasury Department and IRS announce an extension.

Under this relief, an individual who left the particular foreign country on or after the dates stated above, but on or before July 15, 2020, will be treated as a qualified individual under the foreign earned income exclusion rules for the period when he or she was present in, or was a bona fide resident of, that foreign country if the individual establishes a reasonable expectation that he or she would have met the requirements of Code Sec. 911(d)(1) but for the COVID-19 Emergency. An individual who was first physically present or established residency in China after December 1, 2020, or another foreign country after February 1, 2020, is not eligible.

Individuals seeking to qualify for the foreign earned income exclusion because they could reasonably have been expected to have been present in a foreign country for 330 days but for the COVID-19 Emergency, and have met the other requirements to qualify, may use any 12-month period to meet the qualified individual requirement.

Previously issued revenue procedures under Code Sec. 911(d)(4) remain in full force and effect. Rev. Proc. 2020-14, 2020-16 I.R.B. 661, is supplemented.

U.S. Business Activities
Nonresident aliens who perform services or other activities in the United States, and foreign corporations that employ individuals to perform services or other activities in the United States, and are engaged in a U.S. trade or business are subject to federal tax on their business income from that trade or business. If the individuals performing those services or activities are temporarily in the United States solely due to COVID-19 emergency travel disruptions, the nonresident alien or foreign corporation might be treated as engaged in a U.S. trade or business even though it would not be if the individuals performing the services were not present in the United States.

IRS frequently asked questions (FAQs)—at https://www.irs.gov/newsroom/information-for-nonresident-aliens-and-foreign-businesses-impacted-by-covid-19-travel-disruptions—provide that certain U.S. business activities conducted by a nonresident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether the individual or entity is engaged in a U.S. trade or business or has a U.S. permanent establishment, if those activities would not have been conducted in the United States but for the COVID-19 travel disruptions.

The IRS and the Employee Benefits Security Administration are extending certain timeframes during the Outbreak Period for group health plans, disability and other welfare plans, pension plans, and participants and beneficiaries of these plans during the COVID-19 National Emergency. The beginning of the Outbreak Period is March 1, 2020. The end date is yet to be determined.

The IRS and the Employee Benefits Security Administration are extending certain timeframes during the Outbreak Period for group health plans, disability and other welfare plans, pension plans, and participants and beneficiaries of these plans during the COVID-19 National Emergency. The beginning of the Outbreak Period is March 1, 2020. The end date is yet to be determined.

Outbreak Period
Under the relief, all group health plans, disability and other employee welfare benefit plans, and employee pension benefit plans subject to ERISA or the IRC must disregard the period from March 1, 2020, until sixty days after the announced end of the National Emergency.

Affected Deadlines for Plan Participants
The following periods and dates for all plan participants, beneficiaries, qualified beneficiaries, or claimants:

• The 30-day period (or 60-day period, if applicable) to request special enrollment into any group plan under Code Sec. 9801(f) and ERISA Sec. 701(f);
• The 60-day election period for COBRA continuation coverage under Code Sec. 4980B(f)(5) and ERISA Sec. 605;
• The date for making COBRA premium payments under Code Sec. 4980B(f)(2)(B)(iii) and (C), and ERISA Sec. 602(2)(C) and (3);
• The date for individuals to notify the plan of a qualifying event or determination of disability under Code Sec. 4980B(f)(6)(C) and ERISA Sec. 606(a)(3);
• The date within which claimants may file a request for an external review after receipt of an adverse benefit determination or final internal adverse benefit determination pursuant to 26 Reg. §54.9815–2719(d)(2)(i) and 29 CFR 2590.715–2719(d)(2)(i), and
• The date within which individuals may file a benefit claim under the plan’s claims procedure pursuant to 29 CFR 2560.503–1, and the date within which claimants may file an appeal of an adverse benefit determination under the plan’s claims procedure pursuant to 29 CFR 2560.503–1(h).

Affected Dates for Group Health Plans
With respect to group health plans, and their sponsors and administrators, the Outbreak Period shall be disregarded when determining the date for providing a COBRA election notice under Code Sec. 4980B(f)(6)(D) and ERISA section 606(c).

Due to the 2019 Novel Coronavirus outbreak (COVID-19), the IRS has provided increased flexibility with respect to:

• 2020 mid-year elections under a Code Sec. 125 cafeteria plan related to employer-sponsored health coverage, health Flexible Spending Arrangements (health FSAs), and dependent care assistance programs; and
• grace periods to apply unused amounts in health FSAs to medical care expenses incurred through December 31, 2020, and unused amounts in dependent care assistance programs to dependent care expenses incurred through December 31, 2020.

Due to the 2019 Novel Coronavirus outbreak (COVID-19), the IRS has provided increased flexibility with respect to:

• 2020 mid-year elections under a Code Sec. 125 cafeteria plan related to employer-sponsored health coverage, health Flexible Spending Arrangements (health FSAs), and dependent care assistance programs; and
• grace periods to apply unused amounts in health FSAs to medical care expenses incurred through December 31, 2020, and unused amounts in dependent care assistance programs to dependent care expenses incurred through December 31, 2020.

This relief is retroactive to January 1, 2020.

An employer that decides to amend one or more of its Code Sec. 125 cafeteria plans to provide for mid-year election changes for employer-sponsored health coverage, health FSAs, or dependent care assistance programs, or to provide for an extended period to apply unused amounts remaining in a health FSA or a dependent care assistance program to pay or reimburse medical care expenses or dependent care expenses in a manner consistent with this relief, must adopt a plan amendment on or before December 31, 2021, which may be effective retroactively to January 1, 2020.

Cafeteria Plan Elections
Qualified benefits provided under a cafeteria plan include employer-provided accident and health plans excludable under Code Secs. 105(b) and 106, health FSAs excludable under Code Secs. 105(b) and 106, and dependent care assistance programs excludable under Code Sec. 129. Elections regarding these benefits are generally irrevocable, and must be made prior to the first day of the plan year. However, a cafeteria plan may permit an employee to revoke an election during a period of coverage and make a new election under certain circumstances, such as if the employee experiences a change in status or there are significant changes in the cost of coverage.

During 2020, a cafeteria plan may also permit eligible employees to:

• with respect to employer-sponsored health coverage: (a) make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage; (b) revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis; and (c) revoke an existing election on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer;
• revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA on a prospective basis; and
• revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.

To accept an employee’s revocation of an existing election for employer-sponsored health coverage, the employer must receive from the employee an attestation in writing that the employee is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer. The employer may rely on the written attestation provided by the employee, unless the employer has actual knowledge that the employee is not, or will not be, enrolled in other comprehensive health coverage not sponsored by the employer.

This relief may be applied retroactively to periods on or after January 1, 2020.

Health FSAs, Dependent Care Assistance
A cafeteria plan may permit the carryover of unused amounts remaining in a health FSA at the end of a plan year, subject to the carryover limit (currently $550). Additionally, cafeteria plan may permit a grace period to apply unused amounts (including amounts remaining in a health FSA or dependent care assistance program) at the end of a plan year to pay expenses incurred for those same qualified benefits during the period of up to two months and 15 days immediately following the end of the plan year. For a health FSA, a cafeteria plan may adopt a carryover or a grace period (or neither), but may not adopt both.

For unused amounts remaining in a health FSA or a dependent care assistance program at the end of a grace period or plan year ending in 2020, a cafeteria plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses incurred through December 31, 2020. For example, if an employer sponsors cafeteria plan with a health FSA that has a calendar year plan year and provides for a grace period ending on March 15 immediately following the end of each plan year, the employer may amend the plan to permit employees to apply unused amounts remaining in an employee’s health FSA as of March 15, 2020, to reimburse the employee for medical care expenses incurred through December 31, 2020.

This relief may be applied on or after January 1, 2020 and on or before December 31, 2020.

Impact of Health FSA Reimbursements
Code Sec. 223 permits eligible individuals to establish and contribute to health savings accounts (HSAs). With respect to any month, an eligible individual is any individual who:

• is covered under a high deductible health plan (HDHP) as of the first day of such month; and
• is not, while covered under an HDHP, covered under any health plan (a) which is not an HDHP, and (b) which provides coverage for any benefit which is covered under the HDHP.

An HDHP is a health plan that satisfies the minimum annual deductible requirement and maximum out-of-pocket expenses requirement under Code Sec. 223(c)(2)(A).

Coverage by a general purpose health FSA is coverage by a health plan that disqualifies an otherwise eligible individual from contributing to an HSA. Similarly, a telemedicine arrangement would generally disqualify an otherwise eligible individual from contributing to an HSA.

The government has previously provided relief for these issues. Notice 2020-15, I.R.B. 2020-14, 559, provides that a health plan that otherwise satisfies the requirements to be an HDHP will not fail to be an HDHP merely because the health plan provides medical care services and items purchased related to testing for and treatment of COVID-19. Likewise, Section 3701 of the CARES Act amends Code Sec. 223(c) to provide a temporary safe harbor for providing coverage for telehealth and other remote care services.

The new relief clarifies that Notice 2020-15 may be applied retroactively to January 1, 2020. For example, an otherwise eligible individual with coverage under an HDHP who also received coverage beginning February 15, 2020, for telehealth and other remote care services under an arrangement that is not an HDHP will not be disqualified from contributing to an HSA during 2020.

The IRS has released proposed regulations that address changes made to Code Sec. 162(f) by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). The proposed regulations provide operational and definitional guidance on the deductibility of fines and penalties paid to governmental entities.

The IRS has released proposed regulations that address changes made to Code Sec. 162(f) by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). The proposed regulations provide operational and definitional guidance on the deductibility of fines and penalties paid to governmental entities.

TCJA Changes
Under amended Code Sec. 162(f), businesses may not deduct fines and penalties that are paid or incurred after December 21, 2017, due to the violation of a law or the investigation of a violation of law, if a government or similar entity is a complainant or investigator. Exceptions are available in certain cases where the payment was made for restitution, remediation, taxes due, or to come into compliance with a law.

In order for the exceptions to apply, the taxpayer must identify the payment as restitution or compliance in a court order or settlement agreement. In addition, Code Sec. 6050X requires that the officer or employee that has control over the suit or agreement, or the individual designated by the government or entity, must file a return with the IRS.

Establishing Restitution or Remediation
Under the proposed regulations, a taxpayer can establish that a payment was made for restitution or remediation by providing documentary evidence showing:

• the taxpayer was legally obligated to pay the amount of the order or agreement identified as restitution, remediation, or to come into compliance with a law;
• the amount paid or incurred; and
• the date on which the amount was paid or incurred.

The proposed regulations provide a list of documents that taxpayers can use to satisfy the establishment requirement. The regulations also clarify that reporting of the amount by a government or governmental entity under Code Sec. 6050X alone does not satisfy the establishment requirement.

Identification Requirement
According to Code Sec. 162(f)(2)(A), an order or agreement must identify the amount paid or incurred as restitution, remediation, or to come into compliance with a law. The proposed regulations state that an order or agreement should identify a payment by stating both (1) the nature of, or purpose for, each payment, and (2) the amount of each payment identified. Reporting of the amount by a government or governmental entity under Code Sec. 6050X does not satisfy the identification requirement.

Taxes and Interest
Under Code Sec. 162(f)(4), taxpayers may still deduct any taxes due, including any related interest on the taxes. However, the proposed regulations clarify that taxpayers may not deduct interest related to penalties.

Reporting Requirements
The proposed regulations provide appropriate officials with operational, administrative, and definitional rules for complying with statutory information reporting requirements with respect to Code Sec. 162(f). If the aggregate amount a payor is required to pay equals or exceeds the threshold amount under Proposed Reg. §1.6050X-1(g)(5), the appropriate official must file an information return with the IRS with respect to the amounts or incurred paid and any additional information required.

According to the proposed regulations, they must provide this information by filing Form 1098-F, Fines, Penalties, and Other Amounts, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns, on or before the annual due date. However, the proposed regulations do not require an appropriate official to file information returns for each tax year in which a payor makes a payment pursuant to a single order or agreement. Instead, the appropriate official must file only one information return for the aggregate amount identified in the order or agreement.

The proposed regulations also require that the appropriate official furnish a written statement to each payor with respect to which it is required to file an information return. The written statement must include the information that was reported on the information return, and a legend that identifies the statement as important tax information that is being furnished to the IRS. They can satisfy this requirement by providing a copy of Form 1098-F to the payor.

Material Change
According to the TCJA, the amendments to Code Sec. 162(f) apply to agreements entered into on or after December 22, 2017. The proposed regulations clarify that if the parties to an agreement that was binding prior to December 22, 2017, make a material change to that agreement on or after the date that the proposed regulations become final, the regulations will apply to the agreement.

If there is a material change to the agreement, the proposed regulations require the appropriate official to update the IRS by filing a corrected Form 1098-F on or before January 31 of the year following the calendar year. The proposed rules also require the appropriate official to furnish an amended written statement to the payor.

Definitions
The proposed regulations also define key terms and phrases for purposes of Code Sec. 162(f) and Code Sec. 6050X. These include "government," "governmental entity," "nongovernmental entity treated as a governmental entity," "restitution," "remediation of property," "amounts paid to come into compliance with a law," "appropriate official," "payor," and "threshold amount."

Effective Date
Proposed Reg. §1.162-21 is proposed to apply to tax years beginning on or after the date the proposed regulations are published as final regulations, but those rules do not apply to amounts paid or incurred under any order or agreement which became binding under applicable law before such date. Prior to the effective date, taxpayers may rely on Proposed Reg. §1.162-21, but only if they apply the rules in their entirety and in a consistent manner.

Proposed Reg. §1.6050X-1 is proposed to apply to orders and agreements that become binding under applicable law on or after January 1, 2022.

Comments
Taxpayers may submit comments via the Federal eRulemaking Portal at www.regulations.gov by following the online instructions for submitting comments and indicating IRS and REG-104591-18. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. Hard copy submissions must be addressed to: CC:PA:LPD:PR (REG-104591-18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Until further notice, any comments submitted on paper will be considered only to the extent practicable.

A partnership was denied a charitable contribution deduction because it had entered in an conservation easement that violated the perpetuity requirement of Code Sec. 170(h)(5) and its regulations. The Tax Court held that if there is a judicial extinguishment of an easement the donee receives a proportionate value of any proceeds.

A partnership was denied a charitable contribution deduction because it had entered in an conservation easement that violated the perpetuity requirement of Code Sec. 170(h)(5) and its regulations. The Tax Court held that if there is a judicial extinguishment of an easement the donee receives a proportionate value of any proceeds.

Easement Deed
The taxpayer had donated a conservation easement to a land trust and claimed a charitable contribution deduction. The easement deed provided that if the conservation restriction were extinguished at some future date, the donee would receive a share of the proceeds equal to the fair market value (FMV) of the easement on the date the contribution was made. The deed further provided that the donee’s share as thus determined would be reduced by the value of any improvements made by the donor after granting the easement.

The taxpayer argued that Reg. §1.170A-14(g)(6) does not say that the donee is entitled to a proportionate "share" of any proceeds upon extinguishment of the easement but proportionate "value." It argued this means fixed value, and because the regulation requires that the value be fixed as of the donation date, the donee was not entitled to any proceeds attributable to the value of post-donation improvements.

Windfall for Donees?
The IRS disallowed the deduction, contending that the extinguishment clause violated the requirements of Reg. §1.170A-14(g)(6). The Tax Court concurred with the IRS’s reasoning and held that the easement deed violated the "protected in perpetuity" requirement of Code Sec. 170(h)(5), as interpreted in Reg. §1.170A-14(g)(6).

The court held that the donee’s share of the "proportionate value" as used in the regulation means a fraction of the proceeds from a judicial extinguishment, and not a fixed value.

The taxpayer argued that it was unfair for a donee to receive extinguishment proceeds attributable to the value of improvements made solely by the donor, because it would amount to an unintended charitable contribution for which it received no deduction. However, the Tax Court found that the purpose of the regulation is to avoid any windfalls to donors, not donees, if an easement was extinguished. The easement deed violated the regulation because the donee must be entitled to any proceeds from extinguishment or condemnation that were at least equal to the total proceeds multiplied by a fraction defined by the ratio of the FMV of the easement to the FMV of the unencumbered property determined as of the date of the easement deed.

The taxpayer was not liable for accuracy-related penalties, because it acted reasonably and in good faith. The partner was unfamiliar with the nuances of setting up a conservation easement and had relied on private letter rulings.

Regulation Valid
The taxpayer challenged the validity of Reg. §1.170A-14(g)(6), which the Tax Court addressed in a concurrent opinion. The taxpayer contended the "proportionate value" approach to division of proceeds from a judicial extinguishment of the easement does not take into account the possibility of donor improvements. The Tax Court held that the regulation was properly promulgated, as it substantially revised the text regarding the proportionate value in response to comments and had only received one comment on the possibility of improvements. The court therefore found that the regulation was valid under the Administrative Procedure Act, 5 U.S.C. Section 553.

The Tax Court further relied on the two-part test given in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), and held that the construction of Code Sec. 170(h)(5) as set forth in Reg. §1.170A-14(g)(6) was valid. The Treasury exercised reasoned judgment by adhering to a simple rule that split sale proceeds in a direct proportional manner on the basis of a fraction determined as of the date the gift was made. Because the regulation as drafted ensures satisfaction of the statutory mandate that the conservation purpose be "protected in perpetuity," the regulation was not arbitrary, capricious, or manifestly contrary to the Code.

The IRS has released proposed regulations clarifying that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions:

The IRS has released proposed regulations clarifying that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions:

• costs paid or incurred in connection with the administration of an estate or non-grantor trust that would not have been incurred if the property were not held in the estate or trust;
• the personal exemption of an estate or non-grantor trust;
• the distribution deduction for trusts distributing current income; and
• the distribution deduction for estates and trusts accumulating income.

These deductions are not affected by the suspension of the deductibility of miscellaneous itemized deductions for tax years beginning after December 31, 2017, and before January 1, 2026. The proposed regulations also provide guidance on determining the character, amount, and allocation of deductions in excess of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust. Specifically, the proposed regulations clarify that the character of the deductions does not change when succeeded to by a beneficiary on termination of the estate or trust, and require the fiduciary to separately identify deductions that may be limited when claimed by the beneficiary. The proposed regulations affect estates, non-grantor trusts (including the S portion of an electing small business trust), and their beneficiaries.

Section 67(g)
Code Sec. 67(g), as added by the Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA), prohibits individual taxpayers from claiming miscellaneous itemized deductions for any tax year beginning after December 31, 2017, and before January 1, 2026. The Treasury Department and the IRS had issued Notice 2018-61, 2018-31 I.R.B. 278, announcing that proposed regulations would address the effect of Code Sec. 67(g) on the deductibility of certain expenses described in Code Sec. 67(b) and (e) incurred by estates and non-grantor trusts. The notice states that regulations would clarify that expenses described in Code Sec. 67(e) remain deductible in determining the adjusted gross income of an estate or non-grantor trust during the tax years in which Code Sec. 67(g) applies.

Notice 2018-61 requested comments regarding the effect of Code Sec. 67(g) on the ability of the beneficiary to deduct amounts comprising the Code Sec. 642(h)(2) excess deduction on the termination of an estate or trust considering Code Sec. 642(h) and Reg. §1.642(h)-2(a), and expressed the intent to address this issue in regulations. The Treasury Department and IRS also requested comments on whether the separate deductions comprising the Code Sec. 642(h)(2) excess deduction (such as Code Sec. 67(e) deductions) should be analyzed separately when applying Code Sec. 67.

The IRS has released the 2017 optional standard mileage rates that employees, self-employed individuals, and other taxpayers can use to compute deductible costs of operating automobiles (including vans, pickups and panel trucks) for business, medical, moving and charitable purposes. The updated rates are effective for deductible transportation expenses paid or incurred on or after January 1, 2017, and for mileage allowances or reimbursements paid to, or transportation expenses paid or incurred by, an employee or a charitable volunteer on or after January 1, 2017.

The IRS has released the 2017 optional standard mileage rates that employees, self-employed individuals, and other taxpayers can use to compute deductible costs of operating automobiles (including vans, pickups and panel trucks) for business, medical, moving and charitable purposes. The updated rates are effective for deductible transportation expenses paid or incurred on or after January 1, 2017, and for mileage allowances or reimbursements paid to, or transportation expenses paid or incurred by, an employee or a charitable volunteer on or after January 1, 2017.

Business mileage rate

Beginning on January 1, 2017, the standard mileage rates for the use of a car, van, pickup or panel truck used in a business is:

• 53.5 cents per mile for business miles driven (down from 54 cents in 2016);
• 17 cents per mile for medical and moving expenses (down from 19 cents in 2016); and
• 14 cents per mile for miles driven for charitable purposes (permanently set by statute at 14 cents).
• Comment. The business rate had increased by 1.5 cents in 2015 and then dropped 4 cents in 2016, while the medical and moving rates dropped slightly (by 0.5 cents) in 2015 and then more significantly by four cents in 2016. With gas prices dropping and vehicle prices holding steady in 2016, when statistics for the 2017 rates are gathered, the optional mileage rates for business expenses for 2017 dropped to their lowest levels over five years.

Comment. As an alternative to the optional mileage rates, taxpayers can use the actual expense method. Actual expenses include expenditures for gas, oil, repairs, tires, insurance, registration fees, licenses, and other qualified costs, including depreciation. Other items, however, such as parking fees and tolls may also be deductible. A taxpayer may not use the business standard mileage rate after using a depreciation method under Code Sec. 168 or after claiming the Code Sec. 179 first-year expensing deduction for that vehicle. A taxpayer also may not use the business rate for more than four vehicles at a time.

Other amounts

For automobiles used for business, a taxpayer must use 23 cents per mile as the portion of the standard mileage rate treated as depreciation for 2017 for purposes of later determining any gain or loss on a subsequent sale. For prior years, these amounts are 24 cents for 2016 and 2015; 22 cents for 2014; and 23 cents for both 2012 and 2013.

To compute the allowance under a fixed and variable rate (FAVR) plan for 2017, the standard automobile cost may not exceed $27,900 for cars or $31,300 for trucks and vans (down from $28,000 for cars for 2016 but up slightly for trucks and vans from $31,000 for 2016).

The Surface Transportation Act of 2015: Tax Provisions (enacted on Jul. 31, 2015) provided for major changes in certain tax return deadlines. To allow for a transition period for taxpayers to adjust to the new due dates, the new filing deadlines carried a delayed effective date: for tax returns for tax years starting on or after January 1, 2016. As a result, the upcoming 2017 filing season is the first year these changes will take place.

The Surface Transportation Act of 2015: Tax Provisions (enacted on Jul. 31, 2015) provided for major changes in certain tax return deadlines. To allow for a transition period for taxpayers to adjust to the new due dates, the new filing deadlines carried a delayed effective date: for tax returns for tax years starting on or after January 1, 2016. As a result, the upcoming 2017 filing season is the first year these changes will take place.

Partnerships

The due date for partnerships to file Form 1065, U.S. Return of Partnership Income and Schedule K-1s, Partner's Share of Income, is moving this year from April 15 to March 15 (or to the 2½ months after the close of its tax year). This will be the same filing deadline now in place for S corporations.

The shift to a March 15 deadline will better enable partners, like current S corporation shareholders, to receive their Schedules K-1 in time to report that information on their Form 1040 before its April 15 due date. Many partners in the past had been forced to file for a six-month extension to file their Form 1040s.

Note: The traditional April 15, 2017 deadline falls on a Saturday and because Washington, D.C., will celebrate Emancipation Day the following Monday, April 17, 2017, the filing deadline has been pushed to Tuesday, April 18, 2017.

C Corporations

The filing deadline for regular C corporations is moving this year from March 15 (or the 15^th day of the 3^rd month after the end of its tax year) to April 15 (or the 15^th day of the 4th month after the end of its tax year). One exception: For C corporations with tax years ending on June 30, the filing deadline will remain at September 15 until tax years beginning after December 31, 2025, when it will become October 15.

Further, an automatic six-month extension will be available for C corporations, except for calendar-year C corporations through 2025, during which an automatic five-month extension until September 15 will generally apply. The stop-gap bill also instructs the IRS to modify regulations to provide for a variety of extensions-to-file rules, including, among others, a 6-month extension of Form 1065 to September 15 for calendar-year partnerships; and 5½ months ending September 30 for calendar-year trusts filing Form 1041.

FBARs

The new law also aligns the FBAR (Report of Foreign Bank and Financial Accounts) due date with the due date for individual returns, moving it from June 30 to April 15.

A new year may find a number of individuals with the pressing urge to take stock, clean house and become a bit more organized. With such a desire to declutter, a taxpayer may want to undergo a housecleaning of documents, receipts and papers that he or she may have stored over the years in the event of an IRS audit. Year to year, fears of an audit for claims for tax deductions, allowances and credits may have led to the accumulation of a number of tax related documents—many of which may no longer need to be kept.

A new year may find a number of individuals with the pressing urge to take stock, clean house and become a bit more organized. With such a desire to declutter, a taxpayer may want to undergo a housecleaning of documents, receipts and papers that he or she may have stored over the years in the event of an IRS audit. Year to year, fears of an audit for claims for tax deductions, allowances and credits may have led to the accumulation of a number of tax related documents—many of which may no longer need to be kept.

However, it is of extreme importance for tax records to support the income, deductions and credits claimed on returns. Therefore, taxpayers must keep such records in the event the IRS inquires about a return or amended return.

Return-related documents

Generally, the IRS recommended that a taxpayer keep copies of tax returns and supporting documents at least three years. However, the IRS noted, there are some documents that should be kept for up to seven years, for those instances where a taxpayer needs to file an amended return or if questions may arise. As a rule of thumb, taxpayers should keep real estate related records for up to seven years following the disposition of property.

Health care related documents

Although health care information statements should be kept with other tax records, taxpayers are to remember that such statements do not need to be sent to the IRS as proof of health coverage. Records that taxpayers are strongly encouraged to keep include records of employer-provided coverage, premiums paid, advance payments of the premium tax credit received and the type of coverage held. As with other tax records, the IRS recommended that taxpayers keep such information for three years from the time of filing the associated tax return.

Last year’s return

Taxpayers are encouraged to keep a copy of last year’s return. The IRS, in efforts to thwart tax related identity theft and refund fraud, continues to make changes to authenticate and protect taxpayer identity in online return-related interactions. Beginning in 2017, some taxpayers who e-file will need to enter either the prior-year adjusted gross income or the prior-year self-select PIN and date of birth—information associated with the prior year’s return—to authenticate their identity.

Good recordkeeping is essential for individuals and businesses before, during, and after the upcoming tax filing season.

Good recordkeeping is essential for individuals and businesses before, during, and after the upcoming tax filing season.

First, the law actually requires taxpayers to retain certain records for a specified number of years, for example tax returns or employment tax records (for employers).

Second, good recordkeeping is essential for taxpayers while preparing their tax returns. The Tax Code frequently requires taxpayers to substantiate their income and claims for deductions and credits by providing records of various profits, expenses and transactions.

Third, if a taxpayer is ever audited by the IRS, good recordkeeping can facilitate what could be a long and invasive process, and it can often mean the difference between a no change and a hefty adjustment.

Finally, business taxpayers should maintain good records that will enable them to track the trajectory of their success over the years.

Here you will find a sample list of various types of records it would be wise to retain for tax and other purposes (not an exhaustive list; see this office for further customization to your particular situation):

Individuals

Filing status:

Marriage licenses or divorce decrees – Among other things, such records are important for determining filing status.

Determining/Substantiating income:

State and federal income tax returns – Tax records should be retained for at least three years, the length of the statute of limitations for audits and amending returns. However, in cases where the IRS determines a substantial understatement of tax or fraud, the statute of limitations is longer or can remain open indefinitely.

Paystubs, Forms W-2 and 1099, Pension Statements, Social Security Statements – These statements are essential for taxpayers determining their earned income on their tax returns. Taxpayers should also cross reference their wage and income reports with their final pay stubs to verify that their employer has reported the correct amount of income to the IRS.

Tip diary or other daily tip record – Taxpayers that receive some of their income from tips should keep a daily record of their tip income. Under the best circumstances, taxpayers would have already accurately reported their tip income to their employers, who would then report that amount to the IRS. However, mistakes can occur, and good recordkeeping can eliminate confusion when tax season arrives.

Military records – Some members of the military are exempt from state and/or federal tax; combat pay is exempt from taxation, as are veteran’s benefits. (In many cases, a record of military service is necessary to obtain veteran’s benefits in the first place.)

Copies of real estate purchase documents – Up to $500,000 of gain from the sale of a personal residence may be excludable from income (generally up to $250,000 if you are single). But if you own a home that sold for an amount that produces a greater amount of gain, or if you own real estate that is not used as your personal residence, you will need these records to prove your tax basis in your home; the greater your basis, the lower the amount of gain that must be recognized.

Individual Retirement Account (IRA) records – Funds contributed to Roth IRAs and traditional IRAs and the earnings thereon receive different tax treatments upon distribution, depending in part on when the distribution was made, what amount of the contributions were tax deferred when made, and other factors that make good recordkeeping desirable.

Investment purchase confirmation records – Long-term capital gains receive more favorable tax treatment than short-term capital gains. In addition, basis (generally the cost of certain investments when purchased) can be subtracted from gain from any sale. For these reasons, taxpayers should keep records of their investment purchase confirmations.

Substantiating deductions:

Acknowledgments of charitable donations – Cash contributions to charity cannot be deducted without a bank record, receipt, or other means. Charitable contributions of $250 or more must be substantiated by a contemporaneous written acknowledgment from the qualified organization that also meets the IRS requirements.

Cash payments of alimony – Payments of alimony may be deductible from the gross income of the paying spouse . . . if the spouse can substantiate the payments and certain other criteria are met.

Medical records – Disabled taxpayers under the age of 65 should keep a written statement from a qualified physician certifying they were totally disabled on the date of retirement.

Records of medical expenses – Certain unreimbursed medical expenses in excess of 10 percent of adjusted gross income may be deductible. Caution: a pending tax-reform proposal may change the deductibility of these expenses.

Mortgage statements and mortgage insurance – Mortgage interest and real estate taxes have generally deductible for taxpayers who itemize rather than claim the standard deduction. Caution: a pending tax-reform proposal may change the deductibility of these expenses.

Receipts for any improvements to real estate – Part or all of the expense of certain energy efficient real estate improvements can qualify taxpayers for one or more tax credits.

Keeping so many records can be tedious, but come tax-filing season it can result in large tax savings. And in the case of an audit, evidence of good recordkeeping can get you off to a good start with the IRS examiner handling the case, can save time, and can also save money. For more information on recordkeeping for individuals, please contact our offices.

Businesses

Taxpayers are required by law to keep permanent books of account or records that sufficiently substantiate the amount of gross income, deductions, credits and other amounts reported and claimed on any their tax returns and information returns.

Although, neither the Tax Code nor its regulations specify exactly what kinds of records satisfy the record-keeping requirements, here are a few suggestions:

State and federal income tax returns – These and any supporting documents should be kept for at least the period of limitations for each return. As with individual taxpayers, the limitations period for business tax returns may be extended in the event of a substantial understatement or fraud.

Employment taxes – The Tax Code requires employers to keep all records of employment taxes for at least four years after filing for the 4th quarter for the year. Generally these records would include wage payments and other payroll-related records, the amount of employment taxes withheld, reported tip income, identification information for employees and other payees; employees’ dates of employment; income tax withholding allowance certificates (Forms W-4, for example), fringe benefit payments, and more.

Business income – These would go toward substantiating income, and could include cash register tapes, bank deposit slips, a cash receipts journal, annual financial statements, Forms 1099, and more.

Inventory costs – Businesses should keep records of inventory purchases. For example, if an electronics company purchases a certain number of widgets for resale or a manufacturer purchases a certain number of ball bearings for use in the production of industrial equipment that it manufactures and sells. The costs of these goods, parts, or other materials can be deducted from sales income to significantly reduce tax liability.

Business expenses – Ordinary and necessary expenses for carrying on business, such as the cost of rental office space, are also generally deductible from business income. Such expenses can be substantiated through bank statements, canceled checks, credit card receipts or other such records. The cost of making certain improvements to a business, such as through buying equipment or renovating property, can also be deductible.

Electronic back-up

Paper records can take up a great deal of storage space, and they are also vulnerable to destruction in fires, floods, earthquakes, or other natural phenomena. Because records are required to substantiate most income, deductions, property values and more—even when they no longer exist—taxpayers (and especially business taxpayers) should digitize their records on an electronic storage system and keep a back-up copy in a secure location.

Business taxation can be extremely complicated, and the requirements for recordkeeping vary greatly depending on the size of the business, the form of organization chosen, and the type of industry in which the business operates. For more details on your specific situation, please call our offices.

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

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

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

Used clothing contributions worth more than $500

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

Determining the fair market value of used clothing

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

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

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

The IRS allows taxpayers with a charitable inclination to take a deduction for a wide range of donated items. However, the IRS does provide specific guidelines for those taxpayers contributing non-cash items, from the type of charity you can donate to in order to take a deduction to the quality of the goods you contribute and how to value them for deduction purposes. If your summer cleaning has led, or may lead, you to set aside clothes and other items for charity, and you would like to know how to value these items for tax purposes, read on.

Household items that can be donated to charitable, and for which a deduction is allowed, include:

• Furniture;
• Furnishings;
• Electronics;
• Appliances;
• Linens; and
• Similar items.

The following are not considered household items for charitable deduction purposes:

• Food;
• Paintings, antiques, and other art objects;
• Jewelry; and
• Collections.

Valuing clothing and household items

Many people give clothing, household goods and other items they no longer need to charity. If you contribute property to a qualified organization, the amount of your charitable contribution is generally the fair market value (FMV) of the property at the time of the contribution. However, if the property has increased in value since you purchased it, you may have to make some adjustments to the amount of your deduction.

You can not deduct donations of used clothing and used household goods unless you can prove the items are in "good," or better, condition; and in the case of equipment, working. However, the IRS has not specifically set out what qualifies as "good" condition.

Fair market value is the amount that the item could be sold for now; what you originally paid for the clothing or household item is completely irrelevant. For example, if you paid $500 for a sofa that would only get you $50 at a yard sale, your deduction for charitable donation purposes is $50 (the sofa's current FMV). You cannot claim a deduction for the difference in the price you paid for the item and its current FMV.

To determine the FMV of used clothing, you should generally claim as the value the price that a buyer of used clothes would pay at a thrift shop or consignment store.

Comment. In the rare event that the household item (or items) you are donating to charity has actually increased in value, you will need to make adjustments to the value of the item in order to calculate the correct deductible amount. You may have to reduce the FMV of the item by the amount of appreciation (increase in value) when calculating your deduction.

Good faith estimate

All non-cash donations require a receipt from the charitable organization to which they are donated, and it is your responsibility as the taxpayer, not the charity's, to make a good faith estimate of the item's (or items') FMV at the time of donation. The emphasis on valuation should be on "good faith." The IRS recognizes some abuse in this area, yet needs to balance its public ire with its duty to encourage legitimate donations. While the audit rate on charitable deductions is not high, it also is not non-existent. You must be prepared with reasonable estimates for used clothing and household goods, high enough so as not to shortchange yourself, yet low enough to prevent an IRS auditor from threatening a penalty.

In any event, if the FMV of any item is more than $5,000, you will need to obtain an appraisal by a qualified appraiser to accompany your tax form (which is Form 8283, Noncash Charitable Contributions). When dealing with valuables, an appraisal helps protect you as well as the IRS.

If you have questions about the types of items that you can donate to charity, limits on deductibility, or other general inquiries about charitable donations and deductions, please contact out office.

If you've made, or are planning to make, a big gift before the end of 2009, you may be wondering what your gift tax liability, if any, may be. You may have to file a federal tax return even if you do not owe any gift tax. Read on to learn more about when to file a federal gift tax return.

When you must file

Most gifts you make are not subject to the gift tax. Generally, you must file a gift tax return, Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return, if any of the following apply to gifts you have made, or will make, in 2009:

• Gifts you give to another person (other than your spouse) exceed the $13,000 annual gift tax exclusion for 2009.
• You and your spouse are splitting a gift.
• You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy or receive income from until some time in the future.

Remember, filing a gift tax return does not necessarily mean you will owe gift tax.

Gifts that do not require a tax return

You do not have to file a gift tax return to report three types of gifts: (1) transfers to political organizations, (2) gift payments that qualify for the educational exclusion, or (3) gift payments that qualify for the medical payment exclusion. Although medical expenses and tuition paid for another person are considered gifts for federal gift tax purposes, if you make the gift directly to the medical or educational institution, the payment will be non-taxable. This applies to any amount you directly transfer to the provider as long as the payments go directly to them, not to the person on whose behalf the gift is made.

Unified credit

Even if the gift tax applies to your gifts, it may be completely eliminated by the unified credit, also referred to as the applicable credit amount, which can eliminate or reduce your gift (as well as estate) taxes. You must subtract the unified credit from any gift tax you owe; any unified credit you use against your gift tax in one year will reduce the amount of the credit you can apply against your gift tax liability in a later year. Keep in mind that the total credit amount that you use against your gift tax liability during your life reduces the credit available to use against your estate tax.

Let's take a look at an example:

In 2009, you give your nephew Ben a cash gift of $8,000. You also pay the $20,000 college tuition of your friend, Sam. You give your 30-year-old daughter, Mary, $25,000. You also give your 27-year-old son, Michael, $25,000. Before 2009, you had never given a taxable gift. You apply the exceptions to the gift tax and the unified credit as follows:

• The qualified education tuition exclusion applies to the gift to Sam, as payment of tuition expenses is not subject to the gift tax. Therefore, the gift to Sam is not a taxable gift.
• The 2009 annual exclusion applies to the first $13,000 of your gift to Ben, Mary and Michael, since the first $13,000 of your gift to any one individual in 2009 is not taxable. Therefore, your $8,000 gift to Ben, the first $13,000 of your gift to Mary, and the first $13,000 of your gift to Michael are not taxable gifts.
• Finally, apply the unified credit. The gift tax will apply to $24,000 of the above transfers ($12,000 remaining from your gift to Mary, plus $12,000 remaining from your gift to Michael). The amount of the tax on the $24,000 is computed using IRS tables for computing the gift tax, which is located in the Instructions for Form 709. You would subtract the tax owe on these gifts from your unified credit of $345,800 for 2009. The unified credit that you can use against the gift tax in a later year (and against any estate tax) will thus be reduced. If you apply the unified credit to the amount of gift tax owe in 2009, you may not have to pay any gift tax for the year. Nevertheless, you will have to file a Form 709.

Filing a gift tax return

You must report the amount of a taxable gift on Form 709. For gifts made in 2009, the maximum gift tax rate is 45 percent. You can make an unlimited number of tax-free gifts in 2009, as long as the gifts are not more than $13,000 to each person or entity in 2009 (or $26,000 if you and your spouse make a gift jointly), without having to pay gift taxes on the transfers.

If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

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If you use your car for business purposes, you may have learned that keeping track and properly logging the variety of expenses you incur for tax purposes is not always easy. Practically speaking, how often and how you choose to track expenses associated with the business use of your car depends on your personality; whether you are a meticulous note-taker or you simply abhor recordkeeping. However, by taking a few minutes each day in your car to log your expenses, you may be able to write-off a larger percentage of your business-related automobile costs.

Regardless of the type of record keeper you consider yourself to be, there are numerous ways to simplify the burden of logging your automobile expenses for tax purposes. This article explains the types of expenses you need to track and the methods you can use to properly and accurately track your car expenses, thereby maximizing your deduction and saving taxes.

Expense methods

The two general methods allowed by the IRS to calculate expenses associated with the business use of a car include the standard mileage rate method or the actual expense method. The standard mileage rate for 2017 is 53.5 cents per mile. In addition, you can deduct parking expenses and tolls paid for business. Personal property taxes are also deductible, either as a personal or a business expense. While you are not required to substantiate expense amounts under the standard mileage rate method, you must still substantiate the amount, time, place and business purpose of the travel.

The actual expense method requires the tracking of all your vehicle-related expenses. Actual car expenses that may be deducted under this method include: oil, gas, depreciation, principal lease payments (but not interest), tolls, parking fees, garage rent, registration fees, licenses, insurance, maintenance and repairs, supplies and equipment, and tires. These are the operating costs that the IRS permits you to write-off. For newly-purchased vehicles in years in which bonus depreciation is available, opting for the actual expense method may make particularly good sense since the standard mileage rate only builds in a modest amount of depreciation each year. For example, for 2017, when 50 percent bonus depreciation is allowed, maximum first year depreciation is capped at $11,160 (as compared to $3,160 for vehicles that do not qualify). In general, the actual expense method usually results in a greater deduction amount than the standard mileage rate. However, this must be balanced against the increased substantiation burden associated with tracking actual expenses. If you qualify for both methods, estimate your deductions under each to determine which method provides you with a larger deduction.

Substantiation requirements

Taxpayers who deduct automobile expenses associated with the business use of their car should keep an account book, diary, statement of expenses, or similar record. This is not only recommended by the IRS, but essential to accurate expense tracking. Moreover, if you use your car for both business and personal errands, allocations must be made between the personal and business use of the automobile. In general, adequate substantiation for deduction purposes requires that you record the following:

• The amount of the expense;
• The amount of use (i.e. the number of miles driven for business purposes);
• The date of the expenditure or use; and
• The business purpose of the expenditure or use.

Suggested recordkeeping: Actual expense method

An expense log is a necessity for taxpayers who choose to use the actual expense method for deducting their car expenses. First and foremost, always keep your receipts, copies of cancelled checks and bills paid. Maintaining receipts, bills paid and copies of cancelled checks is imperative (even receipts from toll booths). These receipts and documents show the date and amount of the purchase and can support your expenditures if the IRS comes knocking. Moreover, if you fail to log these expenses on the day you incurred them, you can look back at the receipt for all the essentials (i.e. time, date, and amount of the expense).

Types of Logs. Where you decide to record your expenses depends in large part on your personal preferences. While an expense log is a necessity, there are a variety of options available to track your car expenditures - from a simple notebook, expense log or diary for those less technologically inclined (and which can be easily stored in your glove compartment) - to the use of a smartphone or computer. Apps specifically designed to help track your car expenses can be easily downloaded onto your iPhone or Android device.

Timeliness. Although maintaining a daily log of your expenses is ideal - since it cuts down on the time you may later have to spend sorting through your receipts and organizing your expenses - this may not always be the case for many taxpayers. According to the IRS, however, you do not need to record your expenses on the very day they are incurred. If you maintain a log on a weekly basis and it accounts for your use of the automobile and expenses during the week, the log is considered a timely-kept record. Moreover, the IRS also allows taxpayers to maintain records of expenses for only a portion of the tax year, and then use those records to substantiate expenses for the entire year if he or she can show that the records are representative of the entire year. This is referred to as the sampling method of substantiation. For example, if you keep a record of your expenses over a 90-day period, this is considered an adequate representation of the entire year.

Suggested Recordkeeping: Standard mileage rate method

If you loathe recordkeeping and cannot see yourself adequately maintaining records and tracking your expenses (even on a weekly basis), strongly consider using the standard mileage rate method. However, taking the standard mileage rate does not mean that you are given a pass by the IRS to maintaining any sort of records. To claim the standard mileage rate, appropriate records would include a daily log showing miles traveled, destination and business purpose. If you incur mileage on one day that includes both personal and business, allocate the miles between the two uses. A mileage record log, whether recorded in a notebook, log or handheld device, is a necessity if you choose to use the standard mileage rate.

If you have any questions about how to properly track your automobile expenses for tax purposes, please call our office. We would be happy to explain your responsibilities and the tax consequences and benefits of adequately logging your car expenses.

No, taxpayers may destroy the original hardcopy of books and records and the original computerized records detailing the expenses of a business if they use an electronic storage system.

Business often maintain their books and records by scanning hardcopies of their documents onto a computer hard drive, burning them onto compact disc, or saving them to a portable storage device. The IRS classifies records stored in this manner as an "electronic storage system." Businesses using an electronic storage system are considered to have fulfilled IRS records requirements for all taxpayers, should they meet certain requirements. And, they have the freedom to reduce the amount of paperwork their enterprise must manage.

Record-keeping requirements

Code Sec. 6001 requires all persons liable for tax to keep records as the IRS requires. In addition to persons liable for tax, those who file informational returns must file such returns and make use of their records to prove their gross income, deductions, credits, and other matters. For example, businesses must substantiate deductions for business expenses with appropriate records and they must file informational returns showing salaries and benefits paid to employees.

It is possible for businesses using an electronic storage system to satisfy these requirements under Code Sec. 6001. However, they must fulfill certain obligations.

Paperwork reduction

In addition, using an electronic storage system may allow businesses to destroy the original hardcopy of their books and records, as well as the original computerized records used to fulfill the record-keeping requirements of code Sec. 6001. To take advantage of this option, taxpayers must:

(1) Test their electronic storage system to establish that hardcopy and computerized books and records are being reproduced according to certain requirements, and

(2) Implement procedures to assure that its electronic storage system is compliant with IRS requirements into the future.

Our firm would be glad to work with you to meet the IRS's specifications, should you want to establish a computerized recordkeeping system for your business. The time spent now can be worth considerable time and money saved by a streamlined and organized system of receipts and records.