Client Updates

TAX NEWS FALL 2019 -

NOVEMBER IRS UPDATES

IR-2019-183, November 14, 2019

WASHINGTON — The Internal Revenue Service today issued guidance for taxpayers with certain deductible expenses to reflect changes resulting from the Tax Cuts and Jobs Act (TCJA).

Revenue Procedure 2019-46 (PDF), posted today on IRS.gov, updates the rules for using the optional standard mileage rates in computing the deductible costs of operating an automobile for business, charitable, medical or moving expense purposes.

The guidance also provides rules to substantiate the amount of an employee's ordinary and necessary travel expenses reimbursed by an employer using the optional standard mileage rates. Taxpayers are not required to use a method described in this revenue procedure and may instead substantiate actual allowable expenses provided they maintain adequate records.

The TCJA suspended the miscellaneous itemized deduction for most employees with unreimbursed business expenses, including the costs of operating an automobile for business purposes. However, self-employed individuals and certain employees, such as Armed Forces reservists, qualifying state or local government officials, educators and performing artists, may continue to deduct unreimbursed business expenses during the suspension.

The TCJA also suspended the deduction for moving expenses. However, this suspension does not apply to a member of the Armed Forces on active duty who moves pursuant to a military order and incident to a permanent change of station.

THE TAXPAYER FIRST ACT OF 2019

On July 1st, The Taxpayer First Act of 2019 was signed into law by President Trump.  This bill provides for improvements to the operations of the Internal Revenue Service, better interactions with taxpayers, and more safeguards to protect the integrity of the tax system. We have provided some of the key points from the bill, which impact all taxpayers.  We continue to address the major legislation from the last tax filing season, The Tax Cuts and Jobs Act. The impact to the individual taxpayer is felt in the changes to the Schedule A, Itemized Deductions, with the limitation on the state and local taxes, and elimination of various deductions such as tax preparation fees, investment fees, job hunting costs, and unreimbursed employee expenses. For the business taxpayer the changes were seen in the purchase of assets, elimination of the expenses for entertainment, and the new deduction for qualified business income.  If you have rental property, the IRS has issued new recordkeeping guidelines to help determine whether the rental operations are to be considered an active trade or business or if it remains a passive activity. If you feel you may meet the guidelines, contact our office to determine the appropriate actions to take.  Finally, we address the issue of data breaches and working in a secure computer environment. We are committed to maintaining a safe environment whereby our client data is protected. The IRS is working diligently to provide timely information. We employ additional safeguards in the sharing of information and documents with our clients which may necessitate strong passwords or the use of secure transmissions which may require additional authentication.

Contact our office if you have any questions regarding the information provided, or any other tax situation that you may be facing. We are available to assist with tax planning, tax projections and understanding the legislative and tax changes that may impact you and/or your business.

The Taxpayer First Act of 2019 (TFA) was signed into law on July 1, 2019. The focus of the bill is to enact changes in the IRS’s organizational structure which includes customer service, enforcement procedures, management of information technology, and improving interactions with taxpayers.  Some of the changes have already gone into effect as of the date of the enactment of the Act, some were effective 45 days after the date of the enactment of the Act. Other changes are to be built into the new organizational plan for the agency and are applicable by December 31, 2020.  While the TFA is a comprehensive bill which includes changes for the IRS, the tax professional community and the individual taxpayer, following are some provisions which will affect the individual taxpayer:

* IRS Independent Office of Appeals: An independent administrative appeals function at the IRS (these rules had been carried in the agency’s internal rules) is formalized. The IRS Office of Appeals is renamed the “IRS Independent Office of Appeals.”  When a taxpayer requests an appeals hearing, the TFA requires that the administrative case file referred to the IRS Independent Office of Appeals be made available to eligible individual and small business taxpayers. Eligible taxpayers are those that, for the tax year to which the dispute relates, are: (1) individuals with adjusted gross income not exceeding $400,000, and (2) entities with gross receipts not exceeding $5 million for the tax year.

* Offers-in-Compromise: Taxpayers with incomes below 250% of the Federal Poverty level are not required to submit the application fee and initial payment when proposing an OIC to the IRS.

* Increased Penalty for Improper Disclosure or Use of Information by Preparers of Returns: In the case of disclosure of taxpayer identity information by a return preparer where the information is used in an identity theft crime, whether or not related to the filing of a tax return, increased civil penalties will apply. The increase in penalty is to enlist the participation of all tax preparers in securing their client’s information.

* Notice to Taxpayer of IRS Contact with Third Party: The IRS may not contact any person, other than the taxpayer, regarding the determination or collectability of a tax liability without providing the taxpayer with notice at least 45 days’ notice. This replaces the vague requirement that reasonable notice must be provided “in advance” to the taxpayer.

* Misdirected Tax Refund Deposits:  The IRS is to establish procedures for taxpayers to report instances where they did not receive their refund, or a refund was erroneously delivered to the wrong taxpayer. The IRS is to coordinate with financial institutions in order to (1) identify the accounts to which transfers were made, (2) recovery of the amounts transferred, and (3) facilitate the payment of the refund to the correct account of the taxpayer.

* Notification of Suspected Identity Theft: If a determination is made by the agency that there has been unauthorized use of the identify of Taxpayer First Act of 2019

CHECK YOUR BENEFICIARY DESIGNATIONS NOW, BEFORE DISATER STRIKES

You should probably take one very important estate planning action as soon as you finish reading this. Check the beneficiary designations for your:

* bank accounts,

* brokerage firm accounts,

* tax-favored retirement accounts,

* company benefit plans,

* life insurance policies,

* annuities, and

* 529 college savings accounts.

If you have not yet turned in the forms to designate beneficiaries, do so today. If the forms are out of date, change them to reflect current reality before it’s too late.  If you need motivation, here are two real life horror stories to light a fire under you.

Real-Life Horror Story 1

Dad failed to change the beneficiary designations for his Boeing Corporation pension benefits and life insurance after his divorce, so Dad’s former wife was still the named beneficiary.  Two months later, Dad died in a car crash. The Supreme Court ruled 7-2 that the beneficiary designations trumped a state law that would have automatically disinherited the ex-wife. So, the ex-wife received the money, and the kids were handed the bills for an unsuccessful legal fight that went all the way to the Supreme Court.

Real-Life Horror Story 2

In another real-life case, the ex-spouse collected $400,000 from Dad’s company savings and investment plan even though the ex-spouse had specifically waived any interest in the plan under the divorce agreement. Believing the divorce agreement was the last word on the subject, Dad failed to turn in the form to officially change the plan beneficiary from his ex-spouse to his daughter.  He died seven years after the divorce. The company plan document stipulated that beneficiaries could be changed only by submitting the required form. The Supreme Court unanimously ruled that the hideously outdated beneficiary designation trumped the divorce agreement. So, the ex-spouse received the $400,000, and the daughter received nothing.

The Disaster Avoidance Message

Divorce is not the only situation where failing to turn in or update beneficiary designation forms can cause heartache for your intended heirs—it’s just the most obvious situation.

For example, the same basic issue exists if you become disenchanted with an adult child who has decided to become a professional Frisbee golfer on top of marrying someone you cannot stand.  Or you might now decide to leave more of your life insurance benefits to an adult child who just had twins and less to your childless offspring.  You get the idea. When things in your life change, you may need to refresh your beneficiary designations.

Avoids Probate

Another big reason to designate beneficiaries: it avoids probate. Also, consider naming contingent beneficiaries. These are individuals who stand in line behind your primary beneficiaries.

Warning

Do not rely on a will or living trust document to override outdated beneficiary designations. As a general rule, whoever is named on the most recent beneficiary form (which may not be nearly recent enough) will get the money automatically when you die—regardless of what other documents might say.

Takeaways

Check your designations at least once a year or whenever significant life events occur. It usually takes only a few minutes to conduct a checkup and make any needed changes. Often you can access the necessary forms online. But if you wait, it could be too late, as illustrated by the real-life horror stories presented earlier. Don’t wait! 

RENTAL REAL ESTATE SAFE HARBOR FOR THE QUALIFIED BUSINESS INCOME DEDUCITON

One of the major provisions of the Tax Cuts and Jobs Act was the creation of a new deduction (Code Section 199A) for business owners operating as a sole proprietor, as a shareholder in an S Corporation or a partner in a partnership venture. This new deduction also extended to the owners of rental real estate; however, the initial guidelines were unclear as to what properties qualified and how to substantiate the activities of the rental owner.

Subsequently, the IRS has released safe harbor guidelines for those who think they may qualify for the new deduction. Solely for the purposes of the qualified business income deduction, Section 199A, a rental real estate enterprise will be treated as a trade or business if the following safe harbor requirements are satisfied during the taxable year with respect to the rental real estate enterprise:

* Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;

* 250 or more hours of rental services (see below for listing) are performed per year with respect to the rental enterprise; 

* The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS.

Rental services include: (i) advertising to rent or lease the real estate; (ii) negotiating and executing leases; (iii) verifying information contained in prospective tenant applications; (iv) collection of rent; (v) daily operation, maintenance, and  repair of the property; (vi) management of the real estate; (vii) purchase of materials; and (viii) supervision of employees and independent contractors.

Note that travel to and from the rental property(ies) does not count towards the 250 hours.

Real estate used by the taxpayer as a residence for any part of the year is not eligible for this safe harbor. Real estate rented or leased under a triple net lease is also not eligible for this safe harbor (however, it may still qualify as a trade or business based on the activities of the owner). 

A triple net lease includes a lease agreement that requires the tenant or lessee to pay taxes, fees, and insurance, and to be responsible for maintenance activities for a property in addition to rent and utilities. This includes a lease agreement that requires the tenant or lessee to pay a portion of the taxes, fees, and insurance, and to be responsible for maintenance activities allocable to the portion of the property rented by the tenant.

If the taxpayer elects the safe harbor method, they must include a statement attached to the return on which it claims the section 199A deduction. The IRS has created a new form, Form 8995, Qualified Business Income Deduction, to be used when claiming this deduction.

Contact the SFS to verify if you would meet this new criterion for claiming the deduction and the paperwork we will need when preparing your income tax return



Schedule a Consultation


Get In Touch


Featured Articles


Subscribe to our Emailed Newsletter