President Trump recently walked back consideration of capital gains indexing and a payroll tax cut, less than 24 hours after signaling his support for both.

President Trump recently walked back consideration of capital gains indexing and a payroll tax cut, less than 24 hours after signaling his support for both.

Payroll Tax Cut
Reports on Capitol Hill had begun swirling recently that the Trump administration was considering cutting payroll taxes.

"We’re looking at various tax reductions," Trump told reporters at the White House on August 20. "I have been thinking about payroll taxes for a long time," he added. "A lot of people would like to see that."

However, White House staff swiftly denied that any payroll tax cut was under consideration, according to several reports.

Along those lines, Michael Zona, communications director for Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, told Wolters Kluwer on August 20 that no such discussions were occurring between the SFC majority and the president. "Chairman Grassley has not discussed a potential payroll tax cut with the Administration," Zona told Wolters Kluwer.

Payroll taxes are used to fund certain social programs such as Social Security and Medicare. Generally, payroll taxes are paid primarily through the wages and salaries of employees, as noted by the nonpartisan Tax Foundation. Amid recent reports that the U.S. economy could be heading toward a recession, cutting payroll taxes could potentially benefit middle-income taxpayers and bolster consumer spending.

On August 20, Trump disputed the notion that a recession could be around the bend. Additionally, Trump told reporters that any consideration of a payroll tax cut is unrelated to mostly Democratic claims of an impending recession. In that vein, Zona told Wolters Kluwer on August 20 that "[a]t this point, recession seems more of a political wish by Democrats than an economic reality."

Indexing Capital Gains to Inflation
Further, Trump confirmed to reporters at the White House on August 20 that he is still considering indexing capital gains to inflation. Lately, lawmakers have become increasingly vocal concerning their differing viewpoints on the matter, both as to tax policy and legality.

"We’ve been talking about indexing [capital gains to inflation] for a long time," Trump said. "It can be done directly by me…I can do it directly," he said, referencing a recent uptick in debate between Republican and Democratic lawmakers on the legality of such an executive move.

No Tax Cuts, No Indexing
Then on August 21, Trump told reporters at the White House that "I’m not looking at a tax cut now; we don’t need it. We have a strong economy."

Additionally, Trump followed up his initial assertion of authority to circumvent Congress on the tax policy issue by stating on August 21 that if he wanted to unilaterally index capital gains to inflation, he would need a letter from the Attorney General.

However, the longstanding Republican and Democratic debate as to whether the executive branch has authority to index capital gains to inflation appears to be moot, at least for the time being.

"I’m not looking to do indexing," Trump said on August 21. "I’ve studied indexing for a long time. I want tax [cuts] for middle-class workers. I think indexing is probably better for the upper income groups; I’m not looking to do that."

The Senate’s top tax writers have released the first round of bipartisan task force reports examining over 40 expired and soon to be expired tax breaks known as tax extenders. Congress is expected to address these particular tax breaks, as well as temporary tax policy in general, when lawmakers return to Washington, D.C. in September.

The Senate’s top tax writers have released the first round of bipartisan task force reports examining over 40 expired and soon to be expired tax breaks known as tax extenders. Congress is expected to address these particular tax breaks, as well as temporary tax policy in general, when lawmakers return to Washington, D.C. in September.

Tax Extenders Task Forces
Senate Finance Committee (SFC) Chairman Chuck Grassley, R-Iowa, and Ranking Member Ron Wyden, D-Ore., on August 13 released three of six reports detailing the work of bipartisan task forces that were created to examine certain tax breaks, which expired or will expire between December 31, 2017, and December 31, 2019. The three remaining tax extenders task force reports are expected to be released soon.

The reports released by Grassley and Wyden on August 13 were from the following task forces:

• Energy;
• Cost Recovery; and
• Individual, Excise and Other Temporary Tax Policy.

Next Steps
Wyden also highlighted the importance of moving away from the notion of temporary tax provisions in general, which Democrats and Republicans alike largely agree is not good tax policy. "Tax policy should not be set a year or two at a time. We need to find permanent solutions that provide certainty to families and businesses," Wyden said in an August 13 press release.

Grassley and Wyden introduced their bipartisan tax extenders bill earlier this year. However, Grassley reiterated on August 13 that movement of all tax legislation must be initiated in the House. Although House Ways and Means Committee Chairman Richard Neal, D-Mass., has also introduced his own tax extenders proposal, the bill is unlikely to garner enough support from Senate Republicans.

"The next step will be to put together a legislative package based on the proposals that the taskforces received, the areas of consensus among the taskforce members and continued bipartisan discussions," Grassley said in an August 13 press release. "Taxpayers deserve predictability and clarity, and they haven’t received either for far too long on temporary tax policy."

Bonus depreciation guidance that applies to property acquired after September 27, 2017, in a tax year that includes September 28, 2017, allows taxpayers to make a late election or revoke a prior valid election to...

Bonus depreciation guidance that applies to property acquired after September 27, 2017, in a tax year that includes September 28, 2017, allows taxpayers to make a late election or revoke a prior valid election to:

• elect out of 100 percent bonus depreciation;
• elect 100 percent bonus depreciation on specified plants in the year of planting or grafting; or
• elect the 50 percent rate in place of the 100 percent rate.

The late election or revocation may be made by filing an accounting method change, or in certain cases by filing an amended return. The taxpayer must have timely filed its federal tax return for the 2016 or 2017 tax year. Most taxpayers will prefer the administrative ease of filing an accounting method change with their next return and making a single Code Sec. 481(a) adjustment. This route is easier than filling an amended return and, if necessary, amended returns for any subsequent affected year.

Background
The Tax Cuts and Jobs Act ( P.L. 115-97) increased the bonus depreciation rate from 50 percent to 100 percent, effective for property acquired and placed in service after September 27, 2017. Many taxpayers filed returns for a 2016 or 2017 tax year that included September 27, 2017, before proposed bonus depreciation regulations ( REG-104397-18, August 8, 2018) were issued to explain the related bonus depreciation changes. Consequently, the IRS is granting relief to taxpayers, and disregarding the general rule that advance IRS permission must be obtained in a letter ruling to make a late election or revoke a prior election and that making or revoking an election is not an accounting method change.

Amended Returns
A late election or revocation of an election may be made on an amended return for the 2016 or 2017 tax year that includes September 28, 2017. However, according to the guidance, the amended return must be filed before the taxpayer files its federal return for the first tax year succeeding the 2016 or 2017 tax year, and must include the adjustment directly related to the late election or revocation as well as any collateral adjustments. Thus, for a calendar year taxpayer, an amended return for 2017 may be filed if the 2018 tax year return has not been filed. (e.g., if an October 15, 2019 filing extension was obtained).

Accounting Method Changes
Instead of filing an amended return, a taxpayer may file Form 3115, Application for Change in Accounting Method, with a taxpayer’s timely filed federal tax return for the first, second, or third tax year succeeding the 2016 or 2017 tax year that includes September 28, 2017, to make or revoke a covered election.

The automatic consent procedures apply. Accordingly, no fee is required. Multiple Forms 3115 do not need to be filed if more than one election or revocation is made.

Rev. Proc. 2018-31, I.R.B. 2018-22, 637, which lists all automatic accounting method changes, is modified to include this accounting method change.

Deemed Elections
A taxpayer who filed a timely 2016 or 2017 return that includes September 28, 2017, without following the formal election procedures in Rev. Proc. 2017-33, I.R.B. 2017-19, 1236, may be deemed to have made a valid election. Specifically, with respect to property placed in service after September 27, 2017, in a 2016 or 2017 tax year that includes September 28, 2017:

• An election to claim 100 percent bonus depreciation on a specified plant in the year of planting or grafting is considered made if the 100 percent rate was actually claimed on the return.
• An election not to claim bonus depreciation for a class of property is considered made if the taxpayer did not claim 100 percent bonus depreciation (or the elective 50 percent rate) for that class of property on the return.
• An election to claim the 50 percent bonus rate in lieu of the 100 percent bonus rate is considered made if the taxpayer claimed bonus depreciation on all qualified property using the 50 percent rate or on all specified plants in the year of planting or grafting.

These deemed elections may be revoked by filing an amended return or an accounting method change under the general rules above.

The IRS has granted a six-month extension to eligible partnerships to file a superseding Form 1065, U.S. Return of Partnership Income, and furnish corresponding Schedules K-1, Partner’s Share of Income, Deductions, Credits. For a calendar year partnership, the deadline to file Form 1065 and corresponding Schedules K-1 was March 15, which has now been extended to September 15.

The IRS has granted a six-month extension to eligible partnerships to file a superseding Form 1065, U.S. Return of Partnership Income, and furnish corresponding Schedules K-1, Partner’s Share of Income, Deductions, Credits. For a calendar year partnership, the deadline to file Form 1065 and corresponding Schedules K-1 was March 15, which has now been extended to September 15.

The relief is available to a partnership that satisfies the following eligibility requirements for the applicable tax year:

• the partnership has not elected the application of Code Sec. 6221(b) (Election Out for Certain Partnerships with 100 or Fewer Partners);
• it has timely filed Form 1065 and
• it has timely furnished all required Schedules K-1 (without regard to the extensions of time provided by the revenue procedure).

The extensions are available only to partnerships that timely filed Form 1065 and timely furnished Schedules K-1 and also file a superseding Form 1065 and furnish corresponding Schedules K-1 on or before the date that is six-months after the non-extended deadline. Further, the filing and furnishing extensions apply only to partnership tax years that ended prior to the issuance of the revenue procedure and for which the extended due date for the partnership tax year is after July 25, 2019.

The IRS is allowing the extensions because certain Bipartisan Budget Act of 2015 (BBA) partnerships timely filed Form 1065 for the 2018 tax year and timely furnished Schedules K-1 to their partners but may have made errors, including not properly reporting all of the required information on the Schedules K-1. The relief is directed at partnerships that, having timely filed, did not request an extension of the deadline to file and, due to the restrictions on amending Schedules K-1 under Code Sec. 6031(a) may not amend the Schedules K-1, including for the 2018 tax year.

Eligible partnerships taking advantage of the extensions should file a superseding Form 1065 and furnish corresponding Schedules K-1 in the same manner as the original return and Schedules K-1 and write on the top of the superseding Form 1065 "SUPERSEDING FORM 1065 PURSUANT TO REVENUE PROCEDURE 2019-32."

Proposed regulations increase a vehicle’s maximum value for eligibility to use the fleet-average valuation rule or the vehicle cents-per-mile valuation rule. The increase to $50,000 is effective for the 2018 calendar year. The maximum value is adjusted annually for inflation after 2018. The proposed regulations provide transition rules for certain employers.

Proposed regulations increase a vehicle’s maximum value for eligibility to use the fleet-average valuation rule or the vehicle cents-per-mile valuation rule. The increase to $50,000 is effective for the 2018 calendar year. The maximum value is adjusted annually for inflation after 2018. The proposed regulations provide transition rules for certain employers.

Taxpayers may rely on the proposed regulations until final regulation amendments are published in the Federal Register.

Depreciation Limits Increased, Inflation Calculation Changed
The Tax Cuts and Job Act ( P.L. 115-97) substantially increased the maximum annual dollar limitations on the depreciation deductions for passenger automobiles. The new dollar limitations are based on the depreciation, over a five-year recovery period, of a passenger automobile with a cost of $50,000. As a result, the IRS issued Notice 2019-8, I.R.B. 2019-3, 354, providing that it intends to amend Reg. §1.61-21(d) and (e) to:

• incorporate a higher base value of $50,000 as the maximum value for use of the vehicle cents-per-mile and fleet-average valuation rules, effective for the 2018 calendar year; and
• adjust the $50,000 base value annually for inflation in 2019 and subsequent years.

Additionally, the Notice provides that the IRS will not publish separate maximum values for trucks and vans for use with the fleet-average and vehicle cents-per-mile valuation rules. For tax years beginning after December 31, 2017, inflation adjustments for these purposes are calculated using both the consumer price index (CPI) automobile component and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) automobile component ( Code Sec. 280F(d)(7)(B)). The C-CPI-U automobile component does not currently have separate components for new cars and new trucks.

The IRS later issued Notice 2019-34, I.R.B. 2019-22, 1257, to:

• provide a 2019 inflation increase to $50,400 for these amounts; and
• announce it would revise Reg. §1.61-21(d) to provide a transition rule for certain employers.

Transition Rules
The proposed regulations include the following transition rules.

Fleet-average valuation rule. If an employer did not qualify to use the fleet-average valuation rule prior to January 1, 2018, because the automobile’s fair market value exceeded the inflation-adjusted maximum value requirement for the year the automobile was first made available to the employee for personal use, the employer may adopt the fleet-average valuation rule for 2018 or 2019, provided the fair market value of the automobile does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

Vehicle cents-per-mile valuation rule. An employer that did not qualify to adopt the vehicle cents-per-mile valuation rule for a vehicle first made available to an employee for personal use before calendar year 2018 may first adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year for the vehicle if:

• the employer did not qualify to adopt the vehicle cents-per-mile valuation rule because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the vehicle was first used by the employee for personal use; and
• the vehicle’s fair market value does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

Similarly, if the employer first used the commuting valuation rule, the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 tax year if:

• the employer did not qualify to switch to the vehicle cents-per-mile valuation rule on the first day on which the commuting valuation rule was not used because the vehicle’s fair market value exceeded the inflation-adjusted limitation for the year the commuting valuation rule was first not used; and
• the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019.

COMMENT 
An employer that adopts the vehicle cents-per-mile valuation rule generally must continue to use the rule for all subsequent years in which the vehicle qualifies for it. However, the employer may use the commuting valuation rule for any year during which use of the vehicle qualifies for the commuting valuation rule.
 

The temporary nondiscrimination relief for closed defined benefit plans provided in Notice 2014-5, I.R.B. 2014-2, 276, is extended through plan years beginning in 2020. Notice 2014-5 provided temporary nondiscrimination relief for certain defined benefit pension plans that were "closed" before December 13, 2013. Notice 2014-5, I.R.B. 2014-2, 276, Notice 2015-28, I.R.B. 2015-14, 848, Notice 2016-57, I.R.B. 2016-40, 432, Notice 2017-45, I.R.B. 2017-38, 232, and Notice 2018-69, I.R.B. 2018-37, 426, are modified.

The temporary nondiscrimination relief for closed defined benefit plans provided in Notice 2014-5, I.R.B. 2014-2, 276, is extended through plan years beginning in 2020. Notice 2014-5 provided temporary nondiscrimination relief for certain defined benefit pension plans that were "closed" before December 13, 2013. Notice 2014-5, I.R.B. 2014-2, 276, Notice 2015-28, I.R.B. 2015-14, 848, Notice 2016-57, I.R.B. 2016-40, 432, Notice 2017-45, I.R.B. 2017-38, 232, and Notice 2018-69, I.R.B. 2018-37, 426, are modified.

Closed Defined Benefit Plans
Employers have been moving away from traditional defined benefit plans for rank and file employees. Existing plans are sometimes closed for new employees as of a specified date. These plans are referred to as "closed plans," and the employees who continue to earn pension benefits under the closed plan are often known as a "grandfathered group of employees."

Closed plans must continue to meet the coverage and nondiscrimination tests, but they may eventually find it difficult because the proportion of the grandfathered group of employees who are highly compensated employees compared to the employer’s total workforce increases over time. This occurs because grandfathered employees usually continue to receive pay raises and so may become highly compensated employees, while new employees who are generally nonhighly compensated employees are not covered by the closed plan.

Notice 2014-5 Relief
For plan years beginning before 2016, Notice 2014-5 provides testing relief for defined benefit/defined contribution plans that include a closed defined benefit plan that was closed before December 13, 2013. Under this relief the plan can demonstrate satisfaction of the nondiscrimination in amount requirement on the basis of equivalent benefits, even if the does not meet any of the existing eligibility conditions for testing on that basis.

This relief has been extended several times in anticipation of the IRS issuing final amendments to the Code Sec. 401(a)(4) regulations. Most recently the relief was extended until plan years beginning in 2019, and it is now extended for plan years beginning in 2020. The IRS issued proposed regulations in 2016 to provide a permanent fix ( NPRM REG-125761-14, Jan. 29, 2016). The IRS expects the final regulations will provide that the reliance granted in the preamble to the proposed regulations may be applied for plan years beginning before 2021.

The IRS has adopted final regulations with respect to the allocation by a partnership of foreign income taxes. The final regulations are intended to improve the operation of an existing safe harbor rule. This safe harbor rule, under Reg. §1.704-1(b)(4)(viii), determines whether allocations of creditable foreign tax expenditures (CFTEs) are deemed to be in accordance with the partners’ interests in the partnership.

The IRS has adopted final regulations with respect to the allocation by a partnership of foreign income taxes. The final regulations are intended to improve the operation of an existing safe harbor rule. This safe harbor rule, under Reg. §1.704-1(b)(4)(viii), determines whether allocations of creditable foreign tax expenditures (CFTEs) are deemed to be in accordance with the partners’ interests in the partnership.

The final regulations—

• clarify the effect of Code Sec. 743(b) adjustments on the determination of net income in a CFTE category;
• include special rules regarding how deductible allocations (that is, allocations that give rise to a deduction under foreign law) are taken into account for purposes of determining net income in a CFTE category;
• include special rules regarding how nondeductible guaranteed payments (that is, guaranteed payments that do not give rise to a deduction under foreign law) are taken into account for purposes of determining net income in a CFTE category; and
• include a clarification of the rules regarding the treatment of disregarded payments between branches of a partnership for purposes of determining income attributable to an activity included in a CFTE category.

A transition rule applies to partnerships whose agreements were entered into before February 14, 2012.

Transactions involving digital content and cloud computing have become common due to the growth of electronic commerce. The transactions must be classified in terms of character so that various provisions of the Code, such as the sourcing rules and subpart F, can be applied.

Transactions involving digital content and cloud computing have become common due to the growth of electronic commerce. The transactions must be classified in terms of character so that various provisions of the Code, such as the sourcing rules and subpart F, can be applied.

Digital Content Transactions
Existing Reg. §1.861-18 provides rules for classifying transactions involving computer programs. The proposed regulations broaden the scope of the rules to apply to all transfers of digital content. "Digital content" is defined as any content in digital format that is either protected by copyright law or is no longer protected due solely to the passage of time.

The proposed regulations clarify that a transfer of the mere right to public performance or display of digital content for advertising does not alone constitute a transfer of a copyright.

Additionally, the proposed regulations clarify the title passage rule. When there is a sale of a copyrighted article through an electronic medium, the sale will occur at the location of the download or installation onto the end user’s device, or, in the absence of that information, the location of the customer.

A sale of personal property occurs at the place where the rights, title, and interest of the seller in the property are transferred to the buyer. If bare legal title is retained by the seller, the sale occurs where beneficial ownership passes.

Cloud Computing Transactions
Cloud computing transactions are typically characterized by on-demand network access to computer resources. The proposed regulations classify a "cloud transaction" as either:

• a lease of property (i.e., computer hardware, digital content, or other similar resources); or
• a provision of services.

The proposed regulations provide a nonexhaustive list of factors for determining how a cloud transaction is classified. In general, application of the relevant factors will result in a transaction being treated as a provision of services, rather than a lease of property. The factors include both statutory factors under Code Sec. 7701(e)(1) and factors applied by the courts.

The IRS Large Business and International Division (LB&I) has withdrawn its directive to examiners that provided instructions on transfer pricing issue selection related to stock based compensation (SBC) in cost sharing arrangements (CSAs).

The IRS Large Business and International Division (LB&I) has withdrawn its directive to examiners that provided instructions on transfer pricing issue selection related to stock based compensation (SBC) in cost sharing arrangements (CSAs).

U.S. taxpayers that are cost sharing participants must include SBC as intangible development costs (IDCs), under Reg. §1.482-7A(d)(2) and Reg. §1.482-7(d)(3) if these costs are directly identified with, or reasonably allocable to, the intangible development activity of the CSA. In 2015, the Tax Court invalidated Reg. §1.482-7A(d)(2) in Altera Corp., 145 TC 91, Dec. 60,354. The IRS appealed Alteraand issued Directive LB&I-04-0118-005 on January 12, 2018, directing examiners to stop opening new examinations for issues related to SBC included in CSA IDCs until the outcome of the Altera appeal was known.

On June 7, 2019, the U.S. Court of Appeals for the Ninth Circuit reversed the Tax Court’s opinion (Altera Corp., CA-9, 2019-1 ustc ¶50,231). Based on the Ninth Circuit’s decision, LB&I has formally withdrawn LB&I-04-0118-005.

LB&I has instructed examiners to continue applying Reg. §§1.482-7A(d)(2) and 1.482-7(d)(3), including opening new examinations of CSA SBC issues when appropriate. Because the issues may be factually intensive, LB&I states that transfer pricing teams should develop the facts to support their analyses and conclusions. Finally, LB&I instructs issue teams to consider consulting the Practice Network and Counsel where appropriate, for support in developing the most reliable analyses of this issue.

LB&I will continue to monitor further developments related to the Ninth Circuit’s decision.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended.

Passage of the “Tax Extenders” undeniably provided one of the major headlines – and tax benefits – to come out of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law on December 18, 2015. Although these tax extenders (over 50 of them in all) were largely made retroactive to January 1, 2015, valuable enhancements to some of these tax benefits were not made retroactive. Rather, these enhancements were made effective only starting January 1, 2016. As a result, individuals and businesses alike should treat these enhancements as brand-new tax breaks, taking a close look at whether one or several of them may apply. Here’s a list to consider as 2016 tax planning gets underway now that tax filing-season has ended:

Section 179 expensing. The PATH Act permanently extended the Code Section 179 dollar of investment limitations at the higher $500,000 and $2 million, levels, which are adjusted for inflation for tax years beginning after 2015 (it is $500,000 and $2,010,000 for 2016). In addition, starting only in 2016, the $250,000 limitation on the amount of section 179 property that can be attributable to qualified real property has been eliminated. Further, for tax years beginning after 2015, the Code Section 179 expense deduction is now allowed for air conditioning and heating units.

Bonus depreciation. In addition to the big news that the PATH Act extended Code Section 168(k) bonus depreciation to apply to most qualifying property placed in service before January 1, 2020, it made a number of modifications, including:

• replacement of the bonus allowance for qualified leasehold improvement property with a bonus allowance for additions and improvements to the interior of any nonresidential real property, effective for property placed in service after 2015; and
• allowance to farmers of a 50 percent deduction in place of bonus depreciation on certain trees, vines, and plants in the year of planting or grafting rather than the placed-in-service year, effective for planting and grafting after 2015.

Section 181 expensing. Special Section 181 expensing for qualified film and television productions is extended for two years to apply to qualified film and television productions commencing before January 1, 2017. However, the expensing rule is also expanded to apply to qualified live theatrical productions commencing after December 31, 2015.

WOTC. The Work Opportunity Tax Credit (WOTC) has been extended five years through December 31, 2019. In addition, the credit has been expanded and made available to employers who hire individuals who are qualified long-term unemployment recipients who begin work for the employer after December 31, 2015.

Research credit. The PATH Act permanently extended the research credit that applies to amounts paid or incurred after December 31, 2014. However, a new allowance of the research credit against alternative minimum tax liability applies to credits determined for tax years beginning after December 31, 2015. In addition, a new payroll tax credit associated with the research credit applies only to tax years beginning after December 31, 2015 (Act Sec. 121(d) (3) of the PATH Act).

Military differential pay. The PATH Act extended the employer tax credit for differential wage payments made to qualified employees on active military duty has been made permanent and applies to payments made after December 31, 2014. Effective only for tax years beginning after December 31, 2015, however, the credit may be claimed by all employers regardless of the average number of individuals employed during the tax year. The credit is also no longer limited to eligible small business employers with less than 50 employees.

Teachers' classroom expense deduction. The PATH Act permanently extended the above-the-line deduction for elementary and secondary school teachers' classroom expenses. Additionally, for tax years after 2015, the Act includes "professional development expenses" within the scope of the deduction. These expenses include courses related to the curriculum in which the educator provides instruction.

Nonbusiness energy property credit. The PATH Act extended the nonrefundable nonbusiness energy property credit allowed to individuals under Code Sec. 25C for two years, making it available for qualified energy improvements and property placed in service before January 1, 2017. For property placed in service after December 31, 2015, the standards for energy efficient building envelope components are modified to meet new conservation criteria. 

If you have any questions about these new “extenders,” please contact our office.

Individual taxpayers may claim a nonrefundable personal tax credit for qualified residential alternative energy expenditures. The residential alternative energy credit generally is equal to 30 percent of the cost of eligible solar water heaters, solar electricity equipment, fuel cell plants, small wind energy property, and geothermal heat pump property. After 2016, the credit is available only for qualified solar electric property and qualified solar water heating property placed in service before 2022.

Individual taxpayers may claim a nonrefundable personal tax credit for qualified residential alternative energy expenditures. The residential alternative energy credit generally is equal to 30 percent of the cost of eligible solar water heaters, solar electricity equipment, fuel cell plants, small wind energy property, and geothermal heat pump property. After 2016, the credit is available only for qualified solar electric property and qualified solar water heating property placed in service before 2022.

Solar electric property. A qualified solar electric property expenditure must meet these requirements:

• an individual taxpayer must make the expenditure for qualified solar electric property,
• the qualified solar electric property must use solar energy to generate electricity,
• the electricity must be for use in a dwelling unit,
• the dwelling unit must be located in the United States, and
• the dwelling unit must be used as a residence by the taxpayer (but it does not have to be the taxpayer’s principal residence).

Expenditures for purposes of the credit include labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified solar electric property and for piping or wiring to interconnect such property to the dwelling unit. Generally, for purposes of determining the tax year when the credit is allowed, an expenditure with respect to an item is treated as made when the original installation of the item is completed.

Solar electric property panels, such as photovoltaic panels, are eligible for the credit even if they constitute structural components of a building, such as when they are installed as a roof or a portion of a roof. Conversely, qualified solar electric property does not have to be installed directly on the taxpayer’s home, as long as the panels use solar energy to generate electricity for use in a home that the taxpayer uses as a residence. Under certain circumstances, a purchase of solar panels that are placed on an off-site solar array may meet the definition of qualified solar electric property expenditures. 

Caution. This credit should not be confused with the credit for nonbusiness energy property. For property placed in service through 2016, a tax credit is available for nonbusiness energy property that meets the requirements for qualified energy efficiency improvements (building envelope components) and residential energy property expenditures (furnaces, central air conditioners, water heaters, certain heat pumps, biomass stoves).

Tweaks to enhanced Code Sec. 179 expensing and the high-dollar health care excise tax are two proposals in President Obama’s fiscal year (FY) 2017 budget that could become law before the end of his term. President Obama released his FY 2017 budget proposals in February. Other proposals that could be passed by Congress include enhancements to small business tax incentives, expanded opportunities for retirement saving, revisions to the net investment income (NII) tax, and more.

Tweaks to enhanced Code Sec. 179 expensing and the high-dollar health care excise tax are two proposals in President Obama’s fiscal year (FY) 2017 budget that could become law before the end of his term. President Obama released his FY 2017 budget proposals in February. Other proposals that could be passed by Congress include enhancements to small business tax incentives, expanded opportunities for retirement saving, revisions to the net investment income (NII) tax, and more.

Small businesses

A long-sought goal of many small businesses was made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act): enhanced Code Sec. 179 expensing. President Obama proposed more tweaks to Code Sec. 179 expensing. Under the President’s proposal, the annual expensing limitation would increase from an inflation-adjusted $500,000 to an inflation-adjusted $1 million. The phase-out threshold would remain at an inflation-adjusted $2 million level. President Obama also proposed to increase the deduction for start-up expenses and the tax break for small employers that obtain health coverage for their employees through SHOP.

High-cost health plans

Certain employer-sponsored health insurance plans (high-cost plans also known as “Cadillac plans”) may be liable for an excise tax. Generally, if the aggregate cost of applicable employer-sponsored coverage provided to an employee exceeds a statutory dollar limit, adjusted annually, the excess benefit is subject to a 40 percent excise tax.

Originally, the Affordable Care Act (ACA) imposed the excise tax on high-cost health plans effective after 2017. The PATH Act delayed the excise tax on high dollar health plans until after 2019. President Obama has proposed to increase the excise tax threshold to the greater of the current law threshold or a "gold plan average premium."

Retirement savings

In his 2016 State of the Union Address, President Obama urged lawmakers to expand the availability of retirement savings plans, especially to part-time employees and workers at businesses without retirement plans. The President’s FY 2017 budget follows through on some of these approaches. The President proposed to require employers in business for at least two years and having more than ten employees and offering no retirement plan to offer an automatic payroll-deduction IRA option. Another proposal would allow unaffiliated employers to maintain a single multiple-employer retirement plan.

NII tax

The ACA also created the NII tax to help fund health care reform. Generally, individuals with incomes over certain threshold amounts are subject to the 3.8 percent tax on NII. Under current law, the NII tax does not apply to self-employment earnings. The President has proposed to ensure that the 3.8 percent is paid (either through the NII tax or the Self-Employed Contributions Act (SECA)) by amending the definition of net investment income to include gross income and gain from any trades or businesses of an individual that is not otherwise subject to employment taxes.

Higher income individuals

President Obama renewed previous proposals to tighten tax breaks for higher income individuals. The so-called “Buffett Rule” would impose a minimum 30 percent tax on higher income taxpayers with large deductions and other tax preferences. Certain tax expenditures of higher income individuals would be capped at 28 percent. Tax rates on capital gains and qualified dividends would also be increased in individuals in the higher brackets.

EITC and other incentives

In 2012 and subsequent years, Congress made permanent some enhancements to the earned income tax credit (EITC). President Obama has proposed to continue this pattern of enhancements, by, among other changes, expanding the EITC to qualified taxpayers without children. Other proposals targeted to individuals’ income include a second-earner credit (for two-earner families), reforms to the child and dependent care tax credit, and some enhancements to the American Opportunity Tax Credit (AOTC).

Fossil fuels

As in past years, President Obama proposed to repeal fossil fuel tax preferences. The President also proposed a new revenue raiser: a fee of $10.25 (adjusted for inflation from 2016) per barrel on oil to be phased-in over a five year period beginning October 1, 2016. The fee would be collected on domestically produced as well as imported petroleum requirements.

If you have any questions about the President’s proposals, please contact our office.

Hiring new employees imposes many burdens on an employer. One of the most important is the collection and filing of Form W-4, Employee's Withholding Allowance Certificate. Mistakes can be very costly to employers and employees. Here's a look at some problems and simple steps employers can take to avoid them.

Hiring new employees imposes many burdens on an employer. One of the most important is the collection and filing of Form W-4, Employee's Withholding Allowance Certificate. Mistakes can be very costly to employers and employees. Here's a look at some problems and simple steps employers can take to avoid them.

Name and social security number

First, an employer should verify the name and social security number submitted on the W-4. The Social Security Administration (SSA) offers a free program to confirm an employee's name and social security number. To request SSA assistance, employers should contact the SSA, provide their employer identification number, and the name and social security number of the employee in question. If the information is inaccurate, the employer should give the employee the opportunity to submit a new form before taking disciplinary action. Employers should also advise the IRS of the incorrect social security number.

Invalid W-4s

Employers must reject a W-4 form if the employer is aware that the form is invalid. This occurs in one of two circumstances: (1) the form has been altered or (2) the employee makes a comment to the employer that the W-4 is inaccurate.

The second scenario includes, for example, a statement by the employee that he or she is claiming to be exempt from withholding because the tax system is unconstitutional or the payment of taxes is voluntary. These claims are wrong and would invalidate the W-4. The employer must reject the W-4 until the employee submits an accurate form. During the interim, the employer must withhold at the highest withholding rate.

The employer also must withhold at the highest rate if an employee fails to submit a Form W-4 unless the employee had previously filed a valid W-4. In that case, the employer should withhold at the rate indicated on the old W-4.

Questionable W-4s

Employers may also be confronted with so-called "questionable" W-4s. An employer must send a copy of Form W-4 to the IRS for verification when the employee is claiming:

--More than 10 allowances; or

--Exemption from withholding if expected wages exceed $200 per week.

In either of these situations, however, the employer is not free to reject the W-4, but must withhold at the rate indicated by the employee until the IRS instructs otherwise. The law presumes that the form, unless "invalid," is accurate until proven otherwise.

Questionable W-4s should be submitted to the IRS with a letter asking the IRS to determine the accuracy of the submission. The letter must include the employer's name, address and EIN.

Caution. Only in the two situations outlined above is the employer required to consider the Form W-4 "questionable." In other questionable cases, there is no obligation to inform the IRS. However, if the IRS deems the reason sufficient to make it "invalid" rather than "questionable" the employer may have been required to withhold taxes at the highest rate rather than at the level indicated on the W-4.

After the IRS conducts an examination, it will send the employer and the employee a "lock-in" letter stipulating the correct rate of withholding. The letter is binding and failure to comply may result in the imposition of civil penalties on the employer. To encourage employees to submit an accurate W-4, employers should remind them that filing a false W-4 may result in a $500 penalty.