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February 2018

January 2018

IRS Issues Additional Guidance on “Transition Tax” on Foreign Earnings

The IRS released an advance version of Notice 2018-13 providing administrative guidance for computing the treatment of deferred foreign income upon transition to a territorial-based taxation system—the “transition tax”—under the new Section 965. Notice 2018-13, which modifies prior Notice 2018-7, provides some clarifying definitions, fixes the exchange rate to be used in translating local currency amounts into U.S. dollars, expands the scope of the “gain-reduction” rule for previously taxed income amounts and addresses the new attribution rules. The IRS has indicated intentions to issue regulations and is requesting comments on what additional guidance should be issued to assist taxpayers in applying Section 965.


Are Client Meals Still Deductible under the New Tax Law?

The Tax Cuts and Jobs Act signed into law in December made significant changes to the deduction of entertainment expenses effective Jan. 1, 2018. The so-called “entertainment” expenses, such as sporting events, clubs and golf outings, are clearly no longer deductible. However, a recent article in Tax Notes indicates that the elimination of the deduction for entertainment expenses does not apply to certain entertainment provided to employees, such as company picnics or holiday parties, and does not appear to apply to business-related meals with associates, referral sources, clients, prospects, etc. Tax preparers should advise their clients to continue to document the business purpose of their meals and track their expenses appropriately while we await further IRS guidance.

Final Rules Govern Electing Out of the Centralized Partnership Audit Regime

The IRS issued final regulations in T.D. 9829 that explain procedures for electing out of centralized partnership audits. It describes what partner information must be disclosed in the election, the requirements for notifying partners of the election, and the requirement that the IRS consent to revoke an election. The centralized partnership audit rules are generally effective for partnership taxable years beginning after Dec. 31, 2017.

The annual election out is only available to partnerships required to furnish 100 or fewer Schedules K-1, which includes K-1s issued by an S corporation partner, where each partner in the partnership is an individual, C corporation, foreign entity that would be treated as a C corporation if it were a domestic entity, S corporation or estate of a deceased person.

Last year, TSCPA’s Federal Tax Policy Committee issued comments and testified at an IRS public hearing on the proposed rules.


Paid Preparer Due Diligence Extended to Head of Household Eligibility

The new tax law expands a paid preparer’s due diligence and record keeping requirements under IRC section 6695(g) to include determining a client’s eligibility to file as head of household. It imposes a $500 penalty for each failure. Due diligence requirements are already in place on Form 8867 for child tax credit, American opportunity tax credit and earned income tax credit.


Until the Treasury Department and the IRS provide guidance, it is uncertain if the effective date will apply to 2017 returns, 2018 returns or perhaps even earlier year returns if prepared after Dec. 31, 2017. Until then, practitioners should continue to exercise due diligence and presume that the new provision applies now.


Since most companies have published their "organizers," practitioners might consider modifying their firm’s organizer to include the elements that demonstrate the preparer exercised due diligence. For example, to show due diligence in the head of household area, a series of questions might be added to the organizer as to whether the taxpayer was single or legally separated for the last half of the year, that a qualifying dependent lived with the taxpayer for at least half the year (unless the dependent is a parent), and that the taxpayer provided more than half the costs of maintaining a home where the taxpayer and dependent lived. Organizers are completed directly by the taxpayer and such assertions may provide protection from any preparer due diligence penalty. Alternatively, the preparer might have a standard memo to file that memorializes a conversation with the taxpayer that shows that the taxpayer qualifies for the benefit or status.   


IRS Provides Safe Harbors for Determining Casualty and Theft Losses

In a set of revenue procedures, the IRS has provided safe harbor methods that taxpayers may use in determining the amount of their casualty and theft losses for their homes and personal belongings. Rev. Proc. 2018-8 offers four safe harbor methods that apply to any qualifying casualty or theft loss, as well as three methods that apply only to losses occurring because of a federally declared disaster. Rev. Proc. 2018-9 provides a safe harbor method that allows a homeowner to use one or more cost indices to determine the amount of a home loss due to Hurricanes Harvey, Irma or Maria. The safe harbors outlined in Rev. Proc. 2018-8 are effective on Dec. 13, 2017. The method detailed in Rev. Proc. 2018-9 is effective for losses attributable to a 2017 hurricane and that arose in the 2017 disaster area after Aug. 22, 2017. (IR 2017-202; Rev. Procs. 2018-8, 2018-2 IRB and 2018-9, 2018-2 IRB)