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October 2018

Proposed Rules Expand HRA Options


In REG-136724-17, the Departments of the Treasury, Labor, and Health and Human Services issued proposed regulations on health reimbursement arrangements (HRAs). These regulations would relax the conditions to increase eligibility and accessibility to employer HRAs, especially small businesses.


The proposed rules would remove the prohibition on integrating an HRA with individual health insurance coverage, if certain conditions are met, and propose requirements that an HRA must meet to be integrated with individual health insurance coverage.


They also provide how employees whose employers have HRAs that may or may not be integrated with individual health insurance coverage may quality for the premium tax credit.


Statutory Employee Classification has New Importance After TCJA


Statutory employees, defined in IRC Section 3121(d)(3), are able to deduct their business expenses on Schedule C, not Form 2106, Employee Business Expenses. The definition includes certain commissioned salespersons and full-time insurance salespersons. Many employers are reluctant to use this classification, as it complicates federal tax withholding and certain employee benefits. However, given the total lack of deductibility for business expenses for other employees, employers should revisit this classification to determine if their sales force can benefit. See IRC 3121(d)(3) and Rev. Rul. 90-93.


New Tax Transcript Format and Procedures


The IRS is hoping a redacted tax transcript and a new customer file number will prevent fraudsters from gaining access to valuable taxpayer data.

This new transcript partially masks the personal identifiable information listed on the federal tax return. For example, only the last four digits of the Social Security number (SSN) or the employer identification number (EIN) are shown. Also, you only see the first four letters of the taxpayer’s name and first six characters of the street address. There is no city or state listed. All money amounts are still visible. This new format is for individual transcripts only.

Since the taxpayer’s SSN is redacted, third parties can create an optional 10-digit identifier—a customer file number—to match a transcript to a taxpayer. Form 4506-T, Request for Transcript, has a new Line 5b to accommodate this new number. Tax professionals authorized to access transcripts through the e-Services Transcript Delivery System (TDS) can enter the 10-digit customer file number to automatically populate on the transcript. Beginning January 2019, taxpayers may also assign a 10-digit number to their own transcript through “Get Transcript Online” or “Get Transcript by Mail.”

Sometime in January 2019, the IRS plans to stop faxing transcripts to taxpayers and third parties. This applies to both individual and business taxpayers. These transcripts will be mailed to the taxpayer’s address on record, but not to the practitioners. Practitioners can obtain available transcripts through the TDS. The IRS plans to stop all mailing of transcripts to third parties listed on Line 5a of Forms 4506-T and 4506T-EZ sometime in May 2019.

A taxpayer or Power of Attorney can request an unredacted transcript at a Taxpayer Assistance Office. However, it must be mailed to the taxpayer’s address on record.

Unfortunately, the new procedures may make it more cumbersome for tax professionals to serve their clients. TSCPA’s Federal Tax Policy Committee is reviewing the changes’ impact on daily tax administration.

Think Twice Before Trading That Truck

Julie Dale, CPA-Austin

(correction 11-1-18)

Changes to the like-kind exchange rules in the Tax Cuts and Jobs Act (TCJA) will have a major impact on the vehicle trade-in process. Under prior law, trading a vehicle in on the purchase of another vehicle triggered the like-kind exchange rules and resulted in the deferral of any gain or loss recognized on the old vehicle. Now that like-kind exchanges are restricted to real estate only under the TCJA, there is no like-kind exchange treatment for vehicle trade ins.

For passenger automobiles used in businesses, this change will potentially result in a tax benefit. The limits placed on depreciation on these vehicles almost guarantee a loss will be recognized when traded in to purchase a new vehicle. This loss will now be recognized when it would have been deferred under the old rules. There are still other limitations that may defer current recognition, such as the passive loss or at-risk basis limits.

For business trucks, the law change will result in a tax liability that many will not expect. Trucks with a gross vehicle weight rating 6,000 pounds or more are not subject to the passenger automobile depreciation limits. This can lead to a potential deduction in the year of purchase equal to the total cost of the truck if bonus depreciation applies or a Section 179 election is made.

For example, a corporation purchases a 2017 Ford F-250 on Oct. 1, 2017 for $60,000. Since 100 percent bonus depreciation applies to this purchase, the corporation deducts the entire $60,000 as depreciation expense in 2017. On Oct. 22, 2018, the corporation trades the 2017 Ford F-250 in on a purchase of a 2018 BMW M5. The trade-in allowance given is $45,000. This results in ordinary income of $45,000 to the corporation on the trade-in allowance, an $18,000 depreciation deduction for the BMW, and a tax liability increased by $5,670 (21 percent of the difference). Under prior law, there would have been no gain recognized and no federal income taxes owed on this transaction.

This is a good example of why it is so important that taxpayers seek tax advice when considering a transaction even as mundane as trading in a vehicle. If this trade in was not truly necessary, then the tax bill of $5,670 could be avoided by seeking advice in advance. If the trade in was necessary, at least the corporation would be able to plan for the tax bill early instead of finding out when the 2018 tax return is prepared.

Private Foundations with Expiring Carryovers

Generally, a private foundation is subject to a 30 percent tax on its income that is not distributed by the following year end. Where the foundation distributes more than its income in a given year, the excess can be carried over for five years thereby reducing the required distribution in those future years. The issue raised by a recent IRS announcement was whether a private foundation can elect to treat its distributions in that fifth year as coming from corpus rather than income. If available, doing so would utilize some or all of the carryover before it expires to offset that year’s income and the amount covered by the distribution out of corpus would “freshen up” the carryover. 

For example: Can a private foundation with a $100 carryover that will expire at the end of this year “elect” to distribute $100 of its current year income out of corpus? If that were appropriate, the $100 carryover would offset all the income and the $100 distribution out of corpus would create a “fresh” $100 carryover.   


The IRS announcement says the carryover cannot be refreshed by an “election” to treat distributions out of corpus. The announcement cites Code Section 4942 and Regulation Section 53.4942(a)-3(e)(2), which it interprets to limit the ability of the foundation that has income to elect that a distribution is out of corpus unless the distributions for the year exceed the foundation’s income. In effect, the IRS takes the position that, for purposes of utilizing a carryover, a distribution is deemed to be first applied against income and only if distribution exceeds the income can it be considered a distribution of corpus.


IRS Guidance on Entertainment Deduction

On Oct. 3, 2018, the IRS issued Notice 2018-76 as the first round of interpretation to the deduction for entertainment under the Tax Cuts and Jobs Act (TCJA) amendment. Until regulations are issued, taxpayers can rely on the guidance provided in this notice.

IRC Section 274 specifies the rules for deducting business meals and entertainment. Meals and entertainment are intertwined in a sense because business meals are used, in part, to entertain clients, prospects and contacts. Although the TCJA made it clear that meals were still deductible, there was concern that the IRS might interpret the rules in a manner to reduce the deductibility of business meals.

The notice indicates that meals are still 50 percent deductible if they meet all of the following requirements:

  • The meal is an ordinary and necessary business expense under Section 162(a) paid or incurred during the taxable year.
  • The meal is not lavish or extravagant under the circumstances.
  • The taxpayer or an employee of the taxpayer is present when the meal is furnished.
  • The meal is provided to a current customer, prospect, consultant or similar business contact.
  • Any meal provided in conjunction with an entertainment activity must have a separately stated cost on the invoice/receipt. The entertainment disallowance rule cannot be circumvented by artificially inflating the cost of the meal.

Notice 2018-76 examples make it clear that even a meal provided at a baseball or basketball game can be deducted assuming the cost is separately stated.

The IRS has requested that any comments on the notice be submitted by Dec. 2, 2018. 


TIGTA Report: Increased Risk of a Delayed Start of the 2019 Filing Season

The Tax Cuts and Jobs Act of 2017 is the first major tax reform legislation in more than 30 years. The IRS has worked diligently all year to implement these tax law changes, which includes creating and revising about 450 forms, publications and instructions. However, the Treasury Inspector General for Tax Administration (TIGTA) recently reported that the IRS’ missed internal deadlines, staffing issues and a shorter testing cycle may cause a delayed start in the upcoming filing season.