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January 2020

IRS Open to Requests for Relief From Double Taxation under Section 965

The IRS announced in IR-2020-16 on Jan. 17, 2020, that it would consider providing relief from double taxation that results from the repatriation tax under Section 965, as amended by the Tax Cuts and Jobs Act (TCJA). The IRS determined that in limited circumstances, such as where a corporation paid an unusual dividend for business reasons and not because of the TCJA, it may be appropriate to provide relief.

Double tax under this release could occur, for example, if a first-tier controlled foreign corporation (CFC) with a fiscal year-end of Nov. 30, 2017, paid a dividend to its U.S. shareholder(s) before Nov. 30, 2017, but after the first measurement date specified under Section 965 of Nov. 2, 2017. Here, the dividend would not reduce the CFC’s Section 965 earnings amount and would not be considered distributed from previously taxed income, thereby resulting in double taxation.

The IRS directs taxpayers to contact the Office of Associate Chief Counsel (International) if they have fact patterns that fit the unique circumstances outlined in the release.

https://www.irs.gov/newsroom/irs-willing-to-consider-requests-for-relief-from-double-taxation-related-to-repatriation


Final Regs Issued on Transfers to Partnerships with Related Foreign Partners

The general rule under IRC Section 721(a) provides that no gain or loss is recognized by a partnership to any of its partners when property is contributed to the partnership in return for an interest in the partnership.

As confirmed in the final regulations issued Jan. 17, 2020, this general rule does not apply when a U.S. person transfers Section 721(c) property to a partnership that has foreign partners related to the transferor. Section 721(c) property includes any property with built-in gain other than excluded property (cash equivalents, certain securities and tangible property with built-in gain that does not exceed $20,000).

A related foreign person is a person (other than a partnership) who is related to the U.S. transferor pursuant to IRC 267(b) (without regard to IRC 267(c)(3)) or 707(b)(1)).

https://s3.amazonaws.com/public-inspection.federalregister.gov/2020-00383.pdf

 


Important Changes to IRA Distributions

On Dec. 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law as part of the year-end spending bill, the Further Consolidated Appropriations Act. Here are some of the significant changes.

The good news for taxpayers:

  • Taxpayers born after June 30, 1949, holding 401(k), 403(b) and IRA accounts can delay their required minimum distributions (RMDs) until they are 72 rather than 70 ½ that was required in prior law.
  • Taxpayers 70 ½ and older can continue to invest into IRA plans.

The bad news for taxpayers:

  • Under prior law, individuals (non-spouse designated beneficiaries) who inherited an IRA were only required to take distributions over their life expectancy, the so-called “stretch” provision. The SECURE Act now requires that, for IRAs inherited after 2019, RMDs must be distributed to the recipient pro rata over a 10-year period with the following exceptions:
    • A surviving spouse can treat the decedent’s IRA as his/her own.
    • Beneficiaries who are minor children can use the stretch provision available under prior law until they reach the age of majority, at which time the 10-year amortization begins to apply.
  • Under prior law, some taxpayers used “conduit trusts” to protect IRA assets from creditors while allowing the beneficiaries of the trust to apply the stretch provision using the oldest beneficiary’s life expectancy. Under the SECURE Act, the entire amount of the IRA will be taxable in the 10th year and, likely, subjecting the funds to a higher tax rate than the 10-year amortization available to individual beneficiaries.  

Also see:

SECURE Act Impacts Employer Plans (RSMUS)

The SECURE Act - Planning Implications for High Net Worth Individuals (RSMUS)


Tax Extenders Approved by the Further Consolidated Appropriations Act

Just before recessing for the holidays, Congress passed the spending bill that included H.R. 1865, the Further Consolidated Appropriations Act, 2020. President Trump signed it into law on Dec. 20.

While the act primarily applies to the allocation of the federal budget to the various government agencies, it also includes important business and individual taxpayer-friendly provisions.

You will recall that the Bipartisan Budget Act of 2018 (BBA) extended the “extenders” only through 2017. The recent act has extended nearly all the extenders retroactively for 2018 through 2020, including the following:

Individual Extenders

  • Reduction in the AGI limitation for medical and dental expense deductions from 10% to 7.5%
  • Renewal of the educational above-the-line deduction for tuition and qualified fees
  • Option to treat mortgage insurance premiums (sometimes called the PMI deduction) as residence interest and deduct it as an itemized expense
  • Exclusion of qualified resident indebtedness from gross income

Business Extenders

  • Depreciation life of motorsports complexes and racehorses
  • Accelerated depreciation for business property on Indian reservations
  • Incentives for investments in Empowerment Zone activities
  • Employer credit for paid family and medical leave
  • Look-through rule for controlled foreign corporations
  • Work Opportunity Tax Credit

Energy Credits

  • Nonbusiness energy property
  • Qualified fuel cell motor vehicles
  • Alternative fuel vehicle refueling property
  • Energy-efficient commercial buildings deduction
  • Incentive for biodiesel and renewable diesel
  • Energy production from certain solar, fuel cell and wind property (already extended by the BBA)

https://www.journalofaccountancy.com/news/2019/dec/tax-provisions-new-government-spending-bill-201922651.html

https://www.congress.gov/116/bills/hr1865/BILLS-116hr1865eah.pdf

 

 


2019 Returns Virtual Currency Question Must Be Answered

The IRS is getting serious about bitcoins and other cryptocurrencies. The 2019 Form 1040 has a new question on Schedule 1 that must be answered: "At any time during 2019, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?" The taxpayer must check yes or no.

This question is easy to miss, coming above Part 1 of the form on a separate line of Schedule 1 (Additional Income and Adjustments to Income). However, failing to answer this question will likely have the same consequences as not completing the foreign bank and financial interests on Schedule B. Be sure this is in your organizer and follow up as necessary!

In the fall, the IRS issued Revenue Ruling 2019-24 that covers buying, selling, trading, receiving and other transactions. The IRS is looking for unreported appreciation in the currencies, which it views as property. It is also looking for payments in the underground economy that will not otherwise have a record for tax purposes, such as paying contractors or employees for services.  

https://www.irs.gov/pub/irs-drop/rr-19-24.pdf

 


Social Security Card for Newborns

If any of your clients had a baby in 2019, that child needs a Social Security number (SSN) and here's why this is important:

  1. The Tax Cuts and Jobs Act (TCJA) requires parents to have an SSN for a child in order to get the child tax credit. This is $2,000 (phasing out fully at $400,000 for married filing jointly and $200,000 for others). The credit drops to $500 if there is no SSN because the child becomes a qualifying relative, not a qualifying child!   
  2. The SSN is required to open a bank or brokerage account and to buy savings bonds.
  3. Medical insurers usually require the number for insurance coverage.
  4. Local governments sometimes require the number for any child benefits.

Hopefully, your clients received an SSN as they applied for the birth certificate application at the hospital, which will arrange for the card to be sent if the parents make the election to get an SSN. However, with everything going on at the hospital, some parents decide to apply later. If so, they need to get on this quickly because after the application is submitted, it can take several weeks.  

To apply, parents need to fill out Form SS-5, Application for a Social Security Card. It can be completed online, printed and taken to the local Social Security office. (Search location by zip code: https://secure.ssa.gov/ICON/main.jsp). 

Follow the application instructions for documents to bring, but basically, they'll need proof of the baby's citizenship (birth certificate) and proof of parents' identities (drivers licenses). There is no cost to apply.  

Happy baby and happy child tax credit!