TSCPA Federal Tax Policy Blog

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.

https://www.irs.gov/newsroom/irs-issues-guidance-on-tax-cuts-and-jobs-act-changes-on-business-expense-deductions-for-meals-entertainment

https://www.irs.gov/pub/irs-drop/n-18-76.pdf 

 

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.

https://www.treasury.gov/tigta/auditreports/2018reports/201824064_oa_highlights.html

https://www.treasury.gov/tigta/auditreports/2018reports/201824064fr.pdf

2018 Employer Reimbursements for Employees’ 2017 Moves are Generally Tax-Free

The IRS provides guidance in Notice 2018-75 that employer payments or reimbursements in 2018 for employees’ qualified moving expenses incurred prior to 2018 are excluded from the Tax Cuts and Jobs Act (TCJA) suspension of treatment as a tax-free benefit. Employers that have already treated these payments or reimbursements as taxable employee compensation can follow the normal employment tax adjustment and refund procedures to adjust withholding and recover refunds of overpayments, where applicable.

https://www.irs.gov/pub/irs-drop/n-18-75.pdf

What the Increased Standard Deduction May Do to Your Billable Hours

The Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction, but cut back on many itemized deductions such as state and local taxes (SALT) and employee business expenses. In the past, less than a third of taxpayers itemized deductions, but for the most part, these were our clients. It is anticipated that an additional 27 million taxpayers will use the standard deduction this year. Start thinking about what this does to your firm's billable hours, scheduling, staffing requirements, etc.

Comptroller’s Ruling on Sales and Use Tax Obligation

The Texas Comptroller, in a Private Letter Ruling (2017010116), ruled that an out-of-state retailer had substantial presence in Texas by sending clothing to potential customers with a seven-day “try-on” period. The customers did not purchase the merchandise before shipment and could return the clothing without purchase. The Comptroller based its decision on the fact that the retailer continued to own the clothing while in Texas – effectively saying that the taxpayer had inventory in Texas.

https://star.comptroller.texas.gov/view/201808011L?q1=2017010116%20%20%20

Delayed Effective Date and Guidance on Phase-in Period for Dividend Equivalent Regs

The IRS announced in Notice 2018-72 that it will amend regulations under Section 871(m) to delay the effective date and provide a phase-in schedule for certain provisions regarding a chain of dividends and dividend equivalents in the context of securities lending and sale repurchase agreements. Notice 2018-72 permits withholding agents to apply the transition rules from Notice 2010-46 in 2020 to deal with the problem of potential overwithholding. Notice 2018-72 addresses issues related to qualified derivatives dealers, Delta-One and Non-Delta-One transactions, and simplified standards for determining whether transactions are combined transactions.

https://www.irs.gov/pub/irs-drop/n-18-72.pdf

TIGTA Report on Third-Party Authorization Forms

The Treasury Inspector General for Tax Administration (TIGTA) recently issued a report titled “Improved Procedures are Needed to Prevent the Fraudulent Use of Third-Party Authorization Forms to Obtain Taxpayer Information.” While tax preparers support measures to combat identity theft, TIGTA’s recommendation for the Power of Attorney (POA) process is that the IRS mail letters to taxpayers to confirm third-party access and only validate a POA upon receipt of a return mail authorization. This could hinder an already sluggish verification system and deny taxpayers the right to due process and counsel during a difficult time. TSCPA’s Federal Tax Policy Committee is considering responding to this concern.

https://www.treasury.gov/tigta/auditreports/2018reports/201840062fr.pdf

IRS Issues Proposed Regs on CFCs with GILTI Inclusions

The IRS has issued proposed regulations on Section 951A global intangible low-taxed income (GILTI) provisions. Under the rules in the 2017 Tax Cuts and Jobs Act (TCJA), a U.S. person who owns at least 10 percent of the value or voting rights in one or more controlled foreign corporations (CFC) will be required to include its GILTI as currently taxable income, regardless of whether any amount is distributed to the shareholder.

https://www.irs.gov/newsroom/irs-issues-proposed-regulations-on-global-intangible-low-taxed-income-for-us-shareholders

The IRS has released some draft forms and instructions for reporting GILTI:

• Form 8992, S. Shareholder Calculation of GILTI https://www.irs.gov/pub/irs-dft/f8992--dft.pdf
• Instructions for Form 8992 https://www.irs.gov/pub/irs-dft/i8992--dft.pdf
• Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and GILTI https://www.irs.gov/pub/irs-dft/f8993--dft.pdf (Form 8993 instructions have not been released.)

Preview New IRS e-Services User Agreement

 

The IRS added a webpage about the revised e-Services User Agreement that launches Oct. 14, 2018. The most significant change is that tax professionals must notify clients when using an “intermediate service provider.” Failure to do so could result in suspension of your e-Services account. Changes also reflect that federal law requires practitioners to have written information security plans to protect taxpayer data.

Highlights:

• Update any changes to your e-Services account/applications within 30 days.
• Keep your e-Services username, password and PIN confidential.
• Notify your clients if you are using an intermediate service provider.
• Your e-Services username, password and PIN cannot be stored on an intermediate service provider’s system or software. 

Additional items to enhance security and protect sensitive taxpayer data:

• Know your legal obligation to protect all tax data that you access through e-Services.
• Review Publication 4557, Safeguarding Taxpayer Data.
• Contact the IRS Help Desk at 866-255-0654 (international callers use 512-416-7750) if you become aware of, or suspect, unauthorized use of your account.

The IRS strongly encourages e-Services users to read the content and be ready to accept its terms when asked. Changes may require some firms to modify their business procedures.

https://www.irs.gov/tax-professionals/preview-updated-e-services-user-agreement

https://www.irs.gov/pub/irs-utl/2018%20e-Services%20User%20Agreement.pdf

https://www.irs.gov/pub/irs-pdf/p4557.pdf

https://www.irs.gov/e-file-providers/intermediate-service-providers

https://www.ftc.gov/tips-advice/business-center/privacy-and-security/data-security

IRS Updates Automatic Accounting Method Changes

 

The Tax Cuts and Jobs Act (TCJA) passed in December 2017 set forth many significant changes to the tax code. One noteworthy modification is the impact on IRC Section 448. Previously, small business taxpayers with gross receipts exceeding $10 million did not qualify for the cash method of accounting for federal income tax purposes. The TCJA increased this cap to the $25 million threshold, greatly expanding the number of small businesses eligible to use the much simpler method.

While this is advantageous for small companies, switching from accrual-basis to cash-basis accounting posed a tedious process, which included timely applying for and securing prior consent of Form 3115, Application for Change in Accounting Method by the tax deadline. Small business owners were subject to a user fee for obtaining this prior consent.

Fortunately, the IRS released Rev. Proc. 2018-40 last month, which added to the list of automatic changes outlined in Rev. Proc. 2018-31. It solves these complications and will allow qualified small businesses under TCJA to use the cash method by submitting Form 3115 with their 2018 income tax filings.

Rev. Proc. 2018-40 also provides a transition rule for taxpayers with pending Form 3115 applications under the non-automatic change procedures.

https://www.irs.gov/pub/irs-drop/rp-18-40.pdf