Fall V1 10-5-19 DS & VH.

Fall V DS & VH

Chapter 6 Highlights Tax Cuts & Jobs Act - a hard act to follow
6-1 Tax Cuts & Jobs Act - a hard act to follow Accounting method changes Crowdfunding taxes Entertainment not deductible Parking fees and/or bus passes not deductible

Chapter Highlights Business interested limited
6-1 Business interested limited Depreciation changes affecting all business clients Luxury auto depreciation numbers increase No deduction for “excess” business losses

Chapter Highlights NOL deduction limited to 80%, carryback eliminated
6-1 NOL deduction limited to 80%, carryback eliminated HRAs expanded Update on ACA employer mandate Business credit changes

Accounting Periods and Methods
6-1 Accounting Periods and Methods

Accounting Methods Cash Basis Accrual Basis Hybrid Method
6-1 Cash Basis Accrual Basis Required when selling “products” Hybrid Method That includes any business with two different activities”, one sales (accrual) and one services (cash)

Change of Accounting Method Form 3115
6-2 Although automatic, Form 3115 is required for change of accounting method

Cash Method of Accounting
6-2 New. Cash basis allowed if gross receipts do not exceed $26M (2019) Was $5M in 2017

Inventory Method of Accounting
6-3 New. If gross receipts less than $26M (for 2019) taxpayer may use cash method if: Inventory is non incidental supply Conforms to financial statement Must apply to inventory if production, purchase or sale generates business income Was $10M in 2017

UNICAP Accounting Method
6-3 New. UNICAP not required until gross receipts exceed $26M (2019) Was $10M in 2017

Percentage of Completion Method of Accounting
6-3 May use percentage of completion method instead of completed contract method of accounting If gross receipts $26 M or under (2019)

Automatic Consent - Account Method Changes
6-3 For small businesses If average gross receipts are $26M or less (2019) Rev. Proc

The All Events Test 6-4 Income: when all events have occurred fixing the right to Receive income w/ reasonable accuracy Expenses: All events occurred With “reasonable accuracy” and Economic performance has occurred

Rules for Taxable Year of Inclusion
6-5 Existing rule: Follow AFS reporting New. proposed regs on all-events test and advanced payments New. Exception for taxpayers who don’t use AFSs. Purchase to lease; lease to purchase Mark to market Using equity method of accounting

Small Construction Contract Exception Expanded
6-8 New! Long term small construction contract exception to percentage of completion expanded Completed in 2 years Less than $26M gross receipts

IRS Audit Hit List Land Developers
6-8 Not a home builder Can’t use home contractor exception Must use percentage of completion method of accounting

Homebuilders Completed Contracts (Shea Homes)
6-8 Common improvements included to determine if contract complete? IRS: Completed when home sold CA: Completed when 95% of development costs incurred IRS: Will not acquiesce (AOD ) 17

6-8 Gains

Self Created Property 6-8 New! Self created property not qualified for LTCG treatment Patent, invention, model, design, secret formula Effective for dispositions after Dec. 31, 2017 Exception: musical compositions

Rollover of Publicly Traded Securities Gain
6-9 New! Election repealed to Roll over tax-free capital gains realized on sale of publicly traded stock to small business investment company

Opportunity Zones 6-9 Opportunity Zones are in economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.

Opportunity Zones 6-9 New! Temporary deferral of gains reinvested in qualified opportunity zone funds within 180 days of sale Deferred gain reduced in time 10% at 5 years, 15% at 7 years Gain is deferred until the earlier of the Fund sale or Dec. 31, 2026 Use Form 8897 to report deferred gain

Opportunity Zones 6-9 Because gain must be recognized by Dec. 31, 2026, investments after Dec. 31, 2019 will only get basis adjustment of 10% Because gain recognized by Dec. 31, 2026, investor must have cash to py the deferred tax by Apri. 15, 2027 Deferred gain is IRD for beneficiary inheriting the OZ Fund

Opportunity Zones 6-9 Gain on investment in Zone is excludable if held for 10 years Two sets of proposed regs issued (Dec and Apr. 2019) Only net §1231 gain can be deferred; thus, §1231 gains have 180 days from end of year Important planning re timing of investment

Is Opportunity Zone investment better than §1031?
6-13 See chart on Page 6-13 in book It looks like §1031 is still the way to go for real estate Opportunity Zones are worth a look when selling stock, real estate or personal property

Reporting Cash Transactions
6-14 Reporting Cash Transactions

Cash Report: Withdrawals or Deposits of $10,000+
6-14 Business receives more than $10,000 cash in single or related transaction Must file Form 8300 within 15 days the cash transaction occurs. Must report suspicious transaction Trying to prevent filing of Form 8300 Trying to have false Form 8300 filed Signs of possible illegal activity

Examples of Reporting Situations
6-14 IRS FS Auto dealerships Taxi companies Landlords Bail-bond agent Colleges Home builders Hotels / Resorts / Country Clubs

6-15 Medical Cannabis

Cannabis Map Source Wikipedia May 2019

Tax on Medical Cannabis
6-15 Legal sales of Mary Jane exceeded $8 billion in 2018 – and $80 billion by 2030 Illegal Income reportable—§61(a)(3) No deduction or credit allowed—§280E Deduction for cost of goods sold allowed (McHan, Peyton, Franklin) Medical Cannabis—State vs. Federal

Medical Cannabis COGS Medical Cannabis COGS—Producer
6-17 Medical Cannabis COGS—Producer Direct material costs (seeds, etc.) Direct labor costs (planting, harvesting, etc.) Certain indirect costs State excise taxes (e.g., Washington)

Medical Cannabis COGS 6-17 Medical Cannabis Cost of Goods Sold—Inventory Method (CCA ) Purchases Less: Trade or other discounts Plus: Transportation (to acquire possession) §263A, purchase, handling, and storage exp. % of merchandise service costs (payroll, etc.)

Medical Cannabis COGS Pleading the Fifth doesn’t help (Neil Feinberg)
6-17 Pleading the Fifth doesn’t help (Neil Feinberg) Only COGS deductible S corp can’t deduct reasonable wages to owners (Jesse Ploughman) QBI problem? Can’t deduct general business costs (Canna Care)(Alpenglow)

Depositing Withholding
6-20 Banks reject EFTPS deposits IRS understands problem (unbanked business) but doesn’t offer a solution

6-21 Gross Income

Employee Achievement Awards
6-21 New! Cash or cash equivalent employee achievement awards taxable New and old. . . just clarification. What about buying something that can be returned? New. Selection of awards must be limited to a list of items

Crowdfunding 6-21 Funds collected via crowdfunding taxable…unless a loan, capital, or gift Nearly 57M workers earn money in shared economy Project funding, e.g., kickstarter.com and gofundme.com Form 1099-K problems? IRS’s Shared Economy Tax Center

Trade or Business Expenses
6-23 New! Local lobbying expenses not deductible New! Denial of deducting fines and penalties expanded New! Can’t deduct sexual harassment/abuse settlements if NDA Watch for large legal bills and “other” expense deductions

Trade or Business Expenses
6-25 Generally businesses that make donations to a charity and receive a state tax credit can deduct the donation See state and local income tax FAQ and Rev. Proc For pass through entity the state credit cannot be against income tax

Ordinary & Necessary §162 Expenses
6-25 Ordinary: Commonly and frequently incurred Necessary: Appropriate and helpful Not extravagant Substantiation required: maintain records sufficient to substantiate expenses underlying deductions claimed (New Colonial Ice (1934))

Nondeductible Entertainment
6-27 New! No entertainment, amusement and/or recreation deductible starting Jan. 1, 2018 (was 50%) What is entertainment? Difficult to classify entertainment as marketing Membership club dues? No, never…..none !

Business Meals Travel meals remain 50% deductible
6-28 Travel meals remain 50% deductible 80% for transportation employees if paid by employer Exceptions (100% deductible): Employees and SE reimbursed expenses De minimis—too small to worry about! Company party Made available to public for free Food to ship crew and oil hands

Business Meals 6-28 50% of business meals deductible (but not if included in entertainment!) Notice New! §274(o) meals for convenience of employer 50% deductible (was 100%) Not deductible after 2025

Employer Provided Meals
6-29 Must be provided for convenience of employer or value of meals is taxable (§119) Snacks are not includable in employees income See TAM

No Logs For Laptops and Computer Equipment
6-30 New! Home computers and peripheral equipment are not listed property Logs still required for: Automobiles (< 6,000 gvw) Trucks, airplanes Personal property used for entertainment

Listed Property Substantiation
6-30 For each separate use: Date, amount & business purpose With contemporaneous records or “Other sufficient credible evidence” Sampling allowed One week a month or 3 months a year

Auto Logs 6-32 Taxpayer had contemporaneous records for miles driven (Tina Zhou) Taxpayer did not have contemporaneous records for miles driven (Suresh Hatte) Claimed 80,630 business miles & 2,800 personal miles on three cars

Cell Phones Not Listed Property
6-34 Cell Phones and Internet not listed property 90% (Joseph Jackson) 80% (Ron Ezzel) 9% (Sam Kilpatrick) 0% (Pat Windham because she didn’t allocate between business and personal)

Internet Not Listed Property
6-36 New. Internet not listed Property starting in 2018 Internet limited to 9% of annual charges. Cohan defense rejected (Sam Kilpatrick) No internet deduction allowed for attorney working from home (Steven Mendelson) Mendelson case not in manual

Federal Mileage 2018 2019 Business Mileage 54.5¢ 58¢ Medical/ Moving
6-37 Federal Mileage 2018 2019 Business Mileage 54.5¢ 58¢ Medical/ Moving 18¢ 20¢ Charitable Mileage 14¢ 51

2019 Luxury Auto Depreciation Limits
6-37 2019 Luxury Auto Depreciation Limits Year Description Amount % 1 Lesser of $18,100* 20.00% 2 $16,100 32.00% 3 $9,700 19.20% 4-5 $5,760 11.52% Total $55,420 *Includes $8,000 bonus depreciation for year of purchase

2019 Auto Limitations 6-38 Can’t use cents-per-mile to value personal use of company car Leased auto inclusion amount starts at $50,000 (was $19,000 in 2017)

Fringe Benefits, Per Diems, Meals, Listed Property & Travel Deductions
6-39 Fringe Benefits, Per Diems, Meals, Listed Property & Travel Deductions 55

Parking & Bus Tokens Consider adding to W-2
6-39 Type 2020 2019 Parking* $270 $265 Transit pass* Bicycling NONE * Not deductible but still a tax-free fringe benefit

2019-20 Federal Lodging & Meal per Diems
6-40 Go to GSA.gov for high cost locality lodging and meals Simplified high/low rate (M&IE) [Notice ] $297/$200 Meals and IE only $60 non-high cost areas, $71 high cost areas Truckers $66 Incidentals $5

Per Diem Paid to Employee Requirements
6-42 “Adequate accounting” to employer required (expense report needed) Per diem cannot be more than IRS-specified rates Per diem not substantiated must be returned Written “accountable plan” required or add to W-2! (Gary Johnson)

No Away From Home Expense
6-42 “Concierge” CFO not allowed away from home expense (Michael Brown) Work was in NJ and family was in GA Not temporary as contract was for three years One year limit to “temporary”

Business Interest Limit Starting in 2018
6-43 New! Business interest deduction limit: Business interest income 30% of adjusted taxable income (no depreciation, amortization, etc.) & Floor plan financing Indefinite carryforward Effective Jan 1, 2018

Business Interest Limit Starting in 2022
6-43 New! Business interest deduction limit: Business interest income Subtract depreciation, amortization, etc. from gross income 30% of taxable income & Floor plan financing Effective Jan 1, 2022 EBIT Earnings Before Interest Tax

Business Interest Limit
6-43 Doesn’t apply to: Small business with average gross receipts (3 yrs) that don’t exceed $26 million (2019) Applies to tax shelters defined in Sec 461(i)(3) More than 35% of losses allocated to LP or “limited entrepreneur”

Business Interest Limit
6-46 Doesn’t apply to: Real property business (if elected) Must use ADS depreciation Farmers (if elected) Must use ADS depreciation for assets over 10 years File Form 8990 New FAQs

Office-In-Home (§280A) Must be used: Exclusively; Regularly; and
6-47 Must be used: Exclusively; Regularly; and For trade or business No longer deductible for employees 64

Office-In-Home (§280A) Must be either: Principal place of business;
6-48 Must be either: Principal place of business; Are rentals business or good investment? (Patricia Windham) Used to meet with customers, patients, clients; or A separate structure connected to trade or business 65

Office-In-Home (§280A) Regular and exclusive use required
6-48 Regular and exclusive use required Clifton Gibbs didn’t provide a floor plan or other info to establish exclusive use Storage space denied when home was the “principal place of business” (Mohammad Najafpir) Safe harbor is $5 x square footage of office Disadvantage for mortgage and SALT limits Gibbs is 2019

Deducting Repairs vs. Depreciating Improvements
6-51 Deducting Repairs vs. Depreciating Improvements

Depreciable Property Is:
6-51 Capital expenditure in depreciable property Used in trade or business (or §212) Has useful life > one year Deductible business expenses vs. nondeductible capital expenditures

Repair or Capital Improvement?
6-52 Determine “Unit of Property” Determine if “Unit of Property” improved

Building’s Unit of Property
6-54 Applied separately to: Building structure Building systems HVAC and ventilation Plumbing and electrical Escalators and elevators Alarms systems (fire, burglar, etc.) Lessee improvements (same rules) 70

Property Improved If: New—buildings or property
6-54 New—buildings or property Improved (betterment) property Restored property Adapted property to new use If not one of the above, it’s a repair

Improvement (Betterment)
6-54 Ameliorates material condition or defect from prior to ownership or production Material addition Enlargement Expansion Extension Material capacity increase 72

How Material Is Material?
6-54 Consider all facts and circumstances Purpose of expenditure Physical nature of work done Effect on unit of property Book/tax consistency is not required Compare condition of property immediately before and after event 73

$2,500/$5,000 DE MINIMIS EXPENSE SAFE HARBOR ELECTION
6-56 $2,500/$5,000 DE MINIMIS EXPENSE SAFE HARBOR ELECTION

De Minimis Safe Harbors
6-57 $5,000 per invoice may be expensed if business has applicable financial statements (AFS) $2,500 per invoice may be expensed for business without AFS Use of De Minimus expensing disqualifies asset from UBIA when computing QBI deduction

The Invoice Rule 6-57 De minimis safe harbor determined at the invoice or item level Delivery, installation, and other common costs on invoice must be prorated 79

Requirements to Use the De Minimis Safe Harbor
6-57 Timely annual election Once elected, applies to all purchases Cannot be made via accounting method change See optional sample language 80

Safe Harbor Required? De minimis safe harbor elective, not required
6-57 De minimis safe harbor elective, not required Sample Election in book Agreement can be reached with local examiner or court Anti-abuse rules exist Recordkeeping must be sufficient to determine deduction or capitalization 81

Applicable Financial Statement (AFS)
6-58 Financial statements: Filed with SEC (the 10-K or Annual Statement to SHs) Audited by independent CPA (and used for nontax purpose) OR Provided to any federal or state agency other than the IRS 82

$5,000 per Invoice De Minimis with AFS
6-59 Have written “de minimis” plan at beginning of year Book/tax consistency (tax and AFS de minimis the same amount) Amount not more than $5,000 per invoice (or per item as per invoice) Sample language in the book 83

Small Taxpayer / Small Building Election
6-59 Small Taxpayer / Small Building Election

Simplified Alternatives
6-59 When $5,000/$2,500 de minimis expensing or materials and supplies can’t be used: Small taxpayer safe harbor election Routine maintenance safe harbor Capitalize repair and maintenance Capitalize rotable parts election

Small Building/Small Taxpayer
6-60 Safe harbor election available to immediately deduct improvements Annual amount per building limited to lesser of: 2% of building’s unadjusted basis or $10,000 Election made timely in proper format

Small Business/Small Taxpayer
6-60 Small taxpayer: three-year average gross receipts < $10,000,000 Eligible property: $1,000,000 maximum unadjusted basis Unadjusted basis for lessee: total of rent paid and expected to be paid under lease terms (including any renewal periods)

Partial Dispositions 6-61 88

Partial Disposition Loss
6-61 Write off adjusted cost when replaced Building (structure) Building system (roof, windows, siding, HVAC systems, etc.)

Election to Write off Partial Building Disposition
6-61 Write off portion of original cost upon replacement on Form 4797 Safe harbors available Cost segregation study (ATG) – Most accurate and most costly Producer Price Index – Most difficult Replacement cost method – Least accurate

Write off of Partial Disposition of Building
6-62 Calculate partial disposition loss as if the components were sold Discount current year replacement cost back to year building purchased using Producer Price Index Use replacement cost of item over replacement cost of building

Partial Disposition Loss
6-62 KHS Lost Plumbing Original Cost Accum. Depreciation Remaining Basis Building (remaining) $720,000 $129,195 $590,805 Old Plumbing 80,000 14,355 65,645 Totals $800,000 $143,550 $656,450 New Plumbing $100,000

6-63 “Election” made on timely filed return, no formal election required Report on Form 4797 as “partial disposition loss” Late partial disposition election allowed if IRS requires repairs to be “capitalized” (Rev. Proc )

6-63 Passive loss rules may suspend loss No double dipping allowed If taxpayer uses Sec. 179 to expense asset, then no partial disposition loss allowed

Depreciation 6-64 95

Apportion Between Building and Land
6-64 Apportionment of basis required (§1.167(a)-5). Possible methods: County Assessor (highest land value?) Professional appraisal Land sales method Insurance method

Depreciation Not Allowed
6-64 Carlos Langston depreciated a Meridian 580 boat and a Raptor RV saying they were office space for his business IRS agent went to see location of office Langston also deducted loss on sale of former residence saying it was converted to rental Court agreed with IRS FMV at conversion same as sales price and maybe not converted at all

§179 Expense Election 2020 2019 Maximum §179 $1,040,000 $1,020,000
6-65 2020 2019 Maximum §179 $1,040,000 $1,020,000 Start of phase out $2,590,000 $2,550,000 Why use §179 with unlimited §168 available? Use a portion of cost for §179 to back into tax bracket threshold!

Real Estate - §179 6-66 New. Residential lodging facility personal property qualifies for §179 New. Non-residential real property Roofs Heating & air conditioning Fire and alarm systems Security systems

Qualified Improvement Property
6-66 New! Restaurant, retail and leasehold improvement consolidated into “qualified improvement property” QIP is 39 year property until technical correction New! Restaurant property not “qualified” if placed in service after Dec. 31, 2017

§179 Rules §179 limited to taxable income
6-67 §179 limited to taxable income Unused portion is carried forward Aggregate of active trades or businesses Includes wages, even if from different business or from spouse!

New! §168(k) Bonus Depreciation
6-68 Sep 27, 2017 Dec 31, 2022 Jan 1, 2023 Dec 31, 2026 After 100% 80%, 60%, 40%, 20% 0% New or used property

New! §168(k) Bonus Depreciation
6-68 Film, TV and live theater qualifies Qualified improvement property category AMT credits can’t be accelerated. Prior law allowed election to use AMT credits in lieu of using bonus depreciation.

§168(k) Proposed Regulations
6-69 Used property OK unless previously used by same taxpayer Series of related transactions Leaseback property – Lessee who exercised purchase option may use §168(k) Syndication transactions

§168(k) Proposed Regulations
6-69 §734(b) adjustment §743(b) adjustment Contributed property Like-kind exchanges Boot PAID is considered a purchase and is eligible for bonus depreciation

6-71 Hobby Loss Issues

Hobby Loss Rules Expenses deductible if:
6-71 Expenses deductible if: Incurred in trade or business (§162) If no profit motive, expenses limited to income (§183) BUT hobby loss expenses are misc. itemized deductions and no longer deductible Not netted on Sch C

Profit Motive Factors Conducted in business-like manner
6-72 Conducted in business-like manner Expertise in business Time and effort expended Appreciation in value of assets Success in similar/dissimilar activities

Profit Motive Factors History of profit or loss
6-72 History of profit or loss Amount and years of any profits Losses offset other income Personal pleasure Presumption tests – Use Form 5213 Until 6th year – horse racing/breeding Until 4th year – any other activity

Presumption Test 6-72 Existence of profit motive presumed if activity profit for 3 of the last 5 years IRS must give taxpayer time to prove profit motive exists Must file Form 5213 Statute of Limitation extended

Welch Ranch 6-72

Hobby Loss Cases 6-73 Part-time Texas rancher wins big and saves $5m in tax (Finis Welch) What helps with the win? Books, Bank, and Business plan Center Ranch

The Triumphant Lady 6-73

Hobby Loss Cases 6-73 Loser: Yacht charter operation was to offset expenses, not for profit (Charles Steiner, CPA) The Triumphant Lady – $15 million -155 feet Only one charter – sold for $4 million – no business plan When sold yacht asked $15.95M (their cost was $15.489m) and sold for $4.455M

Ranch reported $9 million in losses from 2001 to 2015
6-74 Winner (sort of): Unprofitable ranch a business but loss passive (Shane Robinson) Robinson had ranch experience, assembled records and business plan but couldn’t prove 500 hours of activity per year Suspended loss is better than no loss

Do horse owners ever make money?
6-74 James and Elaine Donoghue, over several years of horse operation, expenses totaling $1,008,303 but realized income only $33,691 Held to be a hobby Court noted that the tax preparer did not warn the taxpayers about the hobby loss rules.

Remote Worker 6-74 Fred Barbara sold his trucking business at a huge profit and started a loan business in Chicago while a Florida resident Loan business generated huge losses which IRS contended were passive because Fred lived in Florida Tax Court found Fred materially participated for 700 hours including making business decisions and servicing loans by and cell phone

Excess Business Losses
6-75 New! Excess business losses not allowed (except for C corporations) $510,000 MFJ ($255,000 Single) Excess is carried forward as part of taxpayer’s NOL

6-75 Net Operating Losses

NOL Rules 6-75 New! NOL deduction limited to 80% of income in year to which NOL carries New! Carryforward indefinitely New! Farmers still have 2-year carryback but non-farmers do not effective after 2017

NOL Cases 6-77 Tax returns from loss years ( ) alone not sufficient to prove NOL carryforward to 2012 (Robert De Sylva) He hadn’t filed 2009 – 11 returns yet Tax return didn’t include concise explanatory statement (Martha Smith) No NOL when theft loss denied (James Gaunt)

NOL Cases NOL deduction not properly substantiated (Barry Bulakites)
6-78 NOL deduction not properly substantiated (Barry Bulakites) Warn client with NOL to keep books and documents

Research and Experimental Expenses
6-78 Research and Experimental Expenses

Research & Experimental Expenses
6-78 New! Capitalize R&E expenditures and amortize over 5 years Including software development Excluded: Depreciable & depletable property Previous R&E property Effective: Jan 1, 2022

6-80 Farm Topics

Farm Topics 6-80 New! Farm machinery or equipment depreciated over 5 years (not 7 years) New! Required use of 150% declining balance method repealed New! Cost of replanting citrus lost by casualty

6-81 Business Credits

Business Credits New! Orphan drug credit reduced to 25% (was 50%)
6-81 New! Orphan drug credit reduced to 25% (was 50%) New! 10% rehab credit for pre-1936 buildings repealed 20% credit for certified historic structures still available

Claiming Research Credit Against Payroll Tax Owed
6-81 Small businesses can claim research credit against OASDI payroll tax Gross receipts < $5 million Election can’t exceed $250,000 year Small businesses can claim research credit against AMT

Business Credits 6-82 New. Election to accelerate AMT credit in lieu of bonus depreciation repealed New. Employment Zone tax credit retroactively extended for 2017 TIGTA releases report saying IRS doesn’t do enough to verify carryover credits and deductions Expect future zaudits

Work Opportunity Credit
6-82 Extended through 2019 Unemployed for 27 weeks Activated Military Reservists 40% of first-year wages up to $6,000 ($12,000 long-term unemployed vets) Employer needs Form 8850 w/28 days

Understanding the Employer Mandate (ACA)
6-85 Understanding the Employer Mandate (ACA)

2019 Employer Benefits and Burdens
6-85 1-10 FTE 11-24 FTE 26-49 FTE 50+ FTE Pay 50% of premium 50% credit Full credit if <$27,100 average wage Phase-out applies 2 years SHOP eliminated 50% credit No credit if >$54,200 average wage Not required to provide health insurance Employees must carry health coverage Penalty if no health ins. plan Or plan not affordable

SE Health Insurance Deduction
6-86 ACA Impacts HRAs & SE Health Insurance Deduction

SE Health Insurance & Premium Tax Credit
6-86 SE deduct health insurance: Sch. 1, Line 16 Premiums not to exceed lesser of: Specified premiums less premium assistance credit (PAC) or Premiums not paid through advance PAC plus any PAC payback

Employers May Start Offering Individual Coverage HRAs
6-86 Final Regs expand HRAs (TD 9867) Effective Jan. 1, 2020 Individual Coverage HRAs can be offered as option for traditional group health insurance Reimbursement for employee-selected insurance permitted

Employers May Start Offering Individual Coverage HRAs
6-86 Excepted Benefit HRAs can cover co-payments, deductibles and items not covered by regular insurance Employer can contribute up to $1,800 per employee with carryovers allowed No “use it or lose it” as FSAs have

HRAs/§105 Plan Problem 6-87 ACA eliminated stand-alone HRAs for most small employers CURE fixed the problem effective beginning in 2017 “Small employers” may reimburse employees for individual health insurance premiums

21st Century Cure Act Plan Requirements
6-88 No employee discrimination, except Employees not completing 90 days Under age 25 Part-time (< 30 hours a week) Seasonal workers Union workers

6-89 Employer must pay, no salary reduction contributions Plan must pay, or reimburse, medical expenses 2019 limited to $5,150 per employee/$10,450 for family plan Partial year must be prorated

6-89 “Small employer” has less than 50 full-time (and FTE) employees “Small employer” cannot offer group health plan to any employee Employee must have minimum essential health coverage Or else, employer payment is taxable to employee

6-89 Payment is tax-free fringe benefit to employee if “Cures” complied with Employer’s reimbursement reduces employee’s premium tax credit Proper and timely notice of plan availability must be made (Notice )

HRA Reporting Rules 6-90 Annual amount of fringe benefit must be reported on W-2 (see new box) Small businesses offering HRAs are required to file Form 1095-B. HRA considered self-insured plan Insurance company will also file Form 1095-B for same employee

21st Century Cures Act 6-90 No relief under 21st Century Curt Act for “large employers” with 50 or more FTE! But, certain one-participant and “retired-employees-only” HRA plans are still exempt from ACA

S Corp. Shareholder Health Insurance
6-90 S corp. owners treated as self-employed (Notice ) Premiums paid reported in Box 1 W-2 wages S corporation must pay or reimburse premiums and deduct as “officers salary.” No change from prior years

ACA for Large Employers
6-94 ACA for Large Employers

The Big Six 6-91 As ACA only applies to ALE’s, employers must properly establish how many employees they have every year! Six questions: Who is a “large” employer? Who is a “full-time” employee? What is an FTE?

The Big Six 6-91 Which employees must be offered coverage to avoid the ACA penalty? What is “adequate” and “affordable” coverage? How are the ACA penalties calculated?

6-91 Who Is a Large Employer?

Who Is an ALE? Monthly average of FTs & FTEs are 50 or higher:
6-91 Monthly average of FTs & FTEs are 50 or higher: Full-time employees (FT) > 30 hours per week or 130 hours per month Full-time equivalents (FTE), plus Seasonal workers if this creates ALE

Who Is a Full-Time Employee?
6-97 Who Is a Full-Time Employee?

Number of Employees 6-91 Number of full-time and FTE employees determine if employer mandate applies But, number of full-time employees (and not FTEs) determines if employer mandate penalty applies

Two Ways to Measure Time
6-91 Monthly measurement method Wait until end of month to answer “should have we offered coverage?” Default position Look-back measurement method If full-time in past, offer health insurance If not full-time in past, no need to offer

Miscellaneous Employee Rules
6-92 Common law standards determine employer-employee status §530 relief no relief for this purpose §3508 real estate agents and direct sellers never employees Owner hours not employee hours See table in material for recap

Who Needs to Be Offered Health Coverage?
6-93 Who Needs to Be Offered Health Coverage?

Who Needs to be Offered Coverage?
6-93 Only full-time employees 30+ hours per week 130+ hours a month Not full-time equivalent employees Only two measurement methods Monthly measurement method Look-back measurement method

What Is the Penalty for Noncompliance by a Large Employer?
6-93 What Is the Penalty for Noncompliance by a Large Employer?

For 2019 6-93 $2,500 (2019) per employee if health insurance not offered to at least 95% of employees and dependents and employee gets credit from marketplace (§4980H(a) penalty) $3,750 (2019) per employee penalty if health insurance (including family) offered to 95% is unaffordable or subminimum value and employee gets credit from marketplace (§4980H(b) penalty)

Two Penalties, Only One Applies
6-94 Employer can fail to offer up to 5% of full-time employees Dependent coverage must also be offered to full-time employees IRS cannot double-dip penalties Overall cap on penalty is lesser of the 2

Penalty Notice – Form 226-J
6-94 Penalty Notice – Form 226-J

226-J Penalty Notice 6-95 IRS notifies large employer when employees receive Premium Tax Credit (Understanding Letter 226-J) IRS will demand payment Employers will be given time to respond IRS identified 33,000 ALEs ($4.9B penalty potential) for 2015

What Employer Must Do Complete response Form 14764 within 30 days
6-95 Complete response Form within 30 days IRS will acknowledge receipt with Letter 227 (1 of 5 responses) If IRS doesn’t receive a timely Form 14764, IRS will assess penalty Disagree? File Form 14765

Common Reasons Penalty Notice is Wrong
6-95 Not an ALE Not 80 (2015) or 30 (2016 and after) full-time employees Used “look-back” rule Employee was seasonal worker Employee opted out

6-96 Other Provisions

Other Provisions 6-96 40% excise tax on Cadillac plans deferred to 2022 by TCJA New. Medical Device tax postponed until 2020 (HR 195, Jan. 22, 2018)

What Health Coverage Must Be Offered?
6-96 What Health Coverage Must Be Offered? Adequate & Affordable

Employer-Sponsored Plan
6-96 Isn’t minimum essential coverage if: Adequate: Minimum value of employee’s share of benefits less than 60% (< bronze plan) OR Affordable: Employer offers health coverage exceeding 9.86% (2019) of employee’s household income

What Is Household Income?
6-97 Household income is modified AGI of household member (including spouse) required to file MAGI is AGI plus: Foreign earned income exclusion Tax-exempt interest Nontaxable social security

Problem with Household Income
6-97 Employer: What’s household income? Three affordability safe harbor alternatives; only one practical: Rate of pay—known before year starts W-2 wages—known after the year is over Poverty line—known before year starts

2019 Form 1095 Due Date Employees: Jan 31, 2020 IRS: Feb. 28, 2020
6-97 Employees: Jan 31, 2020 Must receive paper Forms 1095 IRS: Feb. 28, 2020 Electronic filing: Mar. 31, 2020 Required if 250+ returns Information reporting penalties $50/$110/$270/$550 in 2019

Forms 1095-A, 1095-B & 1095-C 6-98 The “A” Form—Health Insurance Marketplace The “B” Form—Health Insurance Company/Provider Coverage The “C” Form—Employer-Provided Health Insurance Coverage Employees do not have to wait for 2019 Form 1095 unless they receive APTC

Small Business Health Care Tax Credit
6-99 Small Business Health Care Tax Credit

Small Employer Health Credit
6-99 Fewer than 25 FTEs, including in controlled group Average annual wage < $52,300 Employer pays at least 50% of qualified health plan (QHP) Two consecutive years

Calculating Credit Maximum credit is 50% of lesser of:
6-100 Maximum credit is 50% of lesser of: Total small group premiums As listed on Form 8941 instructions Used for both regular and AMT tax

Credit Only Allowed for Two Years
6-100 Two consecutive years only Credit is not mandatory—employer may choose when to claim Once credit is claimed, next year is the only other year credit may be claimed Irrelevant if credit is -0- in second year Can’t use successors to avoid two years

Claim Credit on Form 8941 Businesses
6-100 Businesses Attach Form 8941 to General Business Credit Form 3800 Credit is nonrefundable Must reduce deduction by credit

Business Client Letter – From You to Your Client
6-103 What TJCA means for your business Corporate rates Bonus depreciation §179 Pass-through businesses Listed property

Use Business Client Letter
6-104 Like-kind exchanges Deductions and credits Interest deductions Stock options NOLs “Call, we can answer your questions”

Thank you!

Fall V1 10-5-19 DS & VH.

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Fall V1 10-5-19 DS & VH.

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