Larry's Tax Law

Like other commentators, we have been writing extensively about the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the historic $2.2 trillion relief package enacted last month by lawmakers in the wake of the COVID-19 pandemic.

In a prior post, we provided a summary and analysis of numerous tax provisions of the CARES Act. 

In this post, we expand on our previous coverage of the CARES Act relative to net operating losses (“NOLs”), and provide an overview of new guidance issued by the IRS.

I apologize in advance for focusing my blog these past several weeks on the new Oregon Corporate Activity Tax (“CAT”), but my mind keeps finding new facets to this tax regime that I suspect most tax practitioners and even the lawmakers who passed the legislation may not have envisioned or anticipated.  So, please indulge me as I explore another one of these numerous issues in this installment of the blog.

After the passage of the Tax Reform Act of 1986 and the introduction of Code Section 469, we started seeing tax practitioners focusing attention on trying to figure out how their clients could be characterized as active participants in a trade or business activity.  Their goal is simple – they want to avoid the deduction limitations imposed by the passive activity loss rules contained in Code Section 469. 

As with any investment, due diligence is required. Investing in an Opportunity Zone Fund (“OZF”) is not any different.

Historically, we have seen taxpayers go to great lengths to attain tax deferral. In some instances, the efforts have resulted in significant losses. With proper due diligence, many of these losses could have been prevented.

A TALE OF IRC § 1031 EXCHANGES GONE WRONG

Tax deferral efforts under IRC § 1031 have often resulted in significant losses for unwary taxpayers.   The best examples of these losses resulted from the mass Qualified Intermediary failures we saw over the last two decades.

BACKGROUND

Sections 1400Z-1 and 1400Z-2 were added to the Internal Revenue Code of 1986, as amended (the “Code”) by the Tax Cuts and Jobs Act. These new provisions to the Code introduce a multitude of new terms, complexities and traps for the unwary.

The first new term we need to add to our already robust tax vocabulary is the phrase “Qualified Opportunity Zones” (“QOZs”). The Code generally defines QOZs as real property located in low-income communities within the US and possessions of the US. Additionally, to qualify as a QOZ, the property must be nominated by the states or possessions where the property is located and be approved by the Secretary of Treasury.

As we discussed in our February 27, 2018 blog post, the Tax Cuts and Jobs Act ("TCJA") eliminated the deduction for entertainment expenses.  Despite commentary to the contrary, we have consistently reported that meals continue to be deductible (subject to the 50% limitation under Code Section 274(n)) post TCJA under Code Section 274(k) as long the meals are not lavish or extravagant, and the taxpayer (or an employee of the taxpayer) is present at the furnishing of the meals.  Our position relative to meals is supported by guidance from the Service (IRS Notice 2018-76) issued on October 3, 2018.  More importantly, the recently issued guidance focuses on an issue raised in our prior blog post, namely whether meals purchased at an entertainment event are deductible provided the requirements of Code Section 274(k) are satisfied.  We suspected that the Service would issue guidance on this issue.  It did.

The NYU 77th Institute on Federal Taxation (IFT) is taking place in New York City on October 21-26, 2018, and in San Diego on November 11-16, 2018.  This year, I will be presenting my latest White Paper, Subchapter S After The Tax Cuts And Jobs Act – The Good, The Bad And The Ugly.  My presentation will include a discussion about the direct changes made by the TCJA to Subchapter S as well as the impact on Subchapter S by other provisions of the TCJA, including creation of a single corporate tax rate under Section 11, creation of the Section 199A deduction, elimination of personal property exchanges under Section 1031, and elimination of the corporate alternative minimum tax. I will also discuss the ongoing benefits of Subchapter S and new traps that exist for the unwary.

The IFT is one of the country's leading tax conferences, geared specifically for CPAs and attorneys who regularly are involved in federal tax matters.  The speakers on our panel, Taxation of Closely Held Businesses, include some of the most preeminent tax attorneys in the United States, including Jerry August, Terry Cuff, Wells Hall, Stephen Looney, Ronald Levitt, Stephen Kuntz, Mark Peltz, and Bobby Philpott.  I am proud to be a part of IFT.

This will be my eighth year as an IFT presenter, and I am again speaking as part of the Closely Held Business panel on October 25 (NYC) and November 15 (San Diego).  As in previous years, the IFT will cover a wide range of fascinating topics, including tax controversy, executive compensation and employee benefits, international taxation, corporate taxation, real estate taxation, partnership taxation, taxation of closely-held businesses, trusts and estates, and ethics.  The IFT is especially important this year given the recent passage of the TCJA and the many new tax provisions that were added to the Code, including Section 199A.   

I hope you will join us this year for what will be a terrific tax institute.  Looking forward to seeing you in either New York or San Diego!

View the complete agenda and register at the NYU 77th IFT website.

The Service issued proposed regulations corresponding to IRC § 199A today.  As discussed in a prior blog post, IRC § 199A potentially allows individuals, trusts and estates to deduct up to 20% of qualified business income (“QBI”) received from a pass-through trade or business, such as an S corporation, partnership (including an LLC taxed as a partnership) or sole proprietorship.

BACKGROUND

Deduction

The deduction effectively reduces the new top 37% marginal income tax rate for business owners to approximately 29.6% (i.e., 80% of 37%) in order to put owners of pass-through entities on a more level playing field with owners of C corporations who now have the benefit of the greatly reduced 21% top corporate marginal tax rate under the Tax Cuts and Jobs Act (“TCJA”). The concept sounds simple, but the application is complex. The new Code provision contains complex definitions and limitations, requires esoteric calculations, and is accompanied by many traps and pitfalls.

New York Attorney General Barbara Underwood and New York Governor Andrew Cuomo announced today that the state of New York, joined by the states of Connecticut, New Jersey and Maryland, have instituted a lawsuit against the federal government in the U.S. District Court for the Southern District of New York, seeking to strike the $10,000 cap imposed on the state and local tax (“SALT”) itemized deduction by the Tax Cuts and Jobs Act (“TCJA”) as unconstitutional.

The lawsuit, which specifically names Steven Mnuchin, U.S. Treasury Secretary and David Kautter, Acting Commissioner of the Internal Revenue Service, as defendants, asserts that the SALT cap (previously discussed in an earlier blog post) was specifically enacted by the federal government to target New York and similarly situated states, that it interferes with a state’s right to make its own fiscal decisions, and that it disproportionately adversely impacts taxpayers in those states.

INTRODUCTION

Charitable organizations work hard to maintain exempt status. These organizations operate in a highly regulated landscape: In exchange for enjoying freedom from income taxes, they must comply with strict organizational and operational rules. Even before the Tax Cuts and Jobs Act (“TCJA”), adhering to these rules required constant oversight. The TCJA changes the rules, impacting both the operations and funding of these organizations.

On the operational side, we review below: Changes to the rules on unrelated business taxable income and employee fringe benefits, the new excise taxes imposed on executive compensation, and college and university endowments, and changes to substantiation requirements for certain donations.

On the funding side, we review below: How changes to the standard deduction (addressed in more detail in a prior blog post), cash contribution limits, deductions for payments to colleges and universities for the right to purchase athletic event tickets, and the estate tax may impact donors and charitable giving patterns.

INTRODUCTION

The Tax Cuts and Jobs Act (“TCJA”) creates the need for tax planning with respect to several major life-changing activities individuals may encounter, including marriage, divorce, home ownership, casualty losses, medical expenses and parenting. More specifically, the TCJA makes major changes to the existing framework of personal exemptions and itemized deductions, the child tax credit, the tax treatment of alimony and spousal maintenance payments made as a result of divorce, and the alternative minimum tax (“AMT”).

The primary focus of this blog post is the provisions of the TCJA that significantly impact families and individuals. Many of these provisions have been exhaustively reviewed by other commentators in the past several weeks. In those instances, our discussion is brief. Rather, we decided to place the bulk of our discussion on the less obvious provisions of the TCJA that may have significant impact on families and individuals.