Final regulations relating to the low-income housing tax credit revise and clarify requirements that low-income housing agencies must follow when conducting physical inspections of low-income units and reviewing low-income certifications and other documentation. The regulations finalize previously issued temporary regulations (T.D. 9753, February 25, 2016).

Final regulations relating to the low-income housing tax credit revise and clarify requirements that low-income housing agencies must follow when conducting physical inspections of low-income units and reviewing low-income certifications and other documentation. The regulations finalize previously issued temporary regulations (T.D. 9753, February 25, 2016).

Sample Inspection Size

The final regulations require the agency to inspect no fewer units than the number specified in the "Low-Income Housing Credit Minimum Unit Sample Size Reference Chart." The reference chart can be found in Rev. Proc. 2016-15, I.R.B. 2016-11, 435, and is borrowed from the U.S. Housing and Urban Development (HUD) Real Estate Assessment Center Protocol (the REAC protocol). Previously, an agency was permitted to inspect 20 percent of the low-income housing units in the project if this was lesser than the number required by the reference chart. This change addresses a concern that limiting physical inspections to 20 percent of units in small projects is not sufficient to ensure overall compliance with habitability and low-income requirements.

All-Buildings Requirement

No change is made to the requirement that an agency must inspect all buildings in a low-income housing project by the end of the second calendar year after the year in which the last building in the project is placed in service unless a project inspection is conducted under the REAC protocol. Suggestions that the IRS dispense with the all-buildings requirement for agencies not using the REAC protocol were not adopted.

Reasonable Notice Time Frame Shortened

A building owner and tenants are allowed a maximum 15 day advance notice that a project will be inspected. The temporary regulations allowed a 30-day notice period. The particular units to be inspected may only be identified on the day of the inspection. The 15 day advance notice limit will also apply to reviews of low-income certifications.

Amendment of Agency’s Qualified Allocation Plan

The final regulations are effective on February 26, 2019. However, an agency only needs to amend it qualified allocation plan by December 31, 2020, to reflect the requirements in the final regulations.

Rev. Proc. 2016-15 is obsolete with respect to an agency as of the date that on which the agency amends its qualified allocation plan.

The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).

The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).

Underpayment Penalty

The IRS announced in IRS News Release IR-2019-3 that it would waive the underpayment penalty for any taxpayer who paid at least 85 percent of their total tax liability during the 2018 tax year. The usual threshold is 90 percent. However, Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., has said that the IRS should "do more."

"Instead of penalizing those who paid less than 90 percent of what they owed in 2018, now they’re penalizing those who paid less than 85 percent," Wyden said on February 7 from the Senate floor. "That was one small step in the right direction," he added.

Before the IRS’s news release, Wyden wrote to Treasury and the IRS urging the waiver of underpayment penalties for withholding errors related to the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Although the IRS did lower the penalty threshold for the 2018 tax year, Wyden stated on February 7 that "nobody should be penalized for the Trump administration’s mistakes on tax withholding."

Democrats are largely opposed to the TCJA as a whole, and claim that Republicans’ tax code overhaul was rushed. Thus, significant tax withholding errors and underpayments are expected to be incurred. "Change the penalty thresholds. Extend safe harbors. Whatever needs to happen," Wyden said.

Additionally, several Republicans have also voiced their concern about the expected increase in underpayment related to withholding. SFC Chairman Chuck Grassley, R-Iowa, recently urged the IRS to be "lenient" on underpayment penalties for 2018, as it is the first tax year since tax reform implementation.

AICPA

The American Institute of Certified Public Accountants (AICPA) has likewise urged Treasury and the IRS to provide more extensive penalty relief. "The substantial uncertainty surrounding the implementation of the TCJA and the updated federal tax withholding tables presented a challenge for many taxpayers in understanding and accounting for their tax liability," Annette Nellen, chair of the AICPA’s Tax Executive Committee said in a recent letter to Treasury and the IRS. The AICPA has recommended an 80 percent threshold for the underpayment penalty waiver.

Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.

Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.

Craft Beverage Tax Reform

The Craft Beverage Modernization and Tax Reform Bill of 2019 was introduced on February 6 by Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., and Sen. Roy Blunt, R-Mo.

"By modernizing burdensome rules and taxes for craft beverage producers, this legislation will level the playing field and allow these innovators to further grow and thrive," Wyden said in a press release. The comprehensive measure is supported by the entire craft beverage industry, according to a summary of the bill.

Generally, the Craft Beverage Modernization and Tax Reform Bill of 2019 would implement the following provisions:

For Brewers:

• Reduce excise taxes to provide more cash flow to reinvest in personal business growth.
• Simplify rules for ingredient approval and brewery collaboration.

For Vintners:

• Expand the wine producer tax credit.
• Expand allowances for tax purposes on carbonation and alcohol content for certain wines.

For Distillers:

• Establish reduced excise taxes for small craft distilleries.
• Reduce restrictions on tax-free transfers of spirits between distillers.

The bill would also exempt beverage producers from certain capitalization rules for aged products.

"The craft beverage industry is driven by small businesses that support thousands of jobs and contribute billions in economic output," Blunt said in the press release.

As of February 6, the bill has 10 bipartisan cosponsors.

The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.

The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.

50-Percent Locational Rule

Many stakeholders have urged the IRS to reconsider its proposed rule requiring that at least 50-percent of gross income of a Qualified Opportunity Zone (QOZ) business is derived from the active conduct of a trade or business within the QOZ. The IRS heard from several of these stakeholders at a full house public hearing on the proposed regulations held last week at IRS headquarters in Washington, D.C.

"[W]e’re concerned that manufacturing businesses, e-commerce enterprises, and others that have the potential to spur significant economic activity could be excluded inadvertently because of this rule," Stefan Pryor, Rhode Island Secretary of Commerce said at the hearing. Additionally, other stakeholders commented that the proposed rule would go against congressional intent.

Comment. There is no locational-related rule for gross income of QOZ businesses included in the law’s statutory language. However, the statutory language does provide a tangible property test to ensure qualifying businesses are predominantly located within the QOZ.

QOZ Business Congressional Intent

To that end, the bipartisan, bicameral tax writers who drafted the original QOZ bill language, too, have urged the IRS to remove the 50-percent gross income locational requirement.

The Opportunity Zone program was enacted under the Tax Cuts and Jobs Act ( P.L. 115-97) in 2017. The program is housed under new Code Secs. 1400Z-1 and 1400Z-2. Although not a single Democrat voted for the TCJA, the Opportunity Zone program was based on a bicameral measure sponsored by a group of bipartisan tax writers.

"Since many businesses derive income from the sale of goods and services outside of a single census tract, this would significantly limit the ability for local operating businesses to qualify for Opportunity Fund investment, contrary to congressional intent," the lawmakers wrote in a recent letter to Treasury Secretary Steven Mnuchin. "Even for those businesses who might qualify under this rule, it would impose immense new administrative burdens to track and report the location of each source of business income," they added.

Second Round of Proposed Regulations

Currently, the IRS is working on a second batch of proposed regulations for Opportunity Zones. Those proposed rules "hopefully will see the light of day shortly," Scott Dinwiddie, an IRS official in the Income Tax and Accounting division said at last week’s hearing.

The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.

The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.

IRS Cybersecurity

The IRS announced in IRS News Release IR-2018-256 last December that it would stop its tax transcript faxing service for individuals and businesses on February 4, 2019. The IRS cited to reasons of taxpayer security for the change in procedure. To that end, ceasing the IRS’s transcript faxing service would better prohibit cybercriminals from obtaining taxpayer data, according to the IRS.

Grassley, Wyden Urge Delay

SFC Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., sent IRS Commissioner Charles Rettig a letter earlier this week expressing concern with the IRS’s original timeline for discontinuing the tax transcript faxing service. The bipartisan leaders did not ask the IRS to eliminate its plan to discontinue the particular service. However, they did encourage the IRS to extend the date of discontinuation for the sake of taxpayers and practitioners in light of the recent partial government shutdown, which included the IRS.

"[W]e encourage the IRS to delay its planned discontinuation of faxing taxpayer information until such time that the agency can reasonably resolve the legitimate concerns of the tax-practitioner community about alternatives to the IRS faxing taxpayer information," Grassley and Wyden wrote. "Of course, such a delay should not compromise the security or privacy of taxpayer information."

IRS Extends Transcript Faxing Service

The IRS’s Wage & Investment Division issued a January 30 statement stating that the IRS will extend its transcript faxing service beyond February 4. Additionally, the IRS said it is reviewing options for a new timeline and will provide taxpayers and practitioners advance notice of the new date.

Starting in 2010, the $100,000 adjusted gross income cap for converting a traditional IRA into a Roth IRA is eliminated. All other rules continue to apply, which means that the amount converted to a Roth IRA still will be taxed as income at the individual's marginal tax rate. One exception for 2010 only: you will have a choice of recognizing the conversion income in 2010 or averaging it over 2011 and 2012.

The Tax Increase Prevention and Reconciliation Act of 2005 eliminated the $100,000 adjusted gross income (AGI) ceiling for converting a traditional IRA into a Roth IRA. While this provision does not apply until 2010, now may be a good time to make plans to maximize this opportunity.

The Roth IRA has benefits that are especially useful to high-income taxpayers, yet as a group they have been denied those advantages up until now. Currently, you are allowed to convert a traditional IRA to a Roth IRA only if your AGI does not exceed $100,000. A married taxpayer filing a separate return is prohibited from making a conversion. The amount converted is treated as distributed from the traditional IRA and, as a consequence, is included in the taxpayer's income, but the 10-percent additional tax for early withdrawals does not apply.

Significant benefits

While recognizing income sooner rather than later is usually not smart tax planning, in the case of this new opportunity to convert a traditional IRA to a Roth IRA, the math encourages it. The difference is twofold:

1. All future earnings on the account are tax free; and
2. The account can continue to grow tax free longer than a traditional IRA without being forced to be distributed gradually after reaching age 70 ½.

These can work out to be huge advantages, especially valuable to individuals with a degree of accumulated wealth who probably won't need the money in the Roth IRA account to live on during retirement.

Example. Mary's AGI in 2010 is $200,000 and she has traditional IRA balances that will have grown to $300,000. Assuming a marginal federal and local income tax of about 40 percent on the $300,000 balance, the $180,000 remaining in the account can grow tax free thereafter, with distributions tax free. Further assume that Mary is 45 years of age with a 90 year life expectancy and money conservatively doubles every 15 years. She will die with an account of $1.44 million, income tax free to her heirs. If the Roth IRA is bequeathed to someone in a younger generation with a long life expectancy, even factoring in eventual required minimum distributions, the amount that can continue to accumulate tax free in the Roth IRA can be staggering, eventually likely to reach over $10 million.

Planning strategies

Now is not too early to start planning to take advantage of the Roth IRA conversion opportunity starting in 2010. While planning to maximize the conversion will become more detailed as 2010 approaches and your assets and income for that year are more measurable, there are certain steps you can start taking now to maximize your savings.

Start a nondeductible IRA

The income limits on both kinds of IRAs have prevented higher income taxpayers from making deductible contributions to traditional IRAs or any contributions to Roth IRAs. They could always make nondeductible contributions to a traditional IRA, but such contributions have a limited pay-off (no current deduction, tax on account income is deferred rather than eliminated, required minimum distributions).

While a taxpayer could avoid these problems by making nondeductible contributions to a traditional IRA and then converting it to a Roth IRA, this option was not available for upper income taxpayers who would have the most to benefit from such a conversion. With the elimination of the income limit for tax years after December 31, 2009, higher income taxpayers can begin now to make nondeductible contributions to a traditional IRA and then convert them to a Roth IRA in 2010. In all likelihood, there will be little to tax on the converted amount.

What's more, taxpayers with $100,000-plus AGIs should consider continue making nondeductible IRA contributions in the future and roll them over into a Roth IRA periodically. As a result, the elimination of the income limit for converting to a Roth IRA also effectively eliminates the income limit for contributing to a Roth IRA.

Example. John and Mary are a married couple with $300,000 in income. They are not eligible to contribute to a Roth IRA because their AGI exceeds the $160,000 Roth IRA eligibility limit. Beginning in 2006, the couple makes the maximum allowed nondeductible IRA contribution ($8,000 in 2006 and 2007, and $10,000 in 2008, 2009, and 2010). In 2010, their account is worth $60,000, with $46,000 of that amount representing nondeductible contributions that are not taxed upon conversion. The couple rolls over the $60,000 in their traditional IRA into a Roth IRA. They must include $14,000 in income (the amount representing their deductible contributions), which they can recognize either in 2010, or ratably in 2011 and 2012.

Assuming they have sufficient earned income each year thereafter (until reaching age 70 1/2), John and Mary can continue to make the maximum nondeductible contributions to a traditional IRA and quickly roll over these funds into their Roth IRA, thereby avoiding significant taxable growth in the assets that would have to be recognized upon distribution from a traditional IRA.

Rollover 401(k) accounts

Contributions to a Section 401(k) plans cannot be rolled over directly into a Roth IRA. The lifting of the $100,000 AGI limit does not change this rule. However, they often can be rolled over into a traditional IRA and then, after 2009, converted into a Roth IRA.

Not everyone can just pull his or her balance out of a 401(k) plan. A plan amendment must permit it or, more likely, those who are changing jobs or are otherwise leaving employment can choose to roll over the balance into an IRA rather than elect to continue to have it managed in the 401(k) plan.

For money now being contributed to 401(k) plans by employees, an even better option would be for those contributions to be made to a Roth 401(k) plan. Starting in 2006, as long as the employer plan allows for it, Roth 401(k) accounts may receive employee contributions.

Gather those old IRA accounts

Many taxpayers opened IRA accounts when they were first starting out in the work world and their incomes were low enough to contribute. Over the years, many have seen those account balances grow. These accounts now may be converted into Roth IRAs starting in 2010, regardless of income.

Paying the tax

In spite of all the advantages of a Roth IRA, a conversion is advisable only if the taxpayer can readily pay the tax generated in the year of the conversion. If the tax is paid out of a distribution from the converted IRA, that amount is also taxed; and if the distribution counts as an early withdrawal, it is also subject to an additional 10-percent penalty. For those planning to convert who may not already have the funds available, saving now in a regular bank or brokerage account to cover the amount of the tax in 2010 can return an unusually high yield if it enables a Roth IRA conversion in 2010 that might not otherwise take place.

Careful planning is key

Transferring funds between retirement accounts can carry a high price tag if it is done incorrectly. For those who plan carefully, however, converting from a traditional IRA to a Roth IRA can yield very substantial after-tax rates of return. Please feel free to call our offices if you have any questions about how the 2010 conversion opportunity should fit into your overall tax and wealth-building strategy.

The AMT is difficult to apply and the exact computation is very complex. If you owed AMT last year and no unusual deduction or windfall had come your way that year, you're sufficiently at risk this year to apply a detailed set of computations to any AMT assessment. Ballpark estimates just won't work.

If you did not owe AMT last year, you still may be at risk. The IRS estimates that half million more individuals will be subject to the AMT in 2006 because of rising deductions and exemptions. If Congress doesn't extend the same AMT exclusion amount given in 2005, an estimated 3 million more taxpayers will pay AMT.

For a system that was intended originally to target only the very rich, the AMT now hits many middle to upper-middle class taxpayers as well. Obviously something has to be done, and will be, eventually, through proposed tax reform measures. In the meantime, expect AMT to be around for at least another year.

Basic calculations. Whether you will be liable for the AMT depends on your combination of income, adjustments and preferences. After all the computations, if your AMT liability exceeds your income tax liability, you will be liable for the AMT. Here are the basic steps to take to determine in evaluating whether you will owe the AMT:

• Step #1: Calculate your regular taxable income. If your regular tax were to be determined by reference to an amount other than taxable income, that amount would need to be determined and used in the next steps.
  
• Step #2: Calculate your alternative minimum taxable income (AMTI) by increasing or reducing your regular taxable income (or other relevant amount) by applying the AMT adjustments or preferences. These include business depreciation adjustments and preferences, loss, timing and personal itemized deductions adjustments, and tax-exempt or excluded income preferences. This is the step with potentially many sub-computations in determining increases and reductions in tax liability.
  
• Step #3:  If your AMTI exceeds the applicable AMT exemption amount, pay AMT on the excess.

While no single factor will automatically trigger the AMT, the cumulative result of several targeted tax benefits considered in Step #2, above, can be fatal. Common items that can cause an "ordinary" taxpayer to be subject to AMT are:

• All personal exemptions (especially of concern to large families);
• Itemized deductions for state and local income taxes and real estate taxes;
• Itemized deductions on home equity loan interest (except on loans used for improvements);
• Miscellaneous Itemized Deductions;
• Accelerated depreciation;
• Income from incentive stock options; and
• Changes in some passive activity loss deductions.

Starting for tax year 2005, businesses have been able to take a new deduction based on income from manufacturing and certain services. Congress defined manufacturing broadly, so many businesses -just not those with brick and mortar manufacturing plants-- will be able to claim the deduction. The deduction is 3 percent of net income from domestic production for 2005 and 2006. This percentage rises to 6 percent and then 9 percent in subsequent years.

Domestic production includes the manufacture of tangible personal property and computer software in the U.S. It also includes construction activities and services from engineering and architecture. Income from these activities must be calculated on an item-by-item basis and cannot be determined by division, product line or transaction. Direct and indirect costs are subtracted to determine "qualified production income." Land does not qualify as domestic production property.

The 3 percent rate is applied to the lower of net income from domestic production and overall net income. That amount is then capped at 50 percent of wages paid out by the employer for all its business activities.

Example. In 2005, Company X has $300,000 of income from domestic production activities. The company's overall net income was $500,000.  The 3 percent rate is applied to $300,000, yielding a potential deduction of $9,000.

Company X paid its employees $50,000 in wages and reported this amount on Forms W-2 for 2005.  Since the deduction is limited to 50 percent of wages paid and reported, Company X's deduction for 2005 is capped at $25,000 (50 percent of $50,000 in wages).  X is entitled to a $9,000 deduction.

W-2 wage limitation

In some cases, the W-2 wage limit can easily trip up taxpayers. A successful sole proprietor who earns income but has no employees would not have any W-2 wages and, therefore, could not take the deduction.  Self-employment income is not treated as wages. Neither are payments made to independent contractors. A small business that is incorporated but has no employees would have the same problem. Because payments to partners are not W-2 wages, a partnership with two partners and no employees also would be unable to take the deduction. Sole proprietors and other small businesses may want to consider putting a family member on the payroll, so that they have W-2 wages to satisfy this requirement.

An incorporated business, such as an S corporation, could put an owner on the payroll and apply the W-2 limit to reasonable wages paid to the owner. Employees include officers of the corporation and common law employees, as defined in the Tax Code.  The more labor-intensive the manufacturing process, the more likely that a deduction will not be reduced by the W-2 wage limitation. The more automated the manufacturing process, the more likely it is that the manufacturer will find itself restricted by the wage limitation and not be able to take the full manufacturing deduction.

Code Sec. 199 defines W-2 wages as the sum of the total W-2 wages reported on Forms W-2, "Wage and Tax Statement," for the calendar year ending during the employer's taxable year. W-2 wages are defined as wages and deferred salary that is included on Form W-2.  Deferred salary includes elective deferrals for a 401(k) plan or tax-sheltered annuity; contributions to a plan of a state and local government or tax-exempt entity; and designated Roth IRA contributions. IRS guidance provides three methods for calculating W-2 wages.

Our office can help you determine your eligibility for the manufacturing deduction and the amount of the deduction. Give us a call today.