In a normal year, March is the busiest month in our office. The April 15th tax filing deadline means we have a full team on site working through tax returns and clients visiting us daily. This is NOT a normal year. The COVID-19 pandemic is changing the way the world works and we have had to adjust our business operations as well. We wanted to provide an update on what we are doing to try to be there for each of you in these trying times, while also keeping everyone as safe as possible. 

March 23, 2020

In a normal year, March is the busiest month in our office. The April 15th tax filing deadline means we have a full team on site working through tax returns and clients visiting us daily. This is NOT a normal year. The COVID-19 pandemic is changing the way the world works and we have had to adjust our business operations as well. We wanted to provide an update on what we are doing to try to be there for each of you in these trying times, while also keeping everyone as safe as possible. 

At this time Governor Lamont has deemed us to be an essential service.  Unless further restrictions are put into place, our office will be open Monday – Friday from 9AM, - 5PM; however, we cannot hold any client meetings, conferences or in person review/signing of tax returns.  While we are open, we encourage everyone to follow the recommendations of the health experts and limit your trips out of your home and practice safe social distancing.  We encourage the use of priority mail, Federal Express/UPS, telephone, fax, email, scanning and our portal site.  If you need to drop off or pick up, please follow the process in place:

DROP OFF – Plastic Bin inside our door (label outside of package with your name)

PICK UP – Notify office of your expected day and time, package will be available at the counter

The tax deadline for Federal, CT and NY has been extended from April 15, 2020 to July 15, 2020 for most return types.  Many other states have done the same.  Information is quite fluid at this time so we will share it as it becomes available.

Due to the current situation, we know it may be difficult for you to sign the 8879 forms and return them to us to indicate we have your approval to efile.  As a result we are allowing clients facing these circumstances to email us the following as a substitute for signing the 8879 if they cannot return the form:  “ (Specify Name(s)) have reviewed my/our 2019 tax returns and are in agreement as prepared to efile them today (specify date)”.  We will then attach your email to the 8879 form as your signature.

If your returns are complete or significant work has been completed but you choose not to file currently due to the extended filing deadline, we may invoice you for progress work.  Upon filing, you will receive a supplemental invoice for processing work and fees.

There is much that is out of our control right now so it's important to focus on what you can control. Practice safe social distancing, wash your hands, check in on those most at risk and be kind to each other. This is a scary time but we will get through this together. 

Thank you for your cooperation, support and patience at this unprecedented time in the world –

Walter J. McKeever & Company, LLC

The Tax Organizers to assist in compiling the information necessary to prepare your 2019 individual income tax return(s) were mailed early to mid-January 2020. Please complete the organizer to the best of your ability. In connection with all items of income, if married, please indicate whether the income is the taxpayer, spouse or joint (TSJ).  Please contact us if you haven't received your 2019 Tax Organizer or if you would like a blank version.

The Tax Organizers to assist in compiling the information necessary to prepare your 2019 individual income tax return(s) were mailed early to mid-January 2020. Please complete the organizer to the best of your ability. In connection with all items of income, if married, please indicate whether the income is the taxpayer, spouse or joint (TSJ).  Please contact us if you haven't received your 2019 Tax Organizer or if you would like a blank version.

The Internal Revenue Service and State Taxing Authorities are matching information returns submitted by businesses, employers and financial institutions with amounts reported on individual tax returns.  Negligence penalties may be assessed when income is underreported. Please be certain to mail or bring with you all of the following original unstapled forms as well as your Organizer (Form # is shown in the upper right-hand corner of the Organizer):

1) Dependent information including names, relationship, date of birth and social security numbers (if a dependent is no longer a student please indicate) (Forms 3 and 3A).  Please remember that names and social security numbers must match exactly in order for the dependent to be allowed.

2) All W-2 forms for wages (Form 3A).

3) All 1099 forms for interest, dividends, sales of securities, pension / IRA distributions, social security benefits, commissions and other income received as well as brokerage statements and realized gain/loss schedules (Forms 5A, 5B, 5EA, 7, 9, 9A and 13).  If you have a foreign bank account, please list it and all applicable information on Form 5C.  Congress has been sharply focused on requiring taxpayer reporting of foreign bank/financial accounts and assets for the last several years.  Besides filing the Report of Foreign Bank and Financial Accounts, information may be required to be attached to the taxpayer's income tax return for those assets with aggregate values exceeding specific thresholds.  If applicable, you will be requested to provide additional information. 

NOTE: Form 114 FinCEN (previously known as Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts) (FBAR) must be electronically filed via the BSA E-Filing System.  Our firm can assist you with the preparation and submission of the electronic FBARs; however, the primary responsibility for this filing remains with the taxpayer.  2019 FBAR filings are due April 15, 2020 with a maximum extension for a 6- month period ending October 15, 2020 to file.

4) All notices from corporations, financial institutions or mutual funds that advise of special tax treatment for earnings.

5) Report of tax-exempt interest and dividends received (Form 5A, 5B and 5EA) with payer identification.

6) Supporting information (including 1099 MISC forms) for business income and expenses (Forms 6, 6A, 6B, 6C and 6D).  For business use of your home, please include the square footage of your home used exclusively for business as well as total square footage of your home on Form 6D (this is required information).

7) Copies of closing statements for any real estate, co-op or condominium purchases or sales which occurred during the year and a copy of the Form 1099B received for gross proceeds (Form 8).  Please remember to include the acquisition date of the property sold, the original cost and improvements. 

8) All 5498 forms and support for 2019 retirement contributions made to date or anticipated to be made for the 2019 tax year (Form 9 and 9A).  Please indicate on Form 9 if you want maximum contribution limits calculated.

9) All 1098 and 1099 MISC forms supporting rental income and expenses (Forms 10 and 10A).  Please be sure to include details for all improvements made and capital assets purchased including acquisition dates.

10) All Schedule K-1 forms (Form 11) from partnerships, limited liability companies, S corporations, trusts and estates including all supporting literature received including state specific K-1s and transmittal/cover letters.

11) All 1099G forms (Form 13) issued/received from State Taxing Authorities.  These forms are available from Connecticut and New York online only. 

12) Adjustments to Income (Forms 13 and 13A) – please be sure to include educator expenses, alimony paid/received, health savings account contributions/distributions and student loan interest paid including all 1098-E forms.  For Health Savings Accounts, please include a statement(s) and 1099 forms that recap the 2019 activity in order to verify the beginning and ending balances of the account.

13) Real estate and personal property taxes paid – please be sure to include only taxes paid during the calendar year 2019.

14) All 1098 forms for interest expense deductions - Please identify for each 1098 form if the loan interest paid is for a home mortgage (secured by principal residence or vacation home) or investment activity (Form 14A).  If your total debt exceeds $1 million, please include the balance of each loan at January 1, 2019 and December 31, 2019.  In addition, please supply new home acquisition balances from December 15, 2017 and beyond if the debt exceeds $750,000.  NOTE: With respect to home mortgages, please note the question on Form 2C should also reference new home mortgages incurred after December 15, 2017 and whether the loan balance exceeds $750,000. See tax planning letter for more details.

15) Contributions (Form 15 - See note on top of the form) – be careful in reporting your contributions as the IRS is aggressively challenging those which appear to be excessive in dollars and valuation.  Please include supporting documentation for cash contributions with values in excess of $250 and noncash contributions with values that exceed $500.

16) Child/Dependent care expenses (Form 18) – Please provide the name, address and social security # and/or employer identification # of the providers as this is required.

17) Household Employment Taxes (Form 19) including W-2 forms for wages paid and quarterly state unemployment returns filed for the 2019 tax year.

18) A schedule of estimated taxes paid (Forms 20 and 20A) for federal and state income taxes including payments made in January 2020 for the 2019 tax year and payments made in January 2019 for the 2018 tax year.  Please be sure to include the date for each payment made.

19) All W-2G forms (Form 13) for gambling winnings.

20) IMPORTANT: (Form 2) Notification received from providers documenting the existence of health insurance coverage for 2019 for you, your spouse and/or dependents. (include Forms 1095-A, 1095-B and/or 1095-C as applicable).

21) Copies of any notices or other communications received during the year from the Internal Revenue Service and State Taxing Authorities.

22) Identity Protection Personal Identification Number (Form 3A) – If you have received notification that an IP PIN has been assigned to you and/or your spouse by the IRS, it is imperative that this information be provided to us with your tax documents as you cannot efile your income tax return without it and our firm has no access to this information.

Because of government enforcement regulations and fraud prevention initiatives, we are requesting that you include copies of the social security cards for yourself, spouse and dependents.  If you provided us with copies of social security cards in the past, you do not have to provide it again; however, the driver’s license and passports on file must be current.  Also, if you are a new client to the firm, include a copy of the current driver’s license for yourself and your spouse as we are required to input the current information in order to electronically file. If you have any questions, please call our office to verify your information on file.  Please review and correct, if necessary, the personal and dependent information, including dates of birth on Forms 3 and 3A. The spelling of names must match the social security cards issued or correspondence from the IRS will be generated.  Returns cannot be filed electronically if discrepancies exist between the tax return and the Social Security Administration.  Refunds will not be issued until the matter is resolved. 

When completing Form 7 in the Tax Organizer, Sales of Stocks, Securities, Capital Assets & Installment Sales, special care should be taken in providing complete and accurate information, especially acquisition dates and cost. For re-investment programs, such as mutual funds and dividend reinvestment programs, it is necessary to provide all data since initial acquisition unless the fund/broker provides the cost information.  Taxpayers are required to complete Form 8949, Sales and Other Dispositions of Capital Assets, along with Schedule D to report this activity.  Form 8949 captures the detail data of each individual sales transaction in conjunction with cost basis information as reported by your broker/financial institution under reporting regulations.

In order to continue providing quality service on a timely basis, we urge you to collect your information as soon as possible.  If information from a “pass-through” entity such as a partnership, S corporation, limited liability company, trust or estate is the only data you are missing, please send the data you have assembled and forward the missing information as soon as it is available. Please clearly indicate which information is missing.  If we do not receive your complete information by March 23, 2020, we cannot guarantee timely completion of your tax returns for the April 15, 2020 filing deadline.  

After completing the Tax Organizer, please sign and date the COVER SHEET before returning it to our office.  Please be sure to include all of your contact information on the COVER SHEET as well - telephone numbers, fax numbers and email addresses, if applicable and the preferred method of contact.

If you or your spouse worked in New York with your residence outside of New York or you worked in Connecticut with your residence outside of Connecticut, please complete the enclosed allocation of wage and salary income.  If you held multiple jobs during the year, please provide a separate allocation schedule for each job.

Two full years have passed since the Tax Cuts and Jobs Act (TCJA) was signed into law.  Over the last two years, the IRS and Treasury have released a considerable amount of guidance in the form of both proposed and final regulations.  While some of this guidance has been taxpayer friendly, not all of the proposed regulations yield favorable results.  As we approach year end, taxpayers continue to seek additional clarity about areas where temporary regulations might affect their individual returns.

Two full years have passed since the Tax Cuts and Jobs Act (TCJA) was signed into law.  Over the last two years, the IRS and Treasury have released a considerable amount of guidance in the form of both proposed and final regulations.  While some of this guidance has been taxpayer friendly, not all of the proposed regulations yield favorable results.  As we approach year end, taxpayers continue to seek additional clarity about areas where temporary regulations might affect their individual returns.

The following is a discussion of the rules applicable to the filing of 2019 individual income taxes.

TAX RATES - For 2019 there are seven income tax brackets ranging between 10% and 37% for ordinary income.  The 37% tax bracket is imposed on taxable income over threshold amounts as follows:

• $612,350 for married taxpayers filing jointly and surviving spouses
• $306,175 for married taxpayers filing separately
• $510,300 for heads of households
• $510,300 for single taxpayers

For 2020, there are still seven brackets and the 37% tax bracket is imposed on taxable income over the following thresholds:

• $622,050 for married taxpayers filing jointly and surviving spouses
• $311,025 for married taxpayers filing separately
• $518,400 for heads of households
• $518,400 for single taxpayers

These rates apply, absent new legislation, to all years until December 31, 2025.

Besides the reduction in rates and expansion of the tax brackets, perhaps the biggest change to deductions was the elimination of the personal exemption effective 2018.  This is to be offset, in part, by the increase in the standard deduction.  For 2019, the standard deduction has essentially been doubled to $12,200 for single taxpayers and $24,400 for married couples filing jointly.  For 2020, the standard deduction is $12,400 for single taxpayers and $24,800 for married filing jointly.

On December 28, 2018 New York State Department of Taxation issued a Technical Memorandum stating that they decoupled from certain personal income tax IRS changes for 2018 and after implemented via TCJA.  These items include certain itemized deductions, alimony or separate maintenance payments, qualified moving expenses reimbursement and moving expenses, Empire State child tax credit and New York 529 college savings account withdrawals.

LONG TERM CAPITAL GAINS AND QUALIFYING DIVIDENDS TAX RATE – The favorable rate of 0% for taxpayers in the 10% and 15% brackets remains unchanged from 2017.  In the TCJA, these rates apply at different thresholds for 2019 and 2020 as follows:

• The 0% tax rate applies to adjusted net capital gain up to $78,750 and $80,000 for joint filers and surviving spouses, $52,750 and $53,600 for heads of household, $39,375 and $40,000 for single filers, $39,375 and $40,000 for married taxpayers filing separately and $2,650 and $2,650 for estates and trusts;
• The 15% tax rate applies to adjusted net capital gain over the amount subject to the 0% rate, and up to $488,850 and $496,600 for joint filers and surviving spouses, $461,700 and $469,500 for heads of household, $434,550 and $425,800 for single filers, $244,425 and $248,300 for married taxpayers filing separately, and $12,950 and $13,150 for estates and trusts; and
• The 20% tax rate applies to adjusted net capital gain over $488,850 and $496,601 for joint filers and surviving spouses, $461,700 and $469,051 for heads of household, $434,500 and $441,451 for single filers, $244,425 and $248,300 for married taxpayers filing separately, and $12,950 and $12,950 for estates and trusts.

Remaining unchanged from prior years is the 25% rate for unrecaptured Code Sec. 1250 gain, the 28% rate for collectibles and gain on qualified small business stock equal to its partial exclusion.

Qualified dividends received from domestic corporations and qualified foreign corporations continue to be taxed at the same rates that apply to capital gains.  Certain dividends do not qualify for the reduced rates, including dividends paid by credit unions, mutual insurance companies, and farmers’ cooperatives.

NET INVESTMENT INCOME TAX (NIIT) – An additional Medicare surtax of 3.8% is imposed on the lesser of net investment income (NII) or modified adjusted gross income (MAGI) above a specified threshold.  However, the Medicare surtax is not imposed on income derived from a trade or business, nor from the sale of property used in a trade or business.

NII includes the following investment income reduced by certain investment-related expenses, such as investment interest expense, investment brokerage fees, royalty related expenses, and state and local taxes allocable to items included in net investment income:

• Gross income from interest, dividends, annuities, royalties, and rents, provided this income is not derived in the ordinary course of an active trade or business
• Gross income from a trade or business that is a passive activity
• Gross income from a trade or business of trading in financial instruments or commodities
• Gain from the disposition of property, other than property held in an active trade or business

Individuals are subject to the 3.8% NIIT if their MAGI exceeds the following thresholds (which are not adjusted for inflation):

• $250,000 for married taxpayers filing jointly or a qualifying widower with a dependent child
• $125,000 for married taxpayers filing separately
• $200,000 for single and head of household taxpayers

ADDITIONAL HI (MEDICARE) TAX - Higher income (HI) individuals continue to be subject to an additional 0.9% HI (Medicare) tax, not to be confused with the 3.8% Medicare surtax on NIIT. The additional Medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately) is subject to a 2.35% Medicare tax rate (normal 1.45% plus additional .9%). The additional Medicare tax also applies to self-employed individuals.   

ALTERNATIVE MINIMUM TAX (AMT) – The TCJA temporarily increased the Alternative minimum tax (AMT) exemption amounts for 2019 and 2020 as follows:

• $111,700 for married taxpayers filing jointly and surviving spouses for 2019 and $113,400 for 2020
• $71,700 for unmarried taxpayers and heads of household, other than surviving spouses, for 2019 and $72,900 for 2020
• $55,850 for married taxpayers filing separately for 2019 and $56,700 for 2020

Exemptions for the AMT are phased out as taxpayers reach high levels of alternative minimum taxable income (AMTI). Generally, the exemption amounts are phased out by an amount equal to 25% of the amount by which an individual’s AMTI exceeds a threshold level.  The threshold amounts for calculating the exemption phase-out are adjusted for inflation as follows:

• $1,020,600 in 2019 and $1,036,800 in 2020 for married taxpayers filing jointly and surviving spouses
• $510,300 in 2019 and $518,400 in 2020 for unmarried taxpayers and heads of household, other than surviving spouses
• $510,300 in 2019 and $518,400 in 2020 for married taxpayers filing separately

For 2019 and 2020, the AMT rates are 26% and 28% on the excess of AMTI over the applicable exemption amount. You should not ignore the possibility of being subject to the AMT as it can negate certain year-end tax strategies; however, tax planning strategies can be used to reduce its impact. As a general rule, taxpayers subject to AMT should accelerate income into AMT years and postpone deductions into non-AMT years.

STOCK LOSSES – Taxpayers should continually review their investments for return and portfolio balance.  They should monitor their investments to take steps necessary to time the recognition of capital gains and losses to minimize their net capital gains tax and maximize the benefit of capital losses.  Remember for tax purposes it is not how much your investments have gone up or down in value but rather how much gain or loss you have realized when an investment is sold since its original purchase date.  The maximum capital loss deduction available to offset ordinary income is $3,000 ($1,500 for married taxpayers filing separately) with the additional capital losses being carried forward until used.  Taxpayers also need to take “wash sale” rules into consideration when generating losses.  The wash sale rule defers use of a tax loss realized upon a sale of stock if the investor repurchases it within 30 days before or after the sale.  Worthless stock also generates an immediate capital loss; however, the rules for “worthless” stocks are very strict.  Stocks and securities must be totally worthless for a taxpayer to take a loss deduction; a mere decrease in value, no matter how great, will not trigger a loss deduction.

ROTH IRA CONVERSIONS - Modified gross income limitations applicable to Roth IRA conversions were repealed and 2010 was the first year in which a taxpayer could convert all or part of their traditional retirement accounts to a Roth account, regardless of income, age or filing status.  A conversion is a taxable transfer and is taxable in the year of conversion.  Under prior law, a Taxpayer could recharacterize IRA contributions from one type of IRA to another.  TCJA provides that a recharacterization cannot be used to unwind a Roth conversion. A taxpayer may still make a contribution to a traditional IRA and convert the Traditional IRA to a Roth IRA but the change is that the Roth conversion can then not be unwound using recharacterization.

IRA & ROTH IRA CONTRIBUTIONS – The maximum contribution is $6,000 for 2019 and 2020 provided you have at least $6,000 respectively of wage, salary or net self-employment earnings.  An additional “catch-up” contribution of $1,000 is allowed for taxpayers over 50 years of age by the end of the tax year for 2019 and 2020.  Contributions to a Roth IRA may continue after age 70 1/2 (by the end of the tax year) but not to a traditional IRA.  Remember that IRA and Roth IRA contributions for the 2019 tax year can be made up to April 15, 2020.

401K AND 403B CONTRIBUTIONS - The annual limit on employee elective deferrals to these plans for 2019 is $19,000 and $19,500 for 2020.  The maximum “catch-up” contribution to a 401K and 403B plan for taxpayers over 50 years of age by the end of the tax year is an additional $6,000 for 2019 and $6,500 for 2020.

CHILD DEPENDENT CARE (CDC) CREDIT – For 2019, the maximum amount of qualifying expenses to which the credit may be applied is $3,000 for individuals with one qualifying child or dependent (for a maximum credit of $1,050) or $6,000 for individuals with two or more qualifying children or dependents (for a maximum credit of $2,100).  For taxpayers with AGI between $15,000 and $43,000, the 35% credit rate is reduced by 1% for each $2,000 of AGI until the credit percentage is 20% for taxpayers with AGI of $43,000.

CHILD TAX CREDIT (CTC) – Beginning in 2018, the CTC doubled to $2,000 for each qualifying child under the age of 17.  For example, a taxpayer with two qualifying children will be entitled to a credit of $4,000.  The refundable portion of the credit is increased to a maximum amount of $1,400 per qualifying child.  In addition, the earned income threshold for determining refund ability is decreased to $2,500 (from the $3,000 amount that was in effect before TCJA was enacted).  A qualifying child must have a Social Security Number to be eligible for the CTC. 

Taxpayers are allowed a $500 credit per qualifying person for any dependents who are not eligible for CTC.  Eligibility is subject to certain rules including the tax tests for dependency.

For 2019, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000.  The threshold is $200,000 for all other taxpayers.  So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.

EDUCATION INCENTIVES – The following are education incentives which exist under current law. 

American Opportunity Tax Credit: The American Opportunity Tax Credit (AOTC) was made permanent by the 2015 PATH Act and was not changed by TCJA.  This $2,500 maximum credit per eligible student is subject to the higher income phase-out ranges of $80,000 to $90,000 for single filers ($160,000 to $180,000 for joint filers) and contains a 40% refundable credit component.  The eligibility extension to the first four years of post-secondary education contains an inclusion for text books and course materials as eligible expenses. The Lifetime Learning Credit was also retained.

Student Loan Interest Deduction: If your modified adjusted gross income during 2019 is less than $85,000 ($170,000 for married filing jointly), a deduction is allowed for interest paid on a student loan used for higher education up to a maximum of $2,500.  This figure will continue to be adjusted each year for inflation. 

Coverdell Education Savings Accounts (ESAs): Total contributions for the beneficiary of this account cannot exceed $2,000 in any year no matter how many accounts have been established.  Contributions to a Coverdell ESA are not deductible but amounts deposited in the account grow tax free until distributed.

Employer-Provided Education Assistance: Employees are allowed to exclude from gross income and wages up to $5,250 in annual educational assistance provided under an employer's nondiscriminatory "educational assistance plan." 

Scholarship Programs: An amount received as a qualified scholarship and used for qualified tuition and related expenses is excludable from income.  The exclusion does not apply to any portion of the amount received which represents payment for teaching, research, or other services by the student as a required condition for receiving the qualified scholarship.  However, scholarship recipients with obligatory service requirements under the National Health Service Corps Scholarship Program and the Armed Forces Scholarship Program can exclude from income qualified tuition and related expenses as well as amounts that represent payment for services.

Section 529 Accounts:  TCJA expanded potential usage of 529 Plans to include elementary and secondary school tuition for public, private and religious schools up to $10,000 per year per student.  Previously, only Coverdell ESA funds could be used for primary and secondary expenses.  New York opted not to follow TCJA; therefore, for New York purposes, withdrawals for kindergarten through 12^th grade school tuition are NOT qualified withdrawals under the New York 529 college savings account program.

MEDICAL EXPENSE THRESHOLD -  For tax years beginning after December 31, 2018, a deduction will be allowed for the expenses paid during the tax year for the medical care of the taxpayer, the taxpayer’s spouse and the taxpayer’s dependents to the extent the expenses exceed 7.5% of adjusted gross income through the end of 2020.  In 2021, the 7.5% will move up to 10%.  Prior to the last minute tax law changes signed right before the new year, the 2019 threshold was supposed to be 10% of adjusted gross income.

CHARITABLE GIVING –

• Congress has long used the tax laws to encourage charitable giving and for many individuals, charitable giving is also a part of their year-end tax strategy. The PATH Act of 2015 made permanent the popular charitable giving incentive with tax-free IRA distributions to public charities by individuals age 70 1/2 and older up to a maximum of $100,000 per qualified taxpayer per year. Individuals taking this option cannot claim a deduction for the charitable gift as the distribution is not claimed as income.
• Congress tightened the rules for substantiation requirements for charitable contributions effective August 17, 2006. The IRS will not allow charitable deductions, regardless of the amount, without proper documentation. Contributions of $250 or more must be substantiated by a written acknowledgement from the donee organization; the acknowledgement must include the date of the donation, amount of cash or a description of property donated and a description and good faith estimate of the value of any goods or services received in exchange for the contribution.  If the donor does not receive a written acknowledgment from a charitable organization, it is the donor’s responsibility to obtain it in order to claim the charitable contribution.  Contributions under $250 must be substantiated by cancelled checks, bank records or receipts from the donee organization.  If it would be impracticable to obtain a receipt, the donor must maintain reliable written records. 
• Just like the rules for cash gifts, the rules for substantiating deductions for donations of clothing and household items (i.e. furniture, furnishings, electronics, appliances) were tightened after August 17, 2006 and will only be allowed if the property is in “good used condition or better”. Donors must have a written acknowledgement from the charity documenting the donation date, description of property donated, a description and good faith estimate of the value of any goods or services received in exchange for the contribution and a valuation/qualified appraisal of the property donated, if applicable.  A deduction for the noncash goods will be allowed, without regard to condition, only if a qualified appraisal is attached to the return for each single item or group of similar items over $500.  We recommend that pictures be taken of any noncash goods that are donated as it will be helpful in supporting the deduction.

Taxpayers donating vehicles (i.e. car, truck, boat, and aircraft) to a charity valued over $500 must obtain from the charity and attach to the tax return Form 1098-C and/or a written acknowledgment of the contribution.  The donation amount is usually limited to the gross proceeds from the sale of the vehicle by the charity.

Gifting of appreciated securities for making charitable contributions continues to be a significant alternative instead of using cash.  In this manner, the appreciated value will not be taxed, low cost basis stock is removed from your portfolio/estate and the fair-market value of the security will be used as the charitable contribution.

IRS has been aggressively reviewing and challenging charitable donations in response to these new substantiation requirements.  It is expected that this trend will continue.  The burden of proof will be on the taxpayer so it is imperative that good records and supporting documentation is maintained.

EDUCATOR EXPENSES – The 2015 PATH Act permanently extended the teacher's classroom expense deduction that allows primary and secondary education professionals to deduct (above-the-line) qualified expenses up to $250 paid out-of-pocket during the year.  Eligible expenses in excess of the $250 limit are no longer deductible as a miscellaneous itemized deduction on Schedule A.  Even though the $250 limit is subject to adjustment for inflation, it remains the same for 2019 and 2020.

BONUS DEPRECIATION & SECTION 179 BUSINESS EXPENSING ELECTIONS –

Bonus Depreciation: Pursuant to TCJA for qualified purchases placed into service after September 27, 2017, 100% of the purchase price can be expensed. This 100% expensing will continue until 2022.  There is a scheduled phase-down to 80% starting in 2023 and ending at 20% in 2026, after which the provision is set to expire.  Unlike regular depreciation, where half year and mid quarter conventions may apply, a taxpayer is entitled to the full 100% bonus depreciation based on when the asset is purchased. Therefore, year-end placed in service strategies provide immediate “cash discount” for qualifying purchases, even when considering finance costs.

Bonus depreciation under old law is available only for new property (i.e. property whose original use begins with the taxpayer) depreciable under MACRS that (a) has a recovery period of 20 years or less, (b) is MACRS water utility property, (c) is computer software depreciable over three years, or (d) is qualified leasehold improvement property. An enticing provision under the new law whereby qualified property includes property that has been used (i.e. the original use does not have to originate with the purchaser).  A taxpayer may elect out of bonus depreciation with respect to any class of property placed in service during the tax year. Although this election may be factored into a year-end strategy, a final decision on making it is not required until the tax return is filed. Bonus depreciation is not a preference item for alternative minimum tax.

Code Sec. 179 Expensing: The PATH Act’s provisions made the enhanced Section 179 expense deduction permanent for taxpayers (other than estates, trusts or certain non-corporate lessors) that elect to treat the cost of qualifying property (generally defined as depreciable tangible property that is purchased for use in an active trade or business) as an expense rather than a capital expenditure. Thus, the current Section 179 dollar cap for 2019 and 2020 is $1,020,000 and $1,040,000 with an overall investment limitation of $2,550,000 and $2,590,000.

Revised Repair/Capitalization Rules: IRS issued comprehensive final rules on the treatment of payments to acquire, produce or improve tangible property.  Beginning January 1, 2014, businesses were required to use these new rules in determining whether they can deduct their costs as repairs under Code Section 162(a) or must capitalize the costs, to be recovered over a period of years under Code Section 263(a).

A relatively new election that is available for “de minimis” asset purchases if certain requirements are met.  When this election is in place, your business may simply expense that which falls below a specified level to the extent that the amounts are deducted for financial accounting purposes or in keeping with your books and records.  The de minimis threshold can be up to $5,000 (per invoice or per item as substantiated on the invoice) if your business has financial statements audited by an independent certified public accountant (CPA) or issued to a state or federal agency.  The threshold is $2,500 for firms without such financial statements.

AUTOMOBILE MILEAGE RATE - Many taxpayers use the standard mileage rates to help simplify their recordkeeping. Using the business standard mileage rate takes the place of deducting the applicable business percentage of the actual costs of your vehicle such as maintenance and repairs, gas and oil, insurance, license and registration fees.  If you choose to use the actual expense method to calculate your business vehicle deduction, you must maintain very careful records by keeping track of the actual costs during the year to maintain and run your vehicle.  One of the most important tools is a mileage log book that details date, miles driven, location and purpose for the vehicle during the calendar year.  Our office can help you compare the benefits of using the business standard mileage rate or the actual expense method.

Business standard mileage rate: The business standard mileage rate for 2019 is 58.00 cents per mile.  The 2020 rate is 57.50 cents per mile. 

Medical/Moving standard mileage rate: The medical/moving standard mileage rate for 2019 is 20.00 cents per mile.  The 2020 rate is 17.00 cents per mile. 

Charitable standard mileage rate:   Taxpayers who itemize deductions may be able to claim a deduction for miles driven in service of a charitable organization. The standard mileage rate for charitable miles as determined by IRS for 2019 and 2020 is 14.00 cents per mile. 

COLLEGE SAVINGS PROGRAMS/PLANS – Connecticut allows a deduction from federal adjusted gross income for contributions made into a CT higher education trust fund (CHET).  New York allows a deduction from federal adjusted gross income for contributions into a New York 529 college savings plan.  The maximum deduction in each state is $5,000 for a single taxpayer and $10,000 for married filing joint.  However, Connecticut allows contributions in excess of these limits to be carried forward for five years; New York does not allow for any carry forward. 

RESIDENTIAL ENERGY CREDIT – The tax credit for making qualified energy improvements to your principal residence, including windows, energy-saving exterior doors, insulation, and certain metal roofs expired in 2016.  Credit for solar electric and solar water heating property expenditures was extended through 2021.  The 30% credit rate is available through 2019 and the credit rate drops to 26% in 2020 and 22% in 2021.

HEALTH CARE REFORM - The Affordable Care Act (ACA) brought a sea of change to our traditional image of health insurance.  Taxpayers and employers will continue to weigh the benefits and costs of obtaining coverage in a public marketplace or a private insurance exchange for themselves and their employees.  Small businesses may be eligible for a tax credit to help pay for health insurance.  Individuals may qualify for a premium assistance tax credit, which is refundable and payable in advance, to offset the cost of coverage. 

Taxpayers began to comply with the tax reporting provisions of ACA in 2014 and employers began complying in 2015.  The reporting level of information continued in 2018.  Individuals reported if they had minimum essential health coverage for all or part of the year, for themselves and their dependents unless exempt.  Taxpayers who were covered for the entire year by health insurance obtained through their workplace will have to check a box to indicate that they had coverage.  Taxpayers will receive Forms 1095-B and/or Form 1095-C from their employers documenting coverage.  The rest of those filing individual tax returns either will have received health coverage through a Health Insurance Marketplace or will not have health insurance coverage.  Those who obtained insurance through the Marketplace will receive Form 1095-A, Health Insurance Marketplace Statement, which will explain their coverage and detail any premium tax credit they received in advance.  Individuals who are not covered by minimum essential coverage and who are not exempt may be liable for an individual shared responsibility payment (also known as a penalty).  For 2019 and 2020, the shared responsibility payment has been eliminated. 

Individuals with flexible spending accounts (FSAs) and similar arrangements should take a look at their annual spending habits and project how they will use these tax favored funds in the future.  The maximum salary reduction contribution to a FSA is $2,700 for 2019 and $2,750 for 2020.  Adjusted for inflation, the annual limitation on deductible contributions to health savings accounts (HSAs) for an individual with self-only coverage under a high deductible health plan (HDHP) is $3,500 for 2019 and $3,550 for 2020; $7,000 for 2019 and $7,100 in 2020 for family coverage. The HSA catch up contributions for age 55 or older is $1,000 for 2018 and 2019 for single and family coverage.

Please note the deadline for employers to issue 1095-B and 1095-C forms for tax year 2019 is March 2, 2020 so these will be arriving late.

GIFT TAXES – Slow and steady estate planning can yield dramatic results - take advantage of the annual gift-giving limits to reduce your income and estate tax liabilities. For 2019 and 2020, the annual exclusion is $15,000 ($30,000 per person for couples.) Remember that if you gift stock, the recipient of the gift takes over the donor’s cost basis and holding period for the security; therefore, the donor needs to provide the recipient with this information.  Effective January 1, 2005, Connecticut laws changed and no gift tax was due by a donor until their cumulative gifts from this date forward added up to $2,000,000; however, a gift tax return has to be filed annually declaring all federal taxable gifts that are made in a tax year.  Due to recent legislation, these exemptions are now $3,600,000 for 2019, $5,100,000 in 2020, $7,100,000 in 2021, $9,100,000 in 2022, and the federal basic exclusion amount for 2023 and thereafter.  Direct payments of educational expenses to a qualified institution for family members, or other beneficiaries, is not treated as a gift for tax purposes and does not count against the annual exclusion amount or the lifetime exemption.

ESTATE TAX REFORM – While TCJA retains the estate tax rate at 40%, for 2019 and 2020 the estate tax exemption moves up $11,400,000 and $11,580,000. TCJA did not repeal the death tax as had been a goal and also did not make the above changes permanent as they expire after 2025. The portability election remains as part of the tax law. Portability allows the second spouse to have the benefit of the deceased spouse’s unused portion of the $11,400,000 exemption even if the second spouse dies when a lower exemption is in effect, possibly after 2025.  No changes were made in TCJA with respect to step up in basis despite the increase in the exemption.

AUTOMATIC REFUND REDUCTIONS - With the number of information sharing acts signed by federal and state taxing authorities as well as other organizations, please be aware that refunds will be automatically reduced for the following matters: delinquent federal taxes, delinquent state taxes, back spousal and/or child support and delinquent non-tax federal debts such as student loans.  If the Department of Treasury’s Financial Management System (FMS), which disburses IRS refunds, offsets the refund for a delinquent amount (correctly or incorrectly), they will send a letter to the taxpayer explaining the reduction and giving the taxpayer the right to challenge the offset.

MAILING & RECORDKEEPING OF TAX PAYMENTS AND TAX RETURNS - When mailing tax returns or payments to federal and state taxing authorities, we advise the use of registered or certified mail to prove timely filing.  We also recommend that you make copies of the checks before mailing for your records.  The IRS has stated that other than direct proof of actual delivery, a mail receipt would be the only evidence of the timely delivery of tax documents.  It is also a good practice to make sure that you have good copies of the front and the back of the check images (where available) once your payments clear the bank in case you have to present this information at a later date.  Please keep in mind that as electronic systems of filing continue to be required, manpower at the federal and state taxing authorities will continue to decline causing longer delays in resolution of matters and placing the burden of proof on the taxpayer.

INCREASED REPORTING PROVISIONS ARE IN EFFECT AIMED AT COMPLIANCE AND REVENUE GENERATION - Banks and other processors of merchant payment cards are required to report a merchant’s annual gross payment card receipts to the IRS along with the merchant’s EIN #.  The law also requires reporting of third-party network transactions such as ones used by online retailers.  Expanded information reporting will continue to assist the IRS in increasing the compliance among merchants.  The IRS plans to compare the merchant’s overall volume of payment card sales in relation to expenses claimed and cash transactions reported, estimating to raise more than $9.5 billion over 10 years as a result of the increased reporting and monitoring.

As of 2013, new rules were fully implemented that required brokers to file information returns that not only provided the IRS and customers with details on the sales proceeds from each trade executed during the year, but also the customer's adjusted basis in the security and whether any gain/loss is short or long term. These information reporting requirements effect business customers as well. Securities subject to the reporting requirements include stocks, bonds, debentures, commodities, derivatives and other financial instruments designated by Treasury.  Brokers notified customers in 2011 regarding elections to make in their accounts concerning the methods to be used for reporting cost basis.  This provision is estimated to raise $6.7 billion over 10 years.

In response to the implementation of broker reporting changes, the IRS introduced Form 8949 Sales and other Dispositions of Capital Assets in 2011.  Form 8949 is used to list all capital gain and loss transactions previously reported on Schedule D of Form 1040.  The subtotals from Form 8949 are then carried over to Schedule D where gain or loss is calculated in the aggregate.  Accurate reporting and matching of data reported by the brokers directly to the IRS as well as the customers is the key focus and purpose of this new form.

Foreign Compliance Activities:  Foreign Account Tax Compliance Act (FATCA) dominated international news beginning in 2014 and still continues today.  Along with FACTA, the U.S. has been expanding its tax treaties and information agreements with foreign jurisdictions to encourage greater transparency.  Since 2014, the IRS provided transition relief with good faith efforts to comply and an offshore voluntary disclosure program (OVDP).  With closure of the OVDP on September 28, 2018, authorities are getting tighter with compliance efforts and the grace periods of transition relief are expected to end.  FinCen Report 114, Report of Foreign Bank and Financial Accounts (FBAR), reporting for tax year 2019 is due by April 15, 2020 with a 6-month extension available until October 15, 2020.

Identity Theft:  Tax fraud and identity theft have become a growing problem over the years.  Further initiatives continue to be taken by the industry to combat identity theft issues for taxpayers throughout the country.  IRS announced joint efforts have been taken with various state taxing authorities and tax preparation software companies to create a security plan to safeguard taxpayer information.  Tax preparers are required to input the current driver’s license state identification number, issue date and expiration date for ALL taxpayers prior to e-filing without exception.

CONNECTICUT DEPARTMENT OF REVENUE NEWS –

Connecticut Income Tax Exemption for Teacher Pensions:  The previously authorized 50% income exemption of any taxable pension received from the Connecticut Teacher’s Retirement System is delayed.  The exemption remains at 25% for 2019 and 2020.

Limitation of Property Tax Credit: For 2019, the property tax credit may only be claimed by Connecticut residents who attain the age of 65 before the end of the year or who validly claim one or more dependents on their federal income tax return.  The maximum income tax credit remains at $200.

Exemption of Social Security Benefits from Connecticut Income Tax:  For 2019, adjusted gross income thresholds for determining the amount of Social Security benefits excluded from Connecticut income tax have been increased.

Pension and Annuity Income Modification:  For taxable years beginning January 1, 2019, an individual with the federal filing status of single, married filing separately or head of household with federal adjusted gross income (AGI) of less than $75,000 or married filing jointly with federal AGI of less than $100,000 will be allowed to subtract 14% of any pension or annuity income received when calculating Connecticut AGI.  This applies to the extent that the pension and annuity income has been properly included in federal AGI.

LOOKING AHEAD ……

Even with the significant amount of TCJA guidance issued, the uncertainty and volume of changes in the law have made it difficult for some taxpayers to take full advantage of the opportunities provided by TCJA.  On December 20, 2019, President Trump signed into law “The Further Consolidated Appropriations Act” and “The Consolidated Appropriations Act, 2020”.  Here are some of the retirement provisions:

• Allowing employers to include annuities as an investment selection for their employer 401K plans.
• No longer allowing an individual who inherits a pension or IRA from a decedent to “stretch” the required minimum distributions over their lifetime. Instead the withdrawals would have to be withdrawn over a 10-year period.  This would apply to inherited amounts after Dec. 31, 2019.
• For plan years beginning after December 31, 2019, the new law allows the employer who automatically enrolls their workers in certain 401K plans to allow them to raise the employee savings rate to 15% of annual earnings over time. This is an increase in the current rule which was up to 10%.
• Beginning in 2020, taxpayers can contribute to a traditional IRA regardless of age as long as they have adequate compensation. Prior to this new law, you could no longer contribute once reached age 70 ½.
• The bill also increases the required minimum distribution (RMD) age from retirement accounts from 70 ½ to 72. This change is effective for RMDs for individuals who attain age 70 ½ after December 31, 2019.  For those turning age 70 ½ in 2019 or earlier, this new provision would not apply and they must continue to take their annual RMDs under provisions of the old law. 

Other items to highlight from the new legislation: 

• The act extends the treatment of mortgage insurance premium as qualified residence interest through 2020.
• The above the line deduction for qualified tuition and related expenses for higher education is extended through 2020.
• Non business energy property credit for windows, doors, skylights and roofs allows a credit of 10%. The credit can be used through the end of 2020.
• The refundable credit for health insurance costs of eligible individuals is extended through 2020.
• Penalty free withdrawals up to $5,000 per taxpayer from retirement plans beginning January 1, 2020 if made during the one year period beginning on the date on which a child is born or legal adoption is finalized.
• 529 distributions made after December 31, 2018 are expanded to cover costs associated with registered apprenticeships and up to $10,000 of qualified student loan repayments of principal and interest of the beneficiary.
• All ACA taxes are repealed. This includes the medical device excise tax, health insurance provider’s fee and high-cost employer-sponsored health coverage tax (Cadillac plans).  This does not repeal the 3.8% tax Obama put on investment income.

Kiddie tax is reinstated and the unearned income of children is taxed at the top marginal rate of their parents.  This change is effective for tax years beginning in 2020; however, you can elect to apply this change to 2018 or 2019 (or both).

When you make retail purchases of goods or services in your resident state, you usually pay sales tax to the seller if the sale of such goods or services is subject to sales tax according to the law of your resident state.  The seller in turn remits the sales tax collected to the state taxing authority.  In general, when these same types of goods or services are purchased outside of your resident state, they are subject to "use tax" when the goods are brought into your resident state.

When you make retail purchases of goods or services in your resident state, you usually pay sales tax to the seller if the sale of such goods or services is subject to sales tax according to the law of your resident state.  The seller in turn remits the sales tax collected to the state taxing authority.  In general, when these same types of goods or services are purchased outside of your resident state, they are subject to "use tax" when the goods are brought into your resident state.

Today, with the increase in catalog and online shopping, many taxpayers are buying items out of state that would be subject to tax if they were purchased in their resident state.  The state tax authorities, especially Connecticut and New York, are actively pursuing the collection of this use tax in order to meet budgetary constraints.  In fact, the states, along with the Internal Revenue Service and U.S. Customs, have signed information sharing agreements to help each other collect all outstanding tax money.  Working together, the authorities have many resources available to gather their information.

Keep in mind that the taxing authorities are specifically targeting the purchase of items such as automobiles (and parts), appliances, furniture, jewelry, cameras, computers, electronics, cigarettes and other tobacco products, alcohol, boats, art and antiques.  However, they are also seeking out those taxpayers who are steady catalog and online shoppers not paying sales tax. 

The individual use tax is declared and paid when you file your resident state individual income tax return. 

If all the goods purchased and brought into Connecticut at one time total $25 or less, you do not have to pay Connecticut use tax.  The $25 exemption does not apply to goods shipped or mailed to you.  Connecticut requires that taxpayers separately list any individual item with a purchase price of $300 or more.  When listing this information, you must provide the date of purchase, a description of goods or service, the retailer or service provider and the purchase price.  Items with an individual purchase price under $300 do not have to be listed separately; instead the total combined purchases must be given to calculate the use tax due.

The general Connecticut sales and use tax rate for 2019 was 6.35%; however, there are categories with different tax rates from the general rates.  There are too many categories to list for the purposes of this letter; however, there are a few that need to be highlighted.  Specifically a use tax rate of 7.75% applies to the following: the sale of most motor vehicles exceeding $50,000, the sale of each piece of jewelry exceeding $5,000, the sale of each piece of clothing or pair of footwear exceeding $1,000 and a handbag, luggage, umbrella, wallet or watch exceeding $1,000.

New York provides two options for calculating the use tax due on purchases of less than $1,000 (excluding shipping and handling) each that are not related to a business, rental real estate or royalty activities - the exact calculation method or the sales and use tax chart.  For the exact calculation method, the taxpayer must provide the purchase price, purchase date and jurisdiction of purchase.  The sales and use tax chart is a simple, time-saving method whereby the taxpayer pays use tax based on their federal adjusted gross income according to the chart established by the state.  The exact calculation method must be used on each purchase of $1,000 or more.  For individual items subject to use tax greater than $25,000, the following information must be provided: date item was purchased, description of item purchased, seller’s name and address, delivery address/address of use and purchase price.

Failure to pay use tax may result in the imposition of penalties and interest.  The states are requiring taxpayers to declare an obligation for use tax on their individual income tax returns.  Zero is a valid declaration if you do not have a liability.  If you do not make an entry on the individual use tax line of your resident tax return, you are considered to not have filed a use tax return.

Therefore, when providing your information for payment of use tax, please be sure to specify the following complete information:

• Details of purchase information as specified by the state thresholds for reporting individual purchases
• Details of purchase information as specified by the special categories in Connecticut

Internal Revenue Service regulations along with the tax authorities of Connecticut and New York mandate that tax preparers electronically file individual, fiduciary and business income   tax returns.  We believe that trends will continue with authorities requiring the electronic filing of more information, tax returns and tax payments.  Therefore, all 2019 income tax returns filed federally and in the States of Connecticut, New York and Massachusetts are required to be filed using the Federal & State Electronic Filing Program (E-File).  The firm will voluntarily file individual returns electronically in the States of California and New Jersey.  We also reserve the right to electronically file in additional states as deemed appropriate and will encourage this method of filing. 

Internal Revenue Service regulations along with the tax authorities of Connecticut and New York mandate that tax preparers electronically file individual, fiduciary and business income   tax returns.  We believe that trends will continue with authorities requiring the electronic filing of more information, tax returns and tax payments.  Therefore, all 2019 income tax returns filed federally and in the States of Connecticut, New York and Massachusetts are required to be filed using the Federal & State Electronic Filing Program (E-File).  The firm will voluntarily file individual returns electronically in the States of California and New Jersey.  We also reserve the right to electronically file in additional states as deemed appropriate and will encourage this method of filing. 

Our firm has informed you of the regulations and mandates for electronic filing.  However, the decision as to whether your income tax returns will be electronically filed or not rests with you, the taxpayer.  If you choose not to file electronically, we will inform you of the necessary procedures that need to be followed for opting out.

Electronic filing offers the following benefits:

1. Allows the Revenue Departments to process returns quickly and accurately, saving tax dollars.
2. Taxpayers who have a return with a balance due can file their return early and choose to make payment anytime on or before April 15, 2020.
3. Taxpayers who file returns with refunds receive those refunds faster especially if the refund is directly deposited into their bank account.
4. Electronically filed returns receive an acknowledgment of receipt from the Internal Revenue Service and the applicable State Tax Authority and are verified to be mathematically correct, eliminating data entry errors and lost or misplaced mail.

If we did not prepare your returns for 2018, we will need copies of your driver’s licenses and social security cards or passports. 

How does this affect the process of preparing your 2019 income tax returns?

The actual preparation process of your return does not change.  However, the administration, review process and completion of the returns will be effected.  The following is an overview of how the electronic filing process will work.

1) Taxpayers should forward complete information for the preparation of their 2019 income tax returns including all supporting documentation.  Regulations for electronic filing require that our firm maintain copies of the social security cards and driver's licenses for yourself, your spouse and all dependents claimed on the 2019 tax return.  NOTE:  If you provided this information to us last year regarding the preparation of your 2018 tax return, you do not have to provide it again.  However, the driver’s license and passports on file must be current.  Please call our office to verify your information on file if you have any questions.

2) Electronic filing provides various methods for payment and receipt of your refunds.  Payments can be made by 1) paper check, 2) credit card (a convenience fee will be charged by the processing company used by tax authorities) and 3) direct debit out of a designated account.  Refunds can be issued by 1) paper check, 2) application of all or a portion to the 2020 tax year and 3) direct deposit into designated account(s) – see NOTE below.  Returns filed electronically can be filed early but payment not made until a later date designated by you whether payment is by check, credit card or direct debit.  Please complete the enclosed Organizer Form 4A (Direct Deposit and Withdrawal) to indicate to us how you would like to handle payments and/or refunds and return it with the information to prepare your tax return.  If you desire to use direct deposit or direct debit, please enclose a voided check so we have complete account information and the financial institution routing transit number.  It is the taxpayer’s responsibility to provide proper banking information and to verify that the payments have been withdrawn from the designated account.  Please allow enough time when scheduling payments to be made directly from accounts.  If problems with payment by direct debit are encountered, taxpayers need to have enough time available for a paper check to be submitted on a timely basis.

NOTE:  Generally, if you do not elect direct deposit, the State of Connecticut will issue refunds by paper check; however, they are encouraging direct deposit.  Direct deposit will NOT be available for first time Connecticut filers.  The State of New York is offering the option for receipt of refunds by direct deposit or paper check.  IRS is offering refunds by paper check or direct deposit. 

WARNING: It is suggested that refunds on joint tax returns should only be directly deposited into joint bank accounts.  The federal banking regulations, as applied by each bank, may not accept a joint refund into an individual account; our firm has no knowledge of how your bank will handle this matter.  Also, be aware that refunds will be retained, not issued or decreased for any of the following: 1) delinquent federal taxes, 2) delinquent state taxes, 3) delinquent student loans, 4) delinquent spousal and/or child support, 5) delinquent state unemployment compensation debts and 6) debts owed to other state and/or federal agencies.

3) Once your return has been prepared, our firm will forward a "Review Copy" to you.  This review copy can be sent electronically using access through a portal system for your protection or by hard copy (either mail or you can pick it up at our office).  Please let us know the delivery method for the "Review Copy" on the bottom of the enclosed engagement letter which should be submitted with your tax information.

4) If you review the return and are in agreement with the return as prepared, the taxpayer(s) will need to sign Form 8879, IRS e-file Signature Authorization, Form TR-579-IT New York State e-file Signature Authorization, Form FTB 8879 California e-file Signature Authorization, Form M-8453, Massachusetts e-file Signature Authorization, as applicable, and any additional efile form(s) as necessary and included in your "Review Copy" package.  Connecticut and New Jersey accept the federal signature on Form 8879.  Tax returns cannot be filed electronically until our firm is in receipt of the signature authorization forms signed by the taxpayer(s). 

5)  If you review the return and are NOT in agreement with the return as prepared, please call our office to discuss the questions/issues.  If necessary, a new "Review Copy" and signature authorization forms will be prepared.  Please remember that the only way electronically filed tax returns can be changed is by amending the returns.  Therefore, it is imperative that you are in complete agreement with the returns before returning the signature authorization forms to us. 

6) Once we receive your completed signature authorization forms, our firm will electronically submit your Federal, Connecticut, Massachusetts, New York, New Jersey and/or California income tax returns.  Income tax returns for all other states will be filed on paper at this time unless we deem it appropriate to electronically file in the other state(s).  Once we receive acknowledgement that your electronically filed returns have been accepted by the taxing authorities, we will forward a complete package to you which will include the following documents: 1) your original information if it has not already been returned with your review copy, 2) 2019 payment vouchers to taxing authorities, if necessary, 3) 2019 income tax returns for other states to be filed by paper, if necessary, 4) 2020 estimated tax payments, if necessary, 5) a copy of the 2019 individual return electronic transmission history and acceptance notification, and 6) a final signed copy of your electronically filed 2019 Federal and state income tax returns, if requested.  Please include on the bottom of the enclosed engagement letter how you would like to receive this complete package.

Some extensions for filing 2019 tax returns must be filed electronically as paper is no longer an acceptable filing method.  Therefore, taxpayers must allow enough time for completing this process.  Please contact our office by Friday, March 23, 2020 if you will need to file extensions for the 2019 tax year.

We ask for your continued cooperation in implementing these income tax return preparation and filing requirements.  If you have any questions, please give us a call.

President Donald Trump signed into law the bipartisan Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142) on June 5. The legislation aims to expand usability of the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s ( P.L. 116-136) headliner small business loan program.

President Donald Trump signed into law the bipartisan Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142) on June 5. The legislation aims to expand usability of the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s ( P.L. 116-136) headliner small business loan program.

PPP in the House
The bipartisan, bicameral-crafted P.L. 116-142 makes several changes to the rapidly implemented Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). The bill, authored by House Reps. Chip Roy, R-Tex., and Dean Phillips, D-Minn., was approved in the House by a 417-to-1 vote on May 27. After a brief stall in the Senate, P.L. 116-142 cruised through the upper chamber by voice vote on June 3.

Most notably, the legislation includes some of the following PPP changes:

• Extends the expense forgiveness period from eight weeks to 24 weeks;
• Reduces the 75 percent payroll ratio requirement to 60 percent;
• Eliminates the two-year loan repayment restrictions for future borrowers;
• Allows payroll tax deferment for PPP recipients; and
• Extends the June 30, 2020, rehiring deadline to December 31, 2020.

Questions Remain
However, riding shotgun with the measure’s increased PPP flexibility is a list of remaining unanswered questions and potential issues. While policymakers and stakeholders alike await more Treasury and SBA guidance, additional legislative text is already in the works to iron out certain wrinkles in past PPP legislation and related IRS guidance.

"Our colleagues have continued to track the program’s [PPP] operation and recommend further tweaks where necessary. In recent days, Senator Collins helped strengthen and improve the House’s proposed PPP modifications before they passed the bill and sent it to us. And I know the senior Senator from Maine has already identified several more technical fixes for the new legislation that I hope Congress will address," Senate Majority Leader Mitch McConnell, R-Ky., said on June 4 from the Senate floor.

Looking Ahead to PPP Technical Corrections, Enhancements
Although the ink may still be drying on the PPP Flexibility Act, Sen. Susan Collins, R-Me., co-architect of the small business loan program, said on June 4 that her staff is currently drafting a PPP technical corrections bill. The next bill is expected to address concerns with P.L. 116-142 60 percent "cliff", among other items.

"Two of my priorities would be to correct what I believe to be a drafting error in the House bill that eliminates partial forgiveness for small businesses with PPP loans who have been unable to retain, recall, or pay their full number of employees due to circumstances beyond the employer’s control," Collins said in a June 4 statement. "The House bill contains a cliff: even if a small employer spent 59 percent out of the 60 percent of the funding designated to pay their employees, none of the loan would be forgiven. The employer would be saddled with debt." Additionally, Collins noted the next PPP bill would allow for overhead funding to be used for masks and other protective gear for employees.

Fellow PPP policy architect Senate Small Business Committee Chair Marco Rubio, R-Fla., on June 4 also alluded to another PPP bill. "I appreciate the Administration’s flexibility and commitment to address the bill’s inadvertent technical errors that could create unintended consequences for small businesses as they seek forgiveness," Rubio said in a June 4 statement. "If the Administration cannot address these issues, Congress will need to fix them through additional legislation…," Rubio said.

Tax Treatment of Ordinary Business Expenses
Additionally, Sen. John Cornyn, R-Tex., told reporters on June 4 that Senate leadership is trying to take up the bipartisan Small Business Expense Protection Bill (S. 3612). The bill would clarify that receipt and forgiveness of a PPP loan does not affect the tax treatment of ordinary business expenses.

However, according to controversial IRS Notice 2020-32, businesses that qualify for PPP loan forgiveness will not be able to deduct certain expenses, including wages, paid for by the loan. "The money coming in the PPP is not taxable. So, if the money that is coming is not taxable, you cannot double dip," Mnuchin said. But Congress’s top, bipartisan tax writers immediately voiced disapproval of IRS and Treasury’s position, stating that the IRS guidance goes against congressional intent.

"[A]s was expressed to Treasury during the development of the PPP, we did not intend to deny the deductibility of ordinary and necessary business expenses, nor did these small businesses expect to lose deductions for their business expenses when they applied for a PPP loan," Senate Finance Committee Chairman Chuck Grassley, R-Iowa, ranking member Ron Wyden, D-Ore., and House Ways and Means Committee Chair Richard Neal, D-Mass., wrote in a recent letter to Mnuchin.

And while many business groups are also commending Congress’s approval of P.L. 116-142, their leadership is also calling for more PPP-related legislation. "The PPP changes passed by both chambers are another important step in providing relief to small businesses that otherwise will not survive until the economic recovery phase," U.S. Travel Association Executive Vice President of Public Affairs and Policy Tori Emerson Barnes said in a statement. However, the Travel Association, similar to other industry trade groups, has called for additional PPP enhancements.

"While this measure does a good job making the PPP work better for businesses that are eligible, other PPP enhancements will be needed to make sure all the key pieces are in place when the recovery begins—in particular, extending eligibility to non-profit and quasi-governmental entities that are vital drivers of local and regional economic development," Barnes said.

To that end, it remains unclear at this time whether additional PPP changes, enhancements, and clarifications will come by way of Treasury and SBA guidance, another stand-alone bill, or catch a ride with the next round of economic relief legislation. However, prior to the Senate’s approval of P.L. 116-142, McConnell submitted to the congressional record per Sen. Ron Johnson's, R-Wisc., hold on the bill, a letter from the measure’s bipartisan, bicameral authors and policy architects clarifying congressional intent for PPP loans covered period extension.

"The extension of the covered period in P.L. 116-142 is to allow borrowers who received PPP loans before June 30, 2020, to continue to make expenditures for allowable uses until December 31, 2020," the record states. "The extension of the covered period does not authorize the [SBA] to issue any new PPP loans after June 30, 2020, as this date remains fixed by section 1102(b) of the CARES Act."

PPP Disclosures
Meanwhile, in the spirit of PPP transparency, Rubio and Senate Small Business Committee ranking member Ben Cardin, D-Md., sent a letter this week to Treasury Secretary Mnuchin and SBA Administrator Jovita Carranza calling for more public disclosures of information related to PPP loans and borrowers. "Given the grave nature of this crisis and the unprecedented level of funding that has been appropriated, it is critical that the public and Congress have timely and complete information about where these funds are going, and the committee expects an increased level of transparency and accountability from the SBA," Rubio and Cardin wrote.

Some of the items Rubio and Cardin have requested be made publicly available on the SBA’s website include the following:

• name of business or nonprofit borrower and address,
• business type,
• lender and address,
• loan or grant amount,
• congressional district, and
• number of jobs supported.

In consultation with Treasury Department, the Small Business Administration (SBA) has issued...

In consultation with Treasury Department, the Small Business Administration (SBA) has issued:

• new and revised guidance for the Paycheck Protection Program (PPP);
• revised PPP application forms;
• a revised PPP loan forgiveness application; and
• a new "EZ" PPP loan forgiveness application.

New, Revised PPP Guidance
The guidance implements the Paycheck Protection Program Flexibility Act (PPPFA) ( P.L. 116-142), which President Trump signed on June 5, 2020. The PPPFA aims to expand usability of the PPP for small businesses provided in the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136).

The updated guidance expands PPP eligibility for business owners who have past felony convictions. Further, to implement the PPPFA, the SBA revised its first PPP interim final rule that was issued in April. As noted in Treasury’s recent announcement issued on June 8, the new rule reflects updates related to loan maturity, deferral of loan payments, and forgiveness.

The new and revised PPP guidance can be found at https://home.treasury.gov/system/files/136/PPP-IFR--Additional-Revisions-to-First-Interim-Final-Rule.pdf.

Revised PPP Applications
The SBA has issued revised the PPP application forms to conform with the changes in the guidance.

The revised Borrower application form can be found at https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form-Revised-June-12-2020.pdf.

For the revised Lender application form, see https://home.treasury.gov/system/files/136/PPP-Lender-Application-Form-Revised-June-12-2020.pdf.

Senators Request PPP Forgiveness Simplification
In a bipartisan effort, a group of over 40 senators have requested that Treasury and the SBA simplify the PPP loan forgiveness application for certain small business loans. Specifically, the senators urged Treasury and the SBA to revise the form so that it is no longer than one page for any loan under $250,000.

"While the Small Business Administrator was also given the ability to require additional documentation necessary to verify proper use of PPP funds, we believe it is beyond the program’s intent to require the information solicited in the 11-page forgiveness application that the SBA recently released," the senators wrote in a recent letter addressed to Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza. "We appreciate the interest in appropriately auditing the use of government money. However, the loan forgiveness application – which understandably needs more information for loans worth significantly more than $250,000 – is three times longer than the original application for the PPP."

On the heels the senators’ request, the SBA has released both a revised, full PPP loan forgiveness application, and a new "EZ" forgiveness application (Form 3508EZ). The new EZ loan forgiveness application can be used by:

• borrowers that are self-employed and have no employees;
• borrowers that did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; or
• borrowers that experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

Both the full forgiveness application and the EZ forgiveness application give borrowers the option of using the original 8-week covered period (if their loan was made before June 5, 2020) or the PPPFA’s extended 24-week covered period. The EZ application requires fewer calculations and less documentation for eligible borrowers.

The new EZ forgiveness application can be found at https://home.treasury.gov/system/files/136/PPP-Forgiveness-Application-3508EZ.pdf.

The revised, full forgiveness application can be found at https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf.

The IRS is postponing deadlines for certain time-sensitive actions due to the Coronavirus Disease 2019 (COVID-19) emergency. This relief affects employment taxes, employee benefit plans, exempt organizations, individual retirement arrangements (IRAs), Coverdell education savings accounts, health savings accounts (HSAs), and Archer and Medicare Advantage medical saving accounts (MSAs).

The IRS is postponing deadlines for certain time-sensitive actions due to the Coronavirus Disease 2019 (COVID-19) emergency. This relief affects employment taxes, employee benefit plans, exempt organizations, individual retirement arrangements (IRAs), Coverdell education savings accounts, health savings accounts (HSAs), and Archer and Medicare Advantage medical saving accounts (MSAs).

With certain exceptions, the relief postpones deadlines for certain actions due to be performed on or after March 30, 2020, and before July 15, 2020. The revised deadline for an affected taxpayer to perform a time-sensitive action described in the relief is July 15, 2020, unless a different revised deadline is specified.

Qualified Retirement Plans
For employee benefit plans (including a section 403(b) plan, a governmental section 457(b) plan, a SEP plan described in section 408(k), or a SIMPLE IRA plan described in section 408(p)), or any sponsor, administrator, participant, beneficiary, disqualified person, or other person with respect to the plan, the relief affects applying for a funding waiver under Code Sec. 412(c) for a defined benefit pension plan that is not a multiemployer plan.

For multiemployer defined benefit pension plans, the relief affects actions due to be performed on or before the dates in (1) Code Sec. 432(b)(3) for certification of funded status and related notice to interested parties; (2) Code Sec. 432(c)(1) and (e)(1) for adopting a funding improvement plan or rehabilitation plan (and the notification to the bargaining parties of the schedules thereunder); or (3) Code Sec. 432(c)(6) and (e)(3) for the annual update of a funding improvement plan or a rehabilitation plan, and its contribution schedules, and the filing of those updates with the Form 5500 annual return.

For cooperative and small employer charity pension (CSEC) plans, the relief affects actions to be performed on or before the dates in (1) Code Sec. 433(c)(9) for making the contribution required to be made for the plan year; (2) Code Sec. 433(f)(3)(B) for making required quarterly installments; (3) Code Sec. 433(j)(3) for the adoption of a funding restoration plan; or (4) Code Sec. 433(j)(4) for the certification of funded status.

For filing Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and payment of the associated excise taxes, the period beginning on March 30, 2020, and ending on July 15, 2020, will be disregarded in calculating any interest or penalty for failure to file the Form 5330 or pay the excise tax postponed under the relief. Interest and penalties on postponed filing and payment obligations will begin to accrue on July 16, 2020.

Other relief related to qualified retirement plans affects:

• extension of initial remedial amendment period for section 403(b) plans;
• certain actions affecting pre-approved defined benefit plans;
• the Employee Plans Compliance Resolution System (EPCRS); and
• requests for approval of a substitute mortality table.

Form 5498 Series
For filers of Form 5498, IRA Contribution Information, Form 5498-ESA, Coverdell ESA Contribution Information, and Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, the due date for filing and furnishing the forms is postponed to August 31, 2020, and the period beginning on the original due date of those forms and ending on August 31, 2020, will be disregarded in calculating any penalty for failure to file those forms. Penalties on the postponed filing will begin to accrue on September 1, 2020.

Employers and CPEOs
The relief applies to employers who perform correct employment tax reporting errors using the interest-free adjustment process under Code Secs. 6205 and 6413.

For certified professional employer organizations (CPEOs), the relief provides a temporary waiver of the requirement that CPEOs must file certain employment tax returns and their accompanying schedules electronically. The relief for CPEOs applies only to (1) Forms 941 filed for the second, third, and fourth quarter of 2020; and (2) Forms 943 filed for calendar year 2020. CPEOs can file paper versions of these forms and their schedules if they so choose. The waiver applies to all CPEOs, and individual waiver requests do not need to be submitted.

Exempt Organizations
For exempt organizations, the relief applies to electronic submissions of Form 990-N under Code Sec. 6033(i), and filing suits for declaratory judgment under Code Sec. 7428.

Effect on Other Documents
Rev. Proc. 2017-18, I.R.B. 2017-5, Rev. Proc. 2017-55, I.R.B. 2017-43, Announcement 2018-5, I.R.B. 2018-13, Rev. Proc. 2019-19, I.R.B. 2019-19, Rev. Proc. 2019-39, I.R.B. 2019-42, and Rev. Proc. 2020-10, I.R.B. 2020-10, are modified. Notice 2020-18, I.R.B. 2020-15, Notice 2020-20, I.R.B. 2020-16, and Notice 2020-23, I.R.B. 2020-18, are amplified.

The IRS has issued guidance on coronavirus-related distributions and plan loans.

The IRS has issued guidance on coronavirus-related distributions and plan loans. The guidance

• presents the rules set out in Act Sec. 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136);
• adds three new categories to the list of individuals who qualify due to adverse financial consequences;
• provides analysis and examples of repayments reporting; and
• includes safe harbors for employee certification and the plan loan payment suspension period.

Background: Coronavirus-Distributions and Plan Loan Relief
The CARES Act provides that qualified individuals may treat up to $100,000 in distributions made from their eligible retirement plans (including IRAs) between January 1, 2020, and December 30, 2020, as "coronavirus-related" distributions. A coronavirus-related distribution is not subject to the 10-percent additional tax that otherwise generally applies to distributions made before an individual reaches age 59-1/2. In addition, a coronavirus-related distribution can be included in income in equal installments over a three-year period, and an individual has three years to repay a coronavirus-related distribution to a plan or IRA and undo the tax consequences of the distribution.

In addition, the CARES Act provides that plans may implement certain relaxed rules for qualified individuals relating to plan loan amounts and repayment terms. In particular, plans may suspend loan repayments that are due from March 27, 2020, through December 31, 2020, and the dollar limit on loans made between March 27, 2020, and September 22, 2020, is raised from $50,000 to $100,000.

New Categories of Qualified Individuals
One of the categories of individuals who qualify for coronavirus-related distributions are those who experience adverse financial consequences as a result of coronavirus. As laid out in the CARES act, these consequences may include:

• being quarantined, being furloughed or laid off, or having work hours reduced due to such virus or disease;
• being unable to work due to lack of child care due to such virus or disease; or
• closing or reducing hours of a business owned or operated by the individual due to such virus or disease.

The CARES Act authorizes the Treasury Department to add to this list. Under the guidance, a qualified individual also includes an individual who experiences adverse financial consequences as a result of:

• a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
• the individual’s spouse or a member of the individual’s household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
• closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.

Recontributions: Recognizing Income in Year of Distribution
The new guidance goes into detail on recontributions. Individuals have up to three years to recontribute qualified distributions. Recontributed dollars are not taxed, so earlier returns may have to be amended. The rules differ depending on whether the individual is recognizing income over three years or entirely in the year of distribution.

If a taxpayer includes all coronavirus-related distributions received in a year in gross income for that year and recontributes any portion during the three-year recontribution period, the amount of the recontribution will reduce the amount of the related distribution included in gross income for the year of the distribution.

Example 1. Bob receives a $45,000 coronavirus distribution from his employer plan on November 1, 2020. Bob recontributes $45,000 to an IRA on March 31, 2021. Bob reports the recontribution on Form 8915-E, and files the 2020 federal income tax return on April 10, 2021. No portion of the coronavirus-related distribution is includible as income for the 2020 tax year. [Note: The guidance states that Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, is expected to be available before the end of 2020.]

Example 2. The facts are the same as in Example 1, except that Bob timely requests an extension of time to file the 2020 federal income tax return and makes a recontribution on August 2, 2021, before filing the 2020 federal income tax return. Bob files the 2020 federal income tax return on August 10, 2021. As in Example 1, no portion of the coronavirus-related distribution is includible in income for the 2020 tax year because Bob made the recontribution before the timely filing of the 2020 federal income tax return.

Example 3. Cynthia receives a $15,000 distribution from an employer plan on March 30, 2020. Cynthia elects out of the 3-year ratable income inclusion on Form 8915-E and includes the entire $15,000 in gross income for the 2020 tax year. On December 31, 2022, she recontributes $15,000 to her employer plan. Cynthia will need to file an amended federal income tax return for the 2020 tax year to report the amount of the recontribution and reduce the gross income by $15,000 with respect to the coronavirus-related distribution included on the 2020 original federal income tax return.

Recontributions: Recognizing Income Over Three Years
If a qualified individual includes a coronavirus-related distribution ratably over a three-year period and the individual recontributes any portion to an eligible retirement plan at any date before the timely filing of the individual’s federal income tax return (that is, by the due date, including extensions) for a tax year in the three-year period, the amount of the recontribution will reduce the ratable portion of the coronavirus-related distribution that is includible in gross income for that tax year.

Example 4. Dan receives $75,000 from his employer plan on December 1, 2020. Dan uses the three-year ratable income inclusion method. Dan makes one recontribution of $25,000 to the plan on April 10, 2022. Dan files his 2021 federal income tax return on April 15, 2022. Without the recontribution, Dan should include $25,000 in income with respect to the coronavirus-related distribution on each of his 2020, 2021, and 2022 federal income tax returns. However, as a result of the recontribution, Dan should include $25,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return, $0 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return, and $25,000 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.

Example 5. The facts are the same as in Example 4, except Dan recontributes $25,000 to the plan on August 10, 2022. Dan files the 2021 federal income tax return on April 15, 2022, and does not request an extension of time to file that federal income tax return. As a result of the recontribution, Dan should include $25,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return, $25,000 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return, and $0 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.

Carryovers. If the taxpayer recontributes an amount for a tax year in the three-year period that exceeds the amount that is otherwise includible in gross income for that tax year, the excess amount of the recontribution may be carried forward to reduce the amount of the distribution includible in gross income in the next tax year in the three-year period. Alternatively, the qualified individual is permitted to carry back the excess amount of the recontribution to a prior tax year or years in which the individual included income attributable to a coronavirus-related distribution. The individual will need to file an amended federal income tax return for the prior tax year or years to report the amount of the recontribution on Form 8915-E and reduce his or her gross income by the excess amount of the recontribution.

Example 6. Eliza receives a distribution of $90,000 from her IRA on November 15, 2020. Eliza ratably includes the $90,000 distribution in income over a three-year period. Without any recontribution, Eliza will include $30,000 in income with respect to the coronavirus-related distribution on each of the 2020, 2021, and 2022 federal income tax returns. Eliza includes $30,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return. Eliza then recontributes $40,000 to an IRA on November 10, 2021 (and makes no other recontribution in the three-year period). Eliza may do either of the following:

• Option 1: Include $0 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return. Carry forward the excess recontribution of $10,000 to 2022, and include $20,000 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.
• Option 2: Include $0 in income with respect to the coronavirus-related distribution on the 2021 tax return and $30,000 in income on the 2022 federal income tax return. Also, file an amended federal income tax return for 2020 to reduce the amount included in income as a result of the coronavirus-related distribution to $20,000 (that is, the $30,000 original amount includible in income for 2020 minus the remaining $10,000 recontribution that is not offset on either the 2021 or 2022 federal tax return).

Safe Harbor for Plan Loans
The CARES Act provides that in the case of a qualified individual with a loan from a qualified employer plan outstanding on or after March 27, 2020, if the due date for any repayment with respect to the loan occurs during the period beginning on March 27, 2020, and ending on December 31, 2020, the due date shall be delayed for one year.

Under a safe harbor provided in the guidance, a qualified employer plan will satisfy this requirement if a qualified individual’s obligation to repay a plan loan is suspended under the plan for any period beginning not earlier than March 27, 2020, and ending not later than December 31, 2020. The loan repayments must resume after the end of the suspension period, and the term of the loan may be extended by up to one year from the date the loan was originally due to be repaid.

The IRS has released guidance that provides temporary administrative relief to help certain retirement plan participants or beneficiaries who need to make participant elections by allowing flexibility for remote signatures. Specifically, the guidance provides participants, beneficiaries, and administrators of qualified retirement plans and other tax-favored retirement arrangements with temporary relief from the physical presence requirement for any participant election (1) witnessed by a notary public in a state that permits remote notarization, or (2) witnessed by a plan representative using certain safeguards. The guidance accommodates local shutdowns and social distancing practices and is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, as permitted by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136).

The IRS has released guidance that provides temporary administrative relief to help certain retirement plan participants or beneficiaries who need to make participant elections by allowing flexibility for remote signatures. Specifically, the guidance provides participants, beneficiaries, and administrators of qualified retirement plans and other tax-favored retirement arrangements with temporary relief from the physical presence requirement for any participant election (1) witnessed by a notary public in a state that permits remote notarization, or (2) witnessed by a plan representative using certain safeguards. The guidance accommodates local shutdowns and social distancing practices and is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, as permitted by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136).

Conditions for Participant Elections
Reg. §1.401(a)-21 sets forth standards for the use of an electronic medium to provide applicable notices to recipients or to make participant elections with respect to a retirement plan, an employee benefit arrangement, or an individual retirement plan. Reg. §1.401(a)-21(e)(6) defines a participant election as any consent, election, request, agreement, or similar communication made by or from a participant, beneficiary, alternate payee, or an individual entitled to benefits under a retirement plan, employee benefit arrangement, or individual retirement plan. Reg. §1.401(a)-21(d) sets forth the following conditions for participant elections:

• The individual must be effectively able to access the electronic medium used to make the participant election;
• The electronic system must be reasonably designed to preclude any person other than the appropriate individual from making the participant election;
• The electronic system must provide the individual making the participant election with a reasonable opportunity to review, confirm, modify, or rescind the terms of the election before it becomes effective; and
• The individual making the participant election, within a reasonable time, must receive confirmation of the election through either a written paper document or an electronic medium under a system that satisfies the applicable notice requirements under Reg. §1.401(a)-21.

Applicability
While this temporary relief, which covers the period from January 1, 2020, through December 31, 2020, is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, as permitted by section 2202 of the CARES Act, the temporary relief applies to any participant election that requires the signature of an individual to be witnessed in the physical presence of a plan representative or notary.

The IRS has released a revenue procedure that describes temporary safe harbors for the purpose of determining the federal tax status of certain arrangements that hold real property as trusts in response to the COVID-19 emergency. Specifically, the Service has provided temporary relief to arrangements that are treated as trusts under Reg. §301.7701-4(c) which are, or have tenants who are, experiencing financial hardship as a result of COVID-19, to allow them to make certain modifications to their mortgages loans and their lease agreements, and to accept additional cash contributions without jeopardizing their tax status as grantor trusts. This revenue procedure also indicates that a cash contribution from one or more new trust interest holders to acquire a trust interest or a non-pro rata cash contribution from one or more current trust interest holders must be treated as a purchase and sale under Code Sec. 1001 of a portion of each non-contributing (or lesser contributing) trust interest holder’s proportionate interest in the trust’s assets.

The IRS has released a revenue procedure that describes temporary safe harbors for the purpose of determining the federal tax status of certain arrangements that hold real property as trusts in response to the COVID-19 emergency. Specifically, the Service has provided temporary relief to arrangements that are treated as trusts under Reg. §301.7701-4(c) which are, or have tenants who are, experiencing financial hardship as a result of COVID-19, to allow them to make certain modifications to their mortgages loans and their lease agreements, and to accept additional cash contributions without jeopardizing their tax status as grantor trusts. This revenue procedure also indicates that a cash contribution from one or more new trust interest holders to acquire a trust interest or a non-pro rata cash contribution from one or more current trust interest holders must be treated as a purchase and sale under Code Sec. 1001 of a portion of each non-contributing (or lesser contributing) trust interest holder’s proportionate interest in the trust’s assets.

Applicability
This revenue procedure applies to arrangements that are trusts under Reg. §301.7701-4(c) and Rev. Rul. 2004-86, 2004-2 CB 191, and that hold real property and engage in one or more of the actions described in sections 6.02, 6.03, or 6.04 of this revenue procedure.

Background
The IRS and the Treasury Department received comments addressing arrangements organized as trusts under Reg. §301.7701-4(c) and Rev. Rul. 2004-86 that hold rental real property. The commenters reported that many of these arrangements and their tenants are experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency.

Rev. Proc. 2020-26
The IRS and the Treasury Department issued certain safe harbors in Rev. Proc. 2020-26, I.R.B. 2020-18, 753. Under the safe harbors, certain modifications of mortgage loans in connection with forbearance programs described in that guidance are not treated as replacing the unmodified obligation with a newly issued obligation, as giving rise to prohibited transactions, or as manifesting a power to vary.

In the case of mortgage loans held by real estate mortgage investment conduits (REMICs) and investment trusts, Rev. Proc. 2020-26 applies to—

• Forbearance (and all related modifications) of a federally backed mortgage loan or a federally backed multifamily mortgage loan, if the forbearance is provided under section 4022 or 4023, respectively, of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136) (CARES Act Forbearances); and
• Forbearances (and all related modifications) that are not CARES Act Forbearances, that are agreed to by the borrower of any Federally backed or non-Federally backed mortgage loan, and that are provided by a holder or servicer of the loan under a forbearance program for borrowers experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency.

The forbearance programs covered are those (a) which are identical or similar to those described in section 2.07 of Rev. Proc. 2020-26; and (b) pursuant to which, between March 27, 2020, and December 31, 2020, inclusive, the borrower requests or agrees to the forbearance (and all related modifications).

The IRS has announced various extensions of deadlines for qualified opportunity funds and their investors due to the Coronavirus pandemic.

The IRS has announced various extensions of deadlines for qualified opportunity funds and their investors due to the Coronavirus pandemic.

180-Day Investment Period
Generally taxpayers must reinvestment capital gain in a qualified opportunity fund (QOF) within 180 days after the gain is realized from a sale or exchange. Under the guidance, if the last day of the 180-day investment period falls on or after April 1, 2020, and before December 31, 2020, the last day of the investment period is automatically postponed to December 31, 2020.

90-Percent Investment Standard
The guidance also provides that a QOF’s failure to hold 90 percent of its assets in qualified opportunity zone property on any semi-annual testing date that falls on or after April 1, 2020 and ends on or before December 31, 2020 is due to reasonable cause on account of the COVIS-19 pandemic. Therefore, the failure to satisfy the 90-percent test does not affect an entity’s status as a QOF or prevent an investment in the entity from being a qualified investment. Penalties due to failure to satisfy the 90-percent investment standard during this period are waived.

30-month Substantial Improvement Period Tolled
The 30-month period during which property held by a QOF or qualified opportunity zone business must be substantially improved is tolled during the period beginning on April 1, 2020, and ending on December 31, 2020.

24-Month Extension of Working Capital Safe Harbor Spending Deadline
Qualified opportunity zone businesses holding working capital intended to be covered by the 31-month working capital safe harbor before December 31, 2020, receive up to an additional 24 months to spend the working on qualifying property. This extension is allowed under the QOF regulations on account of the prior declaration of a Federally declared disaster relating to the pandemic effective on January 20, 2020.

12-Month Extension of Reinvestment Period for QOFs
Finally, if any part of the 12-month period during which a QOF may reinvest returns of capital and proceeds from the sale of qualified opportunity property in other qualified opportunity zone property includes January 20, 2020, the reinvestment period is extended up to an additional 12 months. Again, this extension is allowed under the QOF regulations due to the disaster declaration.

Notice 2020-23, I.R.B. 2020-18, 742 is modified.

The IRS has issued proposed regulations clarifying the definition of a qualifying relative for various tax benefits for tax years 2018 through 2025 in which the dependent exemption amount is zero. During these years, the exemption amount will be inflation adjusted as provided in annual IRS guidance in determining whether an individual is a qualifying relative such as for head of household filing status and $500 child tax credit.

The IRS has issued proposed regulations clarifying the definition of a qualifying relative for various tax benefits for tax years 2018 through 2025 in which the dependent exemption amount is zero. During these years, the exemption amount will be inflation adjusted as provided in annual IRS guidance in determining whether an individual is a qualifying relative such as for head of household filing status and $500 child tax credit.

Qualifying Relative
A taxpayer may claim a qualifying relative as a dependent on his or her return provided certain requirements are met, including that the individual’s gross income is less than the exemption amount for the tax year. The exemption amount is zero (-$0-) for tax years beginning in 2018 through 2025 and no deduction may be claimed for a dependency exemption. However, the rules for determining who is a qualifying relative remain applicable for claiming other tax benefits in 2018 through 2025.

Inflation-Adjustment Exemption Amount
Consistent with Notice 2018-70, I.R.B. 2018-38, 441, the proposed regulations provide that in determining whether an individual is a qualifying relative for purposes of various tax provisions in 2018 through 2025 the exemption amount will be the inflation-adjusted. The IRS will publish the exemption amount annually in guidance. For example, the exemption amount is $4,200 for 2019 ( Rev. Proc. 2018-57, I.R.B. 2018-49, 827) and $4,300 for 2020 ( Rev. Proc. 2019-44, I.R.B. 2019-47, 1093).

Proposed regulations provide guidance regarding the elimination of the deduction for expenses related to qualified transportation fringe benefits (QTFs) provided to an employee. The Tax Cuts and Jobs Act (P.L. 115-97) eliminated the deduction, effective for amounts paid or incurred after December 31, 2017.

Proposed regulations provide guidance regarding the elimination of the deduction for expenses related to qualified transportation fringe benefits (QTFs) provided to an employee. The Tax Cuts and Jobs Act (P.L. 115-97) eliminated the deduction, effective for amounts paid or incurred after December 31, 2017.

In general, the proposed regulations refine guidance previously provided in Notice 2018-99, 2018-52 I.R.B. 1067. They provide a general rule and three simplified methodologies to determine the amount of QTF parking expense that is nondeductible when a parking facility is owned or leased by an employer. Additionally, the proposed regulations address the disallowance of deductions for expenses related to providing employees transportation in a commuter highway vehicle and transit passes.

The proposed regulations include definitions from Notice 2018-99, with modifications in response to public comments, as well as new definitions to clarify application of the rules.

If an employer pays a third party for its employee’s QTF, the disallowance is generally calculated as the taxpayer’s total annual cost of the QTF paid to the third party.

In valuing a QTF relating to employee-owned or leased parking facilities, an employer may choose to apply the general rule or any of the three simplified methods for each tax year and each parking facility: the "qualified parking limit methodology," the "primary use methodology," or the "cost per space methodology." Statistical sampling may be used with the general rule or simplified methodologies.

The general rule allows a taxpayer to calculate the disallowed amount based on a reasonable interpretation of the statute. However, the actual expense paid or incurred in providing the QTF must be used. The value of the QTF to the employee is ignored. In addition, the employee must allocate parking expenses to reserved employee spaces, and properly apply the exception for parking made available to the general public. Parking spaces may be aggregated by geographical location.

Special rules explain how to allocate mixed parking expenses, aggregate parking spaces by geographic location, and remove inventory/unusable spaces from available parking spaces. Five or few reserved parking spaces may be disregarded if the reserved spaces are 5 percent or less of total parking spaces.

Effective Date
The proposed regulations will apply in tax years beginning on or after the date they are published as final regulations. However, a taxpayer may rely on the proposed regulations for expenses paid or incurred in tax years beginning after December 31, 2017. Alternatively, a taxpayer may rely on the guidance provided in Notice 2018-99 until the regulations are published as final.

Proposed regulations would define expenditures for direct primary care arrangements and health care sharing ministry memberships as amounts paid for medical care. Thus, amounts paid for those arrangements may be deductible medical expenses. The proposed regulations also clarify that amounts paid for certain arrangements and programs, such as health maintenance organizations (HMO) and certain government-sponsored health care programs, are amounts paid for medical insurance.

Proposed regulations would define expenditures for direct primary care arrangements and health care sharing ministry memberships as amounts paid for medical care. Thus, amounts paid for those arrangements may be deductible medical expenses. The proposed regulations also clarify that amounts paid for certain arrangements and programs, such as health maintenance organizations (HMO) and certain government-sponsored health care programs, are amounts paid for medical insurance.

President Trump's Executive Order 13877, "Improving Price and Quality Transparency in American Healthcare to Put Patients First" (84 FR 30849) directed Treasury to treat expenses related to these types of arrangements as eligible medical expenses.

These regulations are proposed to apply for tax years that begin on or after the date of publication of a Treasury Decision adopting these rules as final regulations.

Caution: Characterization of direct primary care arrangements and health care sharing ministry memberships as medical insurance may affect eligibility to contribute to a health savings account (HSA). For an individual in a direct primary care arrangement, the type of coverage provided by the arrangement will affect eligibility. Membership in a health care sharing ministry would preclude an individual from contributing to an HSA.

Direct Primary Care Arrangement
A direct primary care arrangement is a contract between an individual and one or more primary care physicians under which the physician or physicians agree to provide medical care for a fixed annual or periodic fee without billing a third party.

The IRS requests comments on whether to expand the definition to include a contract with nurse practitioners, clinical nurse specialists, or physician assistants who provide primary care services. The IRS also requests comments on whether the final regulations should clarify the treatment of other types of arrangements that are similar to direct primary care arrangements, such as an agreement between a dentist and a patient to provide dental care, or a physician and patient to provide specialty care.

Health Care Sharing Ministry
The proposed regulations define a health care sharing ministry as an organization:

• that is described in Code Sec. 501(c)(3) and is exempt from taxation under Code Sec. 501(a);
• members of which share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs and without regard to the state in which a member resides or is employed;
• members of which retain membership even after they develop a medical condition;
• which (or a predecessor of which) has been in existence at all times since December 31, 1999, and medical expenses of its members have been shared continuously and without interruption since at least December 31, 1999; and
• that conducts an annual audit performed by an independent certified public accounting firm in accordance with generally accepted accounting principles and that is made available to the public upon request.

The proposed regulations provide that medical insurance under Code Sec. 213(d)(1)(D) includes health care sharing ministries that share expenses for medical care under Code Sec. 213(d)(1)(A). This proposal does not affect whether a health care sharing ministry is considered an insurance company, insurance service, or insurance organization (health insurance issuer) for other purposes of the Code, ERISA, the Public Health Service Act (PHS Act), or any other federal or state law.

Fees for HMO Membership and Government-Sponsored Programs
The proposed regulations incorporate the longstanding IRS position of treating amounts paid for membership in an HMO as medical insurance premiums. Amounts paid to an HMO or a provider to cover coinsurance, copayment, or deductible obligations under an HMO’s terms are payments for medical care. In either case, such payments are eligible for the medical expense deduction.

Amounts paid for coverage under certain government-sponsored health care programs are also treated as amounts paid for medical insurance. The proposed regulations:

• incorporate the guidance in Code Sec. 213(d)(1)(D) and Rev. Rul. 79-175 that Medicare Parts A and B are medical insurance;
• clarify that Medicare Parts C and D are medical insurance; and
• provide that Medicaid, the Children’s Health Insurance Program (CHIP), TRICARE, and certain veterans’ health care programs are medical insurance.

Thus, to extent individuals pay premiums or enrollment fees for coverage under these programs, those amounts would be eligible for deduction as a medical expense.

The IRS requests comments on whether amounts paid for other government-sponsored health care programs should be treated as amounts paid for medical insurance.

Proposed reliance regulations clarify the definitions of "real property" that qualifies for a like-kind exchange, including incidental personal property. Under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), like-kind exchanges occurring after 2017 are limited to real property used in a trade or business or for investment. Comments are requested.

Proposed reliance regulations clarify the definitions of "real property" that qualifies for a like-kind exchange, including incidental personal property. Under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), like-kind exchanges occurring after 2017 are limited to real property used in a trade or business or for investment. Comments are requested.

Real Property Defined for Like-Kind Exchanges
Under the proposed regulations, real property includes:

• land and improvements to land,
• unsevered crops and other natural products of land, and
• water and air space superjacent to land.

This real property definition language is very similar to the language in many other regulations, but it also includes necessary differences. As under pre-TCJA law, local law definitions are not controlling.

Real Property Includes Improvements and Inherently Permanent Structures
As mentioned above, real property includes improvements to land. Improvements include:

• inherently permanent structures, and
• the structural components of inherently permanent structures.

Each distinct asset must be analyzed separately to determine if it land, an inherently permanent structure, or a structural component of an inherently permanent structure. The regs identify several specific items, assets and systems as distinct assets, and provides factors for identifying other distinct assets.

Inherently Permanent Structures: Buildings and Machinery
Inherently permanent structures include any building or other structure that is permanently affixed to real property and that will ordinarily remain affixed for an indefinite period of time. A building is any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. Buildings also include several distinct assets if permanently affixed, such as houses, hotels, enclosed stadiums shopping malls, factory and office buildings, and warehouse.

The proposed regulations also identify other structures that qualify as inherently permanent structures, and provide factors that must be used to determine if other property is an inherently permanent structure.

Property that is in the nature of machinery or is essentially an item of machinery or equipment is generally not an inherently permanent structure unless it serves the inherently permanent structure and does not produce or contribute to the production of income other than for the use or occupancy of space.

Inherently Permanent Structures: Structural Components
Structural components of inherently permanent structures are improvements to land and, thus, are real property. A structural component is any distinct asset that is a constituent part of, and integrated into, an inherently permanent structure. If interconnected assets work together to serve an inherently permanent structure (for example, systems that provide a building with electricity, heat, or water), the assets are analyzed together as one distinct asset that may qualify as a structural component.

However, a structural component may qualify as real property only if the taxpayer holds its interest in the component together with a real property interest within the physical space of the inherently permanent structure. Customization of a distinct asset in connection with the rental of space does not affect whether the asset is a structural component.

The proposed regulations list properties that are structural components, and provide factors for determining whether other components are structural components. The proposed regs also address tenant improvements to a building, and property produced for sale that is not real property in the hands of the producing taxpayer.

Unsevered Natural Products are Real Property
The proposed regulations provide that unsevered natural products of land are generally real property. These include growing crops, plants, and timber, as well as mines, wells and other natural deposits. Natural products and deposits, such as crops, timber, water, ores, and minerals, cease to be real property when they are severed, extracted, or removed from the land.

Intangible Assets as Real Property
An intangible asset is real property or an interest in real property to the extent that the asset:

• derives its value from real property or an interest in real property,
• is inseparable from that real property or interest in real property, and
• does not produce or contribute to the production of income other than consideration for the use or occupancy of space.

For instance, a license, permit, or other similar right generally is an interest in real property if (1) it is solely for the use, enjoyment, or occupation of land or an inherently permanent structure, and (2) it is in the nature of a leasehold, easement, or fee ownership. In contrast, a license or permit is not an interest in real property if it produces or contributes to the production of income other than consideration for the use and occupancy of space.

Incidental Personal Property and Qualified Intermediaries
The proposed regs provide that personal property that is incidental to replacement real property is disregarded in determining whether a taxpayer's rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by a qualified intermediary are expressly limited as provided in Reg. §1.1031(k)-1(g)(6).

Personal property is incidental to real property acquired in an exchange if:

• in standard commercial transactions, the personal property is typically transferred together with the real property; and
• its aggregate fair market value does not exceed 15 percent of the aggregate fair market value of the replacement real property.

This incidental property rule in the proposed regulations is based on the existing rule in Reg. §1.1031(k)-1(c)(5), which provides that certain incidental property is ignored in determining whether a taxpayer has properly identified replacement property.

Effective Dates
The regulations are proposed to apply to like-kind exchanges that begin on or after the date they are published as final regs. However, taxpayers may rely on them for exchanges of real property beginning after December 31, 2017, if the proposed regs are followed consistently and in their entirety.