Wave Of 2016 Tax Developments Sets Stage For Even Busier 2017
2016 began and ended with the promise of comprehensive tax reform. The election of Donald Trump as the 45th President of the United States appears to make tax reform likely in 2017. At the same time, legislation, court decisions and IRS determinations issued in 2016 will impact 2017 and beyond. During 2016, the IRS issued regulations on a number of far-reaching subjects, including corporate taxation, international taxation, individual taxation, health care, and more. Congress also passed several targeted tax laws. Looking ahead, 2017 is almost certain to be a pivotal year for taxes and tax planning.
At year-end, taxpayers and tax professionals are trying to predict what changes are ahead and what they can do to maximize savings. Some Capitol Hill observers expect the new Administration and the GOP-controlled Congress to move quickly with a package of tax cuts, possibly before Memorial Day. Details could emerge soon after Trump takes office on January 20, 2017.
Unlike previous years, the IRS enters 2017 without having to deal with late tax legislation. The IRS has announced that the 2017 filing season will launch on January 23, 2017.
2016 TAX LEGISLATION
Although Congress did not pass any large tax bills in 2016, lawmakers did agree on a number of specific tax measures.
- In March, President Obama signed the Trade Facilitation and Trade Enforcement Act of 2015, which included an increase in the penalty for failure to file a return. The new law makes the increase in the penalty effective for returns required to be filed in calendar years after 2015.
- President Obama signed the Recovering Missing Children Act in June. The law amends Code Sec. 6103 to allow the IRS to share tax return information with federal, state and local law enforcement agencies to help with investigations involving missing or exploited children.
- President Obama signed the U.S. Appreciation for Olympians and Paralympians Act of 2016 in October. The legislation excludes from income the value of any Olympic or Paralym-pics medal, as well as prize money, for certain athletes.
- In December, President Obama signed the 21st Century Cures Act. The law allows certain small businesses to use qualified small business health reimbursement arrangements without running afoul of penalties for failing to satisfy market reforms under the Affordable Care Act (see discussion, below).
- Also in December, President Obama signed the Combat-Injured Veterans Tax Fairness Act. The law impacts combat-injured veterans who received severance payments on which tax was inappropriately withheld.
Congress did not take up before year-end the remaining extenders. Many relate to energy but a handful, including the higher education tuition and fees deduction, mortgage debt forgiveness tax relief, and private mortgage insurance deductibility, benefit individuals. These remaining extenders are likely to be part of tax reform legislation in 2017. Some could be made permanent; others could be eliminated.
Just as any cross-section of individual taxpayers represents a broad diversity of issues and concerns, notable developments during 2016 that impact the “individual” defy compart-mentalization into only a few categories. The following developments were particularly notable for their continuing impact on 2017.
Sharing Economy. In response to the growing sharing economy, the IRS created in 2016 new resources for taxpayers and has ramped up closer scrutiny of taxpayers who, intentionally or unintentionally, are paying less than they should. The IRS launched a Sharing Economy Tax Center on its website, highlighting tax issues for individuals and companies performing services in the sharing economy. www.irs.gov.
“This rapidly evolving area often presents new challenges for people engaged in these economic activities, whether they are renting a room or providing a ride,” IRS Commissioner John Koskinen said; “The IRS is working to help people in this area by providing them the information and resources they need to file accurate tax returns.” National Taxpayer Advocate Nina Olson said more than 40 percent of service providers in the sharing economy were unaware of possible estimated tax requirements.
Definition of Marriage. The IRS issued final regulations in September to explain that marriage for federal tax purposes encompasses both opposite-sex marriage and same-sex marriage. The final regulations generally track proposed regulations issued after the Supreme Court’s decision on same-sex marriage in Obergefell, 2015-1 ustc ¶50,357. The final regulations also clarify the treatment of common law and foreign marriages; they continue to exclude domestic partnerships and civil unions from the definition of marriage.
In Obergefell, the Supreme Court held that the Fourteenth Amendment requires a state to license a marriage between two people of the same sex. Further, states must recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-state.
Mortgage Interest. The IRS announced in July its acquiescence in the Ninth Circuit Court of Appeals decision in Voss, 2015-2 ustc ¶50,427. The court held that the $1.1 million mortgage-interest deduction debt limits under Code Sec. 163 applied to unmarried co-owners on a per-taxpayer, not a per-residence, basis.
Despite the controversy surrounding this decision, it is unclear whether Congress will eventually overrule this outcome.
Form 1098-T, Tuition Statements. In July, the IRS issued proposed regulations that provide detailed guidance to higher education institutions on how to report tuition and other qualified expenses on Form 1098-T, Tuition Statement. The proposed regulations also provide a window of penalty relief for the institution’s failure to provide the student’s correct taxpayer identification number (TIN). In November, the IRS extended the penalty relief to 2017 Forms 1098-T.
60-Day Rollover Deadline. In August, the IRS unveiled a new self-certification procedure for taxpayers who inadvertently miss the 60-day time limit for certain retirement plan distribution rollovers. The IRS described a number of mitigating circumstances, including mistakes by a financial institution or rollover into an account that the taxpayer mistakenly thought was an eligible retirement plan.
The self-certification procedure provides relief without the time and expense of a private letter ruling request.
Partial Annuity Payouts. The IRS issued final regulations in September that allow qualified retirement plans to facilitate the payment of benefits partly in the form of an annuity and partly as a single sum or other accelerated form. The final regulations generally track proposed regulations issued in 2012 with certain simplifications and clarifications. TD 9783.
Estate Valuation Discounts. The IRS made changes to the estate tax valuation regime under Code Sec. 2704 in August. The proposed regulations attempt to address certain abuses connected to the valuation of interests with respect to corporations and partnerships for estate, gift and generation-skipping transfer tax purposes in conjunction with the treatment of lapsing rights and restrictions on liquidation when determining value in intra-family transfers.
Estate Consistent Basis Reporting. Code Sec. 6035 introduced reporting rules to assure that a beneficiary’s basis in certain property acquired from a decedent be consistent with the value of the property for estate tax purposes. Because many executors were unprepared for this requirement, first mandated by the Surface Transportation and Veterans Health Care Act of 2015 the IRS extended the due date for filing initial Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, and distributing Schedule(s) A, first to February 29, then to March 31, and finally to June 30, 2016. Final regulations in December confirmed that no further extension beyond June 30, 2016, would apply to initial reporting and that the rule going forward generally requires reporting within 30-day of filing Form 706.
The business side of tax developments in 2016 was dominated by changes in rules and approach toward partnerships, corporations and LLCs, as well as a handful of other related developments. Notably, too, some taxpayers continued to struggle with complying with the so-called “repair regs” that now govern capitalization and expensing. In recognition, the IRS at year end again extended the deadline for making the requisite changes of accounting methods under an automatic consent procedure.
The use of partnerships as a business and investment entity of choice continued to expand in 2016. According to the IRS 2016 Fall SOI Bulletin, the latest annual statistics show that more than 3.6 million partnership returns and 27 million partner Schedules K-1 were filed. www.irs.gov.
Partnership Audits. The Bipartisan Budget Act of 2015 (P.L. 114-74) eliminated the so-called TEFRA unified partnership audit rules (as first introduced in the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248)), along with the electing large partnership (ELP) rules, in favor of a more streamlined audit regime. Under a transition provision, the new audit regime will be required only in connection with returns filed for partnership tax years beginning after 2017. However, subject to certain exceptions, partnerships may choose to apply the new regime to any partnership tax year beginning after November 2, 2015.
Although partnerships as a whole did not like the old TEFRA audit regime, most effected partnerships are holding back on using the new opt-in procedure until more detailed guidance on the new rules is provided, either by Congress, Treasury or the IRS.
Leveraged Partnerships. Final and temporary regulations under Code Secs. 707 and 752 issued in October limit use of partnership leveraged transactions. By treating all partnership liabilities as nonrecourse liabilities solely for disguised sale purposes, the regulations render ineffective most structured leveraged partnership transactions built to eliminate the tax on distributions to partners that would follow contributions of appreciated property. The regulations similarly change the treatment of bottom dollar payment obligations.
Although final regulations are immediately effective, temporary regulations are not effective until January 3, 2017, creating some year-end planning opportunities.
Partners, Not Employees. The IRS issued final, temporary and proposed regulations in May intended to tighten, for employment tax purposes, the status of a partner as a partner and not an employee, despite a set up where the partner works for a disregarded entity (DE) owned by the partnership. A limited transition rule applies.
One of the key tax distinctions remaining between a partnership or LLC structure and an S Corporation structure is the ability in an S Corporation structure for an equity owner to also be treated as an employee of the S Corporation. As an alternative to the S Corporation route, some tax practitioners felt that a disregarded entity afforded a possible avenue to obtain employee treatment. These regulations prevent that strategy, at least for now.
Debt versus Equity. In October, the IRS issued final debt-equity Code Sec. 385 regulations. The regulations establish threshold documentation requirements that must be satisfied for certain related-party interests in a corporation to be treated as debt, and that treat as stock certain related-party instruments that otherwise would be treated as debt.
The regulations were issued both to a sigh of relief in toning down the reach of earlier proposed regulations and to a continuing concern over how the final regulations will be applied. They remain controversial in their broad potential for debt/equity reclassification.
Proposed regulations issued in April specifically targeted earnings stripping transactions (using interest deductions on U.S. debt to “strip” U.S.-source earnings to a lower-tax foreign jurisdiction). The final regulations ease concerns only somewhat over the scope of the proposed regulations, with potential application still too broad for some taxpayers not to capture some regular-course business activities.
These final regulations may get another look under the new Administration, especially with Republican tax reform proposals that would limit business interest deductions. Some taxpayers have also threatened judicial challenges.
Section 355 Spin Offs. In July, the IRS issued proposed regulations under Code Sec. 355 that tighten the requirements for corporations to spin off controlled corporations tax-free to their shareholders. Among other things, the regulations would impose new bright-line standards for triggering the device prohibition and for satisfying the active trade or business (ATB) test. The existing device test would also be tightened by adding a per se rule applied to the existence of nonbusiness assets.
In a sure sign that the IRS is planning more guidance in this area, the preamble to these regulations included a long list of issues on which the IRS is asking for comments.
Throughout the fourth quarter of 2016, the IRS announced a variety of inflation-adjusted tax amounts for use in 2017. Some amounts have increased from 2016 to 2017, others have remained the same due to rounding rules in calculating inflation. Here is a sampling of the over 100 adjustments that were made:
|Standard Deduction (Single Filer)||$6,350||$6,300|
|Start of Top 39.6% Tax Bracket (Joint Filers)||$470,700||$466,950|
|Gift Tax Annual Exclusion||$14,000||$14,000|
|Estate/Gift Tax Unified Exclusion||$5.49 million||$5.45 million|
|Section 179 Expensing Cap||$510K||$500K|
|Section 179 Phase-Out||$2.03 million||$2.01 million|
|Per Diem Travel Allowance (High Cost Areas)||$282||$275|
|Social Security Wage Base:||$127,200||$118,500|
In August, after many years on the no-rule list, the IRS reinstated two areas relating to distributions of stock of controlled corporations under Code Sec. 355. These safe harbors include:
- whether distributions are to be carried out for a corporate business purpose; and
- whether transactions are used principally as a device for the distribution of earnings and profits of the distributing corporation, the controlled corporation, or both.
Deemed Distributions. The IRS issued proposed reliance regulations in April on the amount and timing of taxable deemed distributions of stock and stock rights. It also provided guidance to withholding agents on their withholding and reporting obligations for the deemed distributions.
REITs. The Protecting Americans Against Tax Hikes Act of 2015 (PATH Act) (P.L. 114-113) denies tax-free treatment under Code Sec. 355 to a distribution of stock if either the distributing corporation or the controlled corporation is a REIT. Temporary regulations issued in June provide that a C corporation engaging in a conversion transaction involving a REIT, within the 10-year period following a related 355 distribution, will be treated as making an election to recognize gain (or loss) as if it had sold the converted property at fair market value.
OTHER BUSINESS-RELATED DEVELOPMENTS
Repair Regs. The IRS extended in December the 5-year eligibility limitation waiver for certain automatic changes of accounting made to comply with the final tangible property regulations and final depreciation and disposition regulations applicable to tax years beginning on or after January 1, 2014. Specifically, the IRS extended the liberal waiver rules for one year for any tax year beginning before January 1, 2017. Rev. Proc. 2016-29 had previously extended the period only for tax years beginning before January 1, 2016. A transition rule now generally allows taxpayers whose non-automatic consent requests were pending on December 20, 2016 to switch to the automatic consent procedures.
The IRS provided the latest extension “to continue to ease taxpayers’ transition to these final regulations and to reduce the administrative burden that would result from requiring taxpayers to apply for non-automatic changes of accounting methods.”
Research Credit. The IRS issued final regulations under Code Sec. 41 in October to address the application of the research and development credit with respect to internal-use software developed by or for a taxpayer.
Professional Employer Organizations. The IRS unveiled in May a package of final, temporary and proposed reliance regulations on setting up the new voluntary certification program for professional employer organizations (PEO). The IRS also announced that the certification application process would commence July 1, 2016. TD 9768. In June, the IRS provided further details on the certified PEO application process.
Deferred Compensation Plans. The IRS issued proposed reliance regulations under Code Sec. 409A intended to clarify and liberalize existing rules on nonqualified deferred compensation plans. The regulations also tighten the anti-abuse provision in proposed income inclusion rules.
LIFO Pooling. The IRS released proposed regulations in December to clarify the dollar-value last-in, first-out (LIFO) inventory price index computation (IPIC) rules.
Although the future of the Affordable Care Act (ACA) is uncertain, the IRS issued guidance that affects individuals and employers not only for 2016 but also for subsequent years. The IRS also released guidance on non-ACA, health-care related issues.
Small Businesses. The 21st Century Cures Act (P.L. 114-255), signed into law by President Obama in December, generally allows small businesses to continue to offer health reimbursement arrangements (HRAs) to employees without violating market reforms under the ACA and risking an excise tax.
(Qualified small employers are not applicable large employers (ALEs), as defined in Code Sec. 4980H(c)(2) (generally an employer with 50 or more full-time employees).
Without relief, small employers were looking at potential excise taxes reaching $100 per day per affected participant.
Individual Mandate. The ACA generally requires individuals to carry minimum essential health coverage or make a shared responsibility payment, unless exempt. In July, the IRS issued guidance clarifying the individual mandate, benchmark plans and more. NPRM REG-10908-15.
For wage earners, employer-sponsored coverage is generally minimum essential coverage. Grandfathered health plans are treated as providing minimum essential coverage as are Medicare, Medicaid, TRICARE, and the Children’s Health Insurance Program (CHIP).
Individuals report coverage or exemption from coverage, or make a shared responsibility payment, when they file their 2016 returns in 2017. Individuals who had minimum essential health insurance for each month of the tax year indicate this by checking a box on Form 1040, 1040A or 1040EZ.
In April, the IRS announced that the required contribution percentage for 2017 is adjusted to 8.16 percent, reflecting an increase from 8.13 percent for 2016. Rev. Proc. 2016-24.
Employer/Insurer Reporting. The ACA generally requires applicable large employers (ALEs) and certain insurers to file information returns. The IRS announced in November an extension for furnishing to individuals 2016 Form 1095-B, Health Coverage, and 2016 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, along with penalty transition relief. Notice 2016-70.
Premium Assistance Tax Credit. The Code Sec. 36B premium assistance tax credit offsets the cost of health insurance through the ACA Health Insurance Marketplace. In December, the IRS clarified the intentional/reckless standard for certain safe harbors related to eligibility for the credit. TD 9804.
Student Health Coverage Arrangements. In February, the IRS provided transition relief regarding market reforms under the ACA to student health coverage arrangements. Notice 2016-17.
The relief responded to questions as to whether student health coverage arrangements might be employer-sponsored health plans, and, as a result, could be treated as employment payment plans that violate the ACA’s market reforms, the IRS explained.
Short-Term, Limited Duration Insurance. In October, the IRS along with the Departments of Health and Human Services (HHS) and Labor (DOL) issued final regulations on short-term, limited insurance under the ACA and its market reforms. The regulations also address travel insurance under the ACA. TD 9791.
Expatriate Health Plans. The IRS and the U.S. Departments of Health and Human Services (HHS) and Labor (DOL) issued guidance on expatriate health plans in June. The agencies explained that ACA information reporting provisions under Code Secs. 6055 and 6056 generally apply to expatriate health plans. NPRM REG-135702-15.
Health Coverage Tax Credit. In November, the IRS launched the registration and enrollment process for qualified taxpayers to receive the Health Coverage Tax Credit (HCTC) on an advance monthly basis in 2017. IR-2016-148.