The IRS has provided guidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domestic abuse victim distributions. These exceptions were added by the SECURE 2.0 Act of 2022, P.L. 117-328, and became effective January 1, 2024. The Treasury Department and the IRS anticipate issuing regulations under Code Sec. 72(t) and request comments to be submitted on or before October 7, 2024.

The IRS has provided guidance on two exceptions to the 10 percent additional tax under Code Sec. 72(t)(1) for emergency personal expense distributions and domestic abuse victim distributions. These exceptions were added by the SECURE 2.0 Act of 2022, P.L. 117-328, and became effective January 1, 2024. The Treasury Department and the IRS anticipate issuing regulations under Code Sec. 72(t) and request comments to be submitted on or before October 7, 2024.

Distributions for Emergency Personal Expenses

Code Sec. 72(t)(2)(I) provides an exception to the 10 percent additional tax for a distribution from an applicable eligible retirement plan to an individual for emergency personal expenses. The term "emergency personal expense distribution" means any distribution made from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The IRS specifically noted that emergency expenses could be related to: medical care; accident or loss of property due to casualty; imminent foreclosure or eviction from a primary residence; the need to pay for burial or funeral expenses; auto repairs; or any other necessary emergency personal expenses.

The IRS provides that a plan administrator or IRA custodian may rely on a written certification from the employee or IRA owner that they are eligible for an emergency personal expense distribution. Furthermore, the IRS provides that an emergency personal expense distribution is not treated as a rollover distribution and thus is not subject to mandatory 20% withholding. However, the distribution is subject to withholding, the IRS said. If the emergency personal expense distribution is repaid, it is treated as if the individual received the distribution and transferred it to an eligible retirement plan within 60 days of distribution.

If an otherwise eligible retirement plan does not offer emergency personal expense distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is an emergency personal expense distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Distributions to Domestic Abuse Victims

Code Sec. 72(t)(2)(K) provides an exception to the 10 percent additional tax for an eligible distribution to a domestic abuse victim (domestic abuse victim distribution). The guidance defines a"domesticabusevictimdistribution" as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. "Domesticabuse" is defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.

As with distributions for emergency personal expenses, a retirement plan may rely on an employee’s written certification that they qualify for a domestic abuse victim distribution. Similarly, if an otherwise eligible retirement plan does not offer domestic abuse victim distributions, the IRS indicated that an individual may still take an otherwise permissible distribution and treat it as such on their federal income tax return. The individual claims on Form 5329 that the distribution is a domestic abuse victim distribution, in accordance with the form’s instructions. The individual has the option to repay the distribution to an IRA within 3 years.

Request for Comments

The Treasury Department and the IRS invite comments on the guidance, and specifically on whether the Secretary should adopt regulations providing exceptions to the rule that a plan administrator may rely on an employee’s certification relating to emergency personal expense distributions and procedures to address cases of employee misrepresentation. Comments should be submitted in writing on or before October 7, 2024, and should include a reference to Notice 2024-55.

On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing tax loopholes and stopping abusive partnership transactions used by wealthy taxpayers to avoid paying taxes.

On June 17, 2024, the U.S. Department of the Treasury and the Internal Revenue Service announced a new regulatory initiative focused on closing tax loopholes and stopping abusive partnership transactions used by wealthy taxpayers to avoid paying taxes.

Specifically targeted by this new tax compliance effort are partnership basis shifting transactions. In these transactions, a single business that operates through many different legal entities (related parties) enters into a set of transactions that manipulate partnership tax rules to maximize tax deductions and minimize tax liability. These basis shifting transactions allow closely related parties to avoid taxes.

The use of these abusive transactions grew during a period of severe underfunding for the IRS. As such, the audit rates for these increasingly complex structures fell significantly. It is estimated that these abusive transactions, which cut across a wide variety of industries and individuals, could potentially cost taxpayers more than $50 billion over a 10-year period, according to an IRS News Release.

"Using Inflation Reduction Act funding, we are working to reverse more than a decade of declining audits among the highest income taxpayers, as well as complex partnerships and corporations," IRS Commissioner Danny Werfel said during a press call discussing the new effort on June 14, 2024.

"This announcement signals the IRS is accelerating our work in the partnership arena, which has been overlooked for more than a decade and allowed tax abuse to go on for far too long," said IRS Commissioner Danny Werfel. "We are building teams and adding expertise inside the agency so we can reverse long-term compliance declines that have allowed high-income taxpayers and corporations to hide behind complexity to avoid paying taxes. Billions are at stake here".

This multi-stage regulatory effort announced by the Treasury and IRS includes the following guidance designed to stop the use of basis shifting transactions that use related-party partnerships to avoid taxes:

• proposed regulations under existing regulatory authority to stop related parties in complex partnership structures from shifting the tax basis of their assets amongst each other to take abusive deductions or reduce gains when the asset is sold;

• proposed regulation to require taxpayers and their material advisers to report if they and their clients are participating in abusive partnership basis shifting transactions; and

• a Revenue Rulingproviding that certain related-party partnership transactions involving basis shifting lack economic substance.

"Treasury and the IRS are focused on addressing high-end tax abuse from all angles, and the proposed rules released today will increase tax fairness and reduce the deficit," said U.S. Secretary of the Treasury Janet L. Yellen.

In the June 14, 2024, press call, Commissioner Danny Werfel also noted that there will be an increase in audits of large partnerships with average assets over $10 billion dollars and larger organizational changes taking place to support compliance efforts, including the creation of a new associate office that will focus exclusively on partnerships, S corporations, trusts, and estates.

By Catherine S. Agdeppa, Content Management Analyst

A savings account with the tax benefits of a health savings account or an educations savings account but without the singular restricted focus could be something that gains traction as Congress addresses the tax provision of the Tax Cuts and Jobs Act that expire in 2025.

A savings account with the tax benefits of a health savings account or an educations savings account but without the singular restricted focus could be something that gains traction as Congress addresses the tax provision of the Tax Cuts and Jobs Act that expire in 2025.

The concept was promoted by multiple witnesses testifying during a recent Senate Finance Committee hearing on the subject of child savings accounts and other tax advantaged accounts that would benefit children. It also is the subject of a recently released report from The Tax Foundation.

Rather than push new limited-use savings accounts, "policymakers may want to consider enacting a more comprehensive savings program such as a universalsavingsaccount," Veronique de Rugy, a research fellow at George Mason University, testified before the committee during the May 21, 2024, hearing. "Universalsavingsaccounts will allow workers to save in one simple account from which they would withdraw without penalty for any expected or unexpected events throughout their lifetime."

She noted that, like other more focused savings accounts, like health savings accounts, it would have "the benefit of sheltering some income from the punishing double taxation that our code imposes."

De Rugy added that universal savings accounts "have a benefit that they do not discourage savings for those who are concerned that the conditions for withdrawals would stop them from addressing an emergency in their family."

Adam Michel, director of tax policy studies at the Cato Institute, who also promoted the idea of universal savings accounts. He said these accounts "would allow families to save for their kids or any of life’s other priorities. The flexibility of these accounts make them best suited for lower and middle income Americans."

He also noted that they are promoting savings in countries that have implemented them, including Canada and United Kingdom.

"For example, almost 60 percent of Canadians own tax-free savingsaccounts," Michel said. "And more than half of those account holders earned the equivalent of about $37,000 a year. These accounts have helped increase savings and support the rest of the Canadian savings ecosystem."

De Rugy noted that in countries that have implemented it, they function like a Roth account in that money that has already been taxed can be put into it and not penalized or taxed upon withdrawal.

Michel also noted that the if the tax benefits extend to corporations as they do with deposits to employee health savings accounts, "to the extent that you lower the corporate income tax, you’re going to encourage a different additional investment into savings by those entities."

Simulating The Universal Savings Account Impact

The Tax Foundation in its report simulated how a universal savings account could work, based on how they are implemented in Canada. The simulation assumed the accounts could go active in 2025 for adults aged 18 years or older.

On a post-tax basis, individuals would be allowed to contribute up to $9,100 on a post-tax basis annually, with that cap indexed for inflation. Any unused "contribution room" would be allowed to be carried forward. Earnings would be allowed to grow tax-free and withdrawals would be allowed for any purpose without penalty or further taxation. Any withdrawal would be added back to that year’s contribution room and that would be eligible for carryover as well.

"The fiscal cost of this USA policy would be offset by ending the tax advantage of contributions to HSAs beginning in 2025," the report states. "As such, future contributions to HSAs would be given normal tax treatment, i.e. included in taxable income and subject to payroll tax with subsequent returns on contributions also included in taxable income."

In this scenario, the Tax Foundation report estimates that "this policy change would on net raise tax revenue by about $110 billion over the 10-year budget window."

As for the impact on taxpayers, the "after-tax income would fall by about 0.1 percent in 2025 and by a smaller amount in 2034, reflecting the net tax increase in those years," the report states. "Over the long run, and accounting for economic impacts, taxpayers across every quintile would see a small increase in after-tax income on average, but the top 5 percent of earners would continue to see a small decrease in after-tax income on average."

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the tax gap needs more documentation and transparency, the U.S. Government Accountability Office stated.

The Internal Revenue Service’s use of artificial intelligence in selecting tax returns for National Research Program audits that areused to estimate the tax gap needs more documentation and transparency, the U.S. Government Accountability Office stated.

In a report issued June 5, 2024, the federal government watchdog noted that while the agency uses AI to improve the efficiency and selection of audit cases to help identify noncompliance, "IRS has not completed its documentation of several elements of its AI sample selection models, such as key components and technical specifications."

GAO noted that the IRS began using AI in a pilot in tax year 2019 for sampling tax returns for NRP audits. The current plan is to use AI to create a sample size of 4,000 returns to measure compliance and help inform tax gap estimates, although GAO expressed concerns about the accuracy of the estimates with that sample size.

"For example, NRP historically included more than 2,500 returns that claimed the Earned Income Tax Credit, but the redesigned sample has included less than 500 of these returns annually," the report stated.

IRS told GAO that it "is exploring ways to combine operational audit data with NRP audit data when developing its taxgapestimates. IRS officials also told us that if IRS can reliably combine these data for taxgap analysis, IRS might be better positioned to identify emerging trends in noncompliance and reduce the uncertainty of the estimates due to the small sample size."

The report also highlighted the fact that the agency "has multiple documents that collectively provide technical details and justifications for the design of the AI models. However, no set of documents contains complete information and IRS analyst could use to run or update the models, and several key documents are in draft form."

"Completing documentation would help IRS retain organizational knowledge, ensure the models are implemented consistently, and make the process more transparent to future users," the report stated.

By Gregory Twachtman, Washington News Editor

Since passage of the Affordable Care Act, several key requirements for employers have been delayed, including reporting of health coverage offered to employees, known as Code Sec. 6056 reporting. As 2015 nears, and the prospects of further delay appear unlikely, employers and the IRS are preparing for the filing of these new information returns.

Since passage of the Affordable Care Act, several key requirements for employers have been delayed, including reporting of health coverage offered to employees, known as Code Sec. 6056 reporting. As 2015 nears, and the prospects of further delay appear unlikely, employers and the IRS are preparing for the filing of these new information returns.

Three related provisions

Three provisions of the Affordable Care Act are closely related: the employer mandate for applicable large employers (ALEs), the Code Sec. 36B premium assistance tax credit and Code Sec. 6056 reporting. To administer the employer mandate and the Code Sec. 36 credit, the IRS must receive information from ALEs, such as the type of health coverage offered, if any, by the ALE, the number of employees, and the cost of coverage.

Who must report?

Not all employers must report under Code Sec. 6056. The most important exception is for employers with fewer than 50 full-time employees, including full-time equivalent employees. These smaller employers are exempt—at all times—from Code Sec. 6056 reporting and the employer mandate.

For 2015, there is also a temporary exemption for some ALEs from the employer mandate only. ALEs are employers that employ on average at least 50 full-time employees, including full-time equivalents but fewer than 100 full-time employees including full-time equivalents. However, mid-size employers must file Code Sec. 6056 information returns for 2015. All other ALEs are subject to the employer mandate for 2015 as well as Code Sec. 6056.

What must be reported?

The IRS has posted draft forms for Code Sec. 6056 reporting on its website: Form 1094-C Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. Draft Instructions for these forms are expected to be released in the near future.

ALEs generally must report:

• The employer's name, address, and employer identification number;
• The calendar year for which information is being reported;
• A certification as to whether the employer offered to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan;
• The number, address and Social Security/taxpayer identification number of all full-time employees;
• The number of full-time employees eligible for coverage under the employer's plan; and
• The employee's share of the lowest cost monthly premium for self-only coverage providing minimum value offered to that full-time employee.

Under IRS regulations, Code Sec. 6056 reporting is optional for 2014. Reporting for 2015 is required. Information returns must be filed no later than March 1, 2016 (February 28, 2016, being a Sunday), or March 31, 2016, if filed electronically.

Simplified method

The IRS has provided ALEs with simplified methods of reporting. Employers that provide a "qualifying offer" to any of their full-time employees may be eligible as are employers that offer coverage to a certain percentage of employees. For more details about the simplified method, please contact our office.

Employers that self-insure

The Affordable Care Act also requires every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs, and other entities that provide minimum essential coverage to file information returns. This is known as "Code Sec. 6055 reporting." The IRS has posted draft versions of Form 1094-B, Transmittal of Health Coverage Information Returns, and Form 1095-B, Health Coverage on its website.

Employers that self-insure have a streamlined way to report for purposes of Code Sec. 6055 reporting and Code Sec. 6056 reporting. The top half of Form 1095-C includes information needed for Code Sec. 6056 reporting; the bottom half includes information needed for Code Sec. 6055 reporting.

If you have any questions about Code Sec. 6056 reporting, please contact our office.

As the 2015 filing season approaches, IRS Commissioner John Koskinen is bracing taxpayers for more reductions in customer service unless the agency receives more funding. According to Koskinen, the IRS is facing its biggest challenge in recent years. Koskinen, who spoke at the annual conference of the National Society of Accountants in August, also predicted that taxpayers will have to wait until after the November elections to learn the fate of many popular but expired tax incentives.

As the 2015 filing season approaches, IRS Commissioner John Koskinen is bracing taxpayers for more reductions in customer service unless the agency receives more funding. According to Koskinen, the IRS is facing its biggest challenge in recent years. Koskinen, who spoke at the annual conference of the National Society of Accountants in August, also predicted that taxpayers will have to wait until after the November elections to learn the fate of many popular but expired tax incentives.

Budget pressures

The IRS has experienced budgetary pressures since 2010. The Budget Control Act of 2011 (BCA) imposed across-the-board spending cuts on many federal agencies, including the IRS. Some funding was restored last year. Looking ahead, the House has voted to cut the IRS's budget by $341 million for Fiscal Year (FY) 2015. The Senate has proposed to increase the IRS's budget by $240 million. Even with the proposed increase, IRS officials have said that the agency's budget would still be seven percent below funding levels for FY 2010.

The funding cuts have drawn criticism from senior IRS officials. "Funding reductions have significantly hampered the IRS's ability to carry out its mission," National Taxpayer Advocate Nina Olson told Congress. Olson warned that "underfunding of the IRS poses one of the greatest long-term risks to tax administration today."

Koskinen echoed Olson's concerns. "Congress is starving our revenue-generating operation. If voluntary compliance with the tax code drops by 1 percent, it costs the U.S. government $30 billion per year," he explained. "The IRS annual budget is only $11 billion per year.

Customer service

For many taxpayers, the most visible impact of the budget cuts has been reductions in customer service. Koskinen said that the IRS has cut 5,200 call center employees because of lack of funding. Wait times to speak with the IRS will increase, he predicted. During the 2014 filing season, the IRS's level of customer service was around 72 percent. The level of customer service for the 2015 filing season could fall to as low as 50 percent without adequate funding, Koskinen cautioned.

Koskinen acknowledged that the funding cuts have fueled efficiencies in the agency's operations. The agency has reduced hiring, offered buyouts to long-time employees, and cut travel and training costs. "We are becoming more efficient but there is a limit," he said. "Eventually the effects will show up. We are no longer going to pretend that cutting funding makes no difference."

Tax extenders

Unless extended, a host of expired tax incentives will be unavailable to taxpayers when they file their 2014 returns. These include widely-used incentives, such as the state and local sales tax deduction, the higher education tuition deduction, and transit benefits parity. Businesses also would be impacted, with failure to renew popular incentives, including the research tax credit and the Work Opportunity Tax Credit.

Legislation to extend many of these incentives will likely not be passed by Congress until after the November elections, Koskinen predicted. "Congress needs to understand that the later these are passed and the more complicated they are, the more challenging it is for taxpayers to file accurate returns on time." Koskinen added that the IRS will be challenged to reprogram its return processing systems for renewal of the tax extenders. As a result, the start of the 2015 filing season could be delayed, he said.

Identity theft

Koskinen lauded the agency's work to curb tax-related indentity theft. This initiative is a high-profile one. The IRS has worked with other federal agencies and state and local governments to discover and prosecute identity thieves. The IRS has also upgraded its return processing systems to uncover fraudulent returns and has assigned special identity protection numbers to victims of identity theft. "We rejected 5.7 million suspicious returns last year that may have been tied to identity theft," he said.

To learn more information or for updates, please contact our offices.

No. Participatory wellness programs do not require a specific outcome in order for a participant to receive a reward.

No. Participatory wellness programs do not require a specific outcome in order for a participant to receive a reward.

Background

Wellness programs have grown in popularity since passage of the Affordable Care Act but they have been around for some time. Individuals are motivated to participate in wellness programs to receive a reward, such as a discount or rebate of a premium or contribution, a waiver of all or part of cost-sharing, or an additional benefit.

The IRS issued proposed rules in 2006 and more guidance in 2013. The IRS has divided wellness programs into two categories: (1) programs that either do not require an individual to meet a standard related to a health factor to obtain a reward or that do not offer a reward at all; and (2) programs that require individuals to satisfy a standard related to a health factor to obtain a reward. The first category is commonly known as participatory wellness programs. The second category is known as health-contingent wellness programs.

Participatory wellness programs

Participatory wellness programs encompass a wide range of activities. One of the most common type of participatory wellness program is a program that reimburses all or part of the cost of a gym membership. A program that encourages individuals to complete a health risk assessment regarding current health status, without any further action with regard to the health issues identified as part of the assessment is another example of a participatory wellness program.

All of these examples have a similar feature. They do not link a reward to certain outcomes, activities or certain results. An individual may take advantage of the gym membership and rarely go. An individual may attend a health risk assessment and elect not to take action on any findings from that assessment.

Participatory wellness programs must be available to all similarly-situated individuals. Participatory wellness programs also must comply with other federal laws.

Health contingent programs

In contrast to participatory programs, health-contingent programs are linked to a certain activity or result. Some threshold or standard must be attained. These types of programs would generally run afoul of laws prohibiting health plans from treating employees differently based on the status of their health. The Affordable Care Act and other laws have created some exceptions for activity-only programs and outcome-based programs.

A gym membership can be a health-contingent program if it requires an individual to participate for a certain number of sessions or obtain a specific health outcome. Tobacco cessation programs are a common example of outcome-based wellness programs. Participants must attain a specific health goal, such as ceasing to use tobacco products. A health screening that requires participants to take a health or fitness course is another example of a health-contingent program. For example, a cholesterol awareness program may require a certain cholesterol count in order for the participant to receive a reward.

Health contingent programs must satisfy five requirements: (1) Size of award; (2) Frequency of opportunity to take advantage of the program; (3) Reasonableness of design; (4) Uniform availability and reasonable alternatives; and (5) Notice to employees. After January 1, 2014, the maximum size of a health-contingent reward is 30 percent of the total cost of coverage (50 percent for health-contingent programs designed to prevent or reduce tobacco). Of significant importance is the requirement that any reward be available to all similarly-situated individuals. If, for example, an individual cannot meet the threshold or standard to receive a reward, there must be a reasonable alternative.

In addition to the Affordable Care Act, other federal laws, as well as state laws, impact wellness programs. Please contact our office if you have any questions about wellness programs under ACA guidelines.

Life expectancies for many Americans have increased to such an extent that most taxpayers who retire at age 65 expect to live for another 20 years or more. Several years ago, a number of insurance companies began to offer a new financial product, often called the longevity annuity or deferred income annuity, which requires upfront payment of a premium in exchange for a guarantee of a certain amount of fixed income starting after the purchaser reaches age 80 or 85. Despite the wisdom behind the longevity annuity, this new type of product did not sell especially well, principally for tax reasons. These roadblocks, however, have largely been removed by new regulations.

Life expectancies for many Americans have increased to such an extent that most taxpayers who retire at age 65 expect to live for another 20 years or more. Several years ago, a number of insurance companies began to offer a new financial product, often called the longevity annuity or deferred income annuity, which requires upfront payment of a premium in exchange for a guarantee of a certain amount of fixed income starting after the purchaser reaches age 80 or 85. Despite the wisdom behind the longevity annuity, this new type of product did not sell especially well, principally for tax reasons. These roadblocks, however, have largely been removed by new regulations.

Treasury and the IRS recently released final regulations (TD 9673) to encourage taxpayers to purchase "qualified longevity annuity contracts" (QLACs) with a portion of their retirement savings held in IRAs or in retirement accounts held under a 401(k), 403(b) or other defined contribution plans that are subject to the rules for required minimum distributions (RMDs). The final regulations are meant to remove or mitigate some of the tax concerns new retirees may face when deciding whether or not to purchase a deferred income annuity.

Longevity Annuities—Generally

Purchase of a longevity annuity provides for a deferred income stream. Although the terms of specific longevity annuity contracts differ from plan to plan, the arrangement generally requires the purchaser to pay the premium as a lump sum to the insurer. The purchaser could be 65 years of age, 55, 50 or some other age, and the insurer would not begin to make payments under the longevity annuity contract until the purchaser had reached the specified age (of no more than 85 years for the tax benefits contained in the final regulations). The amount of the annuity depends on a number of factors, among them: the age at which the contract is purchased; the amount of the premium paid; the contractual interest rate; and the age at which payments begin.

RMDs

Not every individual who reaches retirement age possesses enough spare cash outside of his or her IRAs or other retirement accounts to purchase an income annuity, let alone a longevity annuity that does not begin to pay out for many years. In such cases individuals can purchase an annuity from within an IRA or defined contribution plan account. Prior to the final regulations, however, the RMD rules requiring taxpayers who reach age 70 ½ to begin taking distributions from these accounts would have forced taxpayers to factor the premium amounts into the calculation of their annual taxable distribution. This would have depleted the account funds more quickly than the actual balance, without premium payment, warranted.

QLACs

The final regulations provide that only qualified longevity annuity contracts (QLACs) are eligible for account balance exclusion from the RMD calculation. The regulations define a QLAC as:

• A longevity annuity whose premium payment does not exceed the lesser of $125,000 or 25 percent of the employee’s account balance;
• A contract that provides for payouts to begin no later than the first day of the month following the purchaser’s 85th birthday;
• A contract that does not provide any commutation benefit, cash surrender right, or other similar feature;
• A contract under which any death benefit offered meets the requirements of paragraph A-17(c) of Reg. §1.401(a)(9)-6 (see below for more details);
• A contract that states when issued that it is intended to be a QLAC; and
• A contract that is not a variable contract under Code Sec. 817, an indexed contract, or a similar contract.

The total value of all QLACs held by one person cannot exceed the lesser of $125,000 (indexed for inflation) or 25 percent of all qualified retirement accounts put together. This limitation does not extend to funds held in non-retirement accounts or to funds held in Roth IRAs.

In addition, the amount used to pay the QLAC premium is not taxable when the QLAC is purchased. This means the account holder has a zero basis in the QLAC. Distributions from the QLAC are fully taxable.

Death Benefit

Most longevity annuities do not provide any death benefit for the purchaser's beneficiaries. While some longevity annuity plans do offer a death benefit for the beneficiaries of annuity purchasers who die prematurely, plans that maximize the annuity payment generally provide that the insurer keeps the entire premium amount, plus interest, if the purchaser dies before payouts begin or the contract basis is exhausted.

Return of premium. The final regulations attempt to mitigate some of the risk retirees face when deciding to purchase a QLAC by allowing a QLAC to provide certain death benefits in limited circumstances. Notably, the final regulations add a feature missing from the proposed regulations: return of premium. Under the final rules, a QLAC is authorized to guarantee the return of a purchaser's premium if the purchaser dies before receiving benefits equal to the premium paid.

Surviving spouse. The final regulations provide that, where the purchaser's sole beneficiary under the QLAC is his or her surviving spouse, generally the only benefit permitted to be paid after the purchaser's death is a life annuity that does not exceed 100 percent of the annuity that would have been paid to the employee. The final regulations also allow QLACs to provide the return of premium feature if a surviving spouse who receives a life annuity under the contract dies before the payments equal the premium.

Non-spouse beneficiary/beneficiaries. QLACs may also provide a lifetime annuity to designated non-spouse beneficiaries, but the annuity would likely be reduced. Calculation of an annuity payable to a non-spouse beneficiary would be calculated based on the applicable percentage provided in one of the tables in the final regulations. However, if the QLAC provides a return of premium feature, the applicable percentage that the beneficiary would receive is zero.

Please contact this office if you have any questions on how a qualified longevity annuity might fit into your retirement plans now that the IRS has relaxed some of the rules.

Code Sec. 162 permits a business to deduct its ordinary and necessary expenses for carrying on the business. However, Code Sec. 274 restricts the deduction of entertainment expenses incurred for business by disallowing expenses of entertainment activities and entertainment facilities. Many expenses are totally disallowed; other amounts, if allowed under Code Sec. 274, are limited to 50 percent of the expense.

The income tax regulations define entertainment as any activity of a type generally considered to be entertainment, amusement, or recreation, such as entertaining at night clubs, lounges, theaters, country clubs, golf and athletic clubs, and sports events, as well as hunting, fishing, vacation and similar trips. There are special rules for the costs of facilities used to entertain the customer, such as a boat or a country club membership. Dues or fees for any social, athletic or sporting club or organization are treated as items involving facilities.

Deduction allowed

Expenses are allowed if the expense was either "directly related" to the active conduct of the taxpayer’s trade or business, or "associated with" the conduct of the trade or business. An activity is "associated with" business if the activity directly precedes or follows a substantial and bona fide business discussion.

Entertainment expenses are not directly related to the business if the activity occurred under circumstances with little or no possibility of engaging in the active conduct of the trade or business. These circumstances include an activity where the distractions are substantial, such as a meeting or discussion at a night club, theater, or sporting event. However, taking a customer to a meal at a restaurant or for drinks at a bar can be considered conducive to a business discussion, if there are no substantial distractions to a discussion.

Substantial business discussion

For expenses that are either directly related to or associated with business, the taxpayer must establish that the he or she conducted a substantial and bona fide business discussion with the customer. The IRS has said that there is no specified length for a discussion to be substantial; all facts and circumstances will be considered. The discussion is substantial if the active conduct of the business was the principal character of the combined business and entertainment activity, but it is not necessary that more time be devoted to business than to entertainment.

For an activity that is associated with, the discussion can directly precede or follow the activity. For a discussion to be directly before or after the activity, it generally must be on the same day as the activity. However, facts and circumstances may allow the entertainment and the discussion to be on consecutive days, for example if the customer is from out of town.

Season tickets

The special rules for facilities do not apply to season tickets. Instead, the taxpayer must allocate the cost of the season tickets to each separate entertainment event. The amount deductible is limited to the face value of the ticket. For a "skybox" or other area leased and used exclusively by the taxpayer and guests, the amount deductible is limited to the face value of non-luxury seats for the area covered by the lease.

Under these rules, it appears that the deductible costs of baseball season tickets must be determined separately for each baseball game. Attendance at a baseball game would involve a "distracting" activity that is not conducive to a business discussion, so the cost of the game would not be directly related to the conduct of the trade or business. However, attendance at a game before or after the conduct of a substantial business discussion could qualify as being associated with the business; in these circumstances, the cost of the event would be deductible.

If the taxpayer provided food to the customer at the baseball game, the cost of the food would be deductible as part of the cost of the event. Some "luxury" seats include food provided by the baseball team to the ticket user. It appears that the taxpayer would have to determine the fair market value of the ticket and the food separately, although the costs of food actually provided to the customer may still be deductible.

One of the most complex, if not the most complex, provisions of the Patient Protection and Affordable Care Act is the employer shared responsibility requirement (the so-called "employer mandate") and related reporting of health insurance coverage. Since passage of the Affordable Care Act in 2010, the Obama administration has twice delayed the employer mandate and reporting. The employer mandate and reporting will generally apply to applicable large employers (ALE) starting in 2015 and to mid-size employers starting in 2016. Employers with fewer than 50 employees, have never been required, and continue to be exempt, from the employer mandate and reporting.

Employer mandate

The employer mandate under Code Sec. 4980H and employer reporting under Code Sec. 6056 are very connected. Code Sec. 4980H generally provides that an ALE is required to pay a penalty if it fails to offer minimum essential coverage and any full-time employee receives cost-sharing or the Code Sec. 36B premium assistance tax credit. An ALE would also pay a penalty if it offers coverage and any full-time employee receives cost-sharing or the Code Sec. 36B credit.

To receive the Code Sec. 36B credit, an individual must have obtained coverage through an Affordable Care Act Marketplace. The Marketplaces will report the names of individuals who receive the credit to the IRS. ALEs must report the terms and conditions of health care coverage provided to employees (This is known as Code Sec. 6056 reporting). The IRS will use all of this information to determine if the ALE must pay a penalty.

ALEs

Only ALEs are subject to the employer mandate and must report health insurance coverage under Code Sec. 6056. Employers with fewer than 50 employees are never subject to the employer mandate and do not have to report coverage under Code Sec. 6056.

In February, the Obama administration announced important transition rules for the employer mandate that affects Code Sec. 6056 reporting. The Obama administration limited the employer mandate in 2015 to employers with 100 or more full-time employees. ALEs with fewer than 100 full-time employees will be subject to the employer mandate starting in 2016. At all times, employers with fewer than 50 full-time employees are exempt from the employer mandate and Code Sec. 6056 reporting.

Reporting

The IRS has issued regulations describing how ALEs will report health insurance coverage. The IRS has not yet issued any of the forms that ALEs will use but has advised that ALEs generally will report the requisite information to the agency electronically.

ALEs also must provide statements to employees. The statements will describe, among other things, the coverage provided to the employee.

30-Hour Threshold

A fundamental question for the employer mandate and Code Sec. 6056 reporting is who is a full-time employee. Since passage of the Affordable Care Act, the IRS and other federal agencies have issued much guidance to answer this question. The answer is extremely technical and there are many exceptions but generally a full-time employee means, with respect to any month, an employee who is employed on average at least 30 hours of service per week. The IRS has designed two methods for determining full-time employee status: the monthly measurement method and the look-back measurement method. However, special rules apply to seasonal workers, student employees, volunteers, individuals who work on-call, and many more. If you have any questions about who is a full-time employee, please contact our office.

Form W-2 reporting

The Affordable Care Act also requires employers to disclose the aggregate cost of employer-provided health coverage on an employee's Form W-2. This requirement is separate from the employer mandate and Code Sec. 6056 reporting. The reporting of health insurance costs on Form W-2 is for informational purposes only. It does not affect an employee's tax liability or an employer's liability for the employer mandate.

Shortly after the Affordable Care Act was passed, the IRS provided transition relief to small employers that remains in effect today. An employer is not subject the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. Special rules apply to multiemployer plans, health reimbursement arrangements, and many more.

Please contact our office if you have any questions about ALEs, the employer mandate or Code Sec. 6056 reporting.

Mid-size employers may be eligible for recently announced transition relief from the Patient Protection and Affordable Care Act's employer shared responsibility requirements. Final regulations issued by the IRS in late January include transition relief for mid-size employers for 2015. Mid-size employers for this relief are defined generally as businesses employing at least 50 but fewer than 100 full-time employees. Exceptions and complicated measurement rules continue to apply. The final regulations also describe the treatment of seasonal employees, volunteer workers, student employees, the calculation of the employer shared responsibility payment, and much more.

Mid-size employers may be eligible for recently announced transition relief from the Patient Protection and Affordable Care Act's employer shared responsibility requirements. Final regulations issued by the IRS in late January include transition relief for mid-size employers for 2015. Mid-size employers for this relief are defined generally as businesses employing at least 50 but fewer than 100 full-time employees. Exceptions and complicated measurement rules continue to apply. The final regulations also describe the treatment of seasonal employees, volunteer workers, student employees, the calculation of the employer shared responsibility payment, and much more.

Delayed implementation

As enacted in 2010, the Affordable Care Act required applicable large employers (ALEs) to make an assessable payment if any full-time employee is certified to receive a health insurance premium tax credit or cost-sharing reduction, and either:

• The employer does not offer to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan; or
• The employer offers its full-time employees and their dependents the opportunity to enroll in MEC under an employer-sponsored plan, but the coverage is either unaffordable or does not provide minimum value.

The employer shared responsibility requirement was scheduled to apply January 1, 2014, the same effective date for the individual mandate and the health insurance premium assistance tax credit. In July 2013, the Obama administration announced that employer shared responsibility requirements would not apply for 2014.

The final regulations make further changes. Under the final regulations, the employer mandate will generally apply to large employers (employers with 100 or more employees) starting in 2015 and to qualified mid-size employers (employers with 50 to 99 employees) starting in 2016. Employers that employ fewer than 50 full-time employees (including full-time equivalents (FTEs)) are not subject to the employer mandate.

Caution. Determining the number of employees for purposes of the employer shared responsibility requirement is a complex calculation for many employers that is beyond the scope of this article. The Affordable Care Act and the final regulations describe how to calculate full-time employees (including FTEs) and also which employees are excluded from that calculation. Please contact our office for details about the Affordable Care Act and your business.

Transition relief for mid-size employers

Qualified employers are not subject to the employer mandate until 2016 if they satisfy certain conditions. Among other requirements, the employer must employ on average at least 50 full-time employees (including FTEs) but fewer than 100 full-time employees (including FTEs) on business days during 2014. Additionally, the final regulations impose a broad maintenance of previously offered heath coverage requirement.

The final regulations do not allow an employer to reduce the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition and thus be eligible for the transition relief. A reduction in workforce size or overall hours of service for bona fide business reasons, however, will not be considered to have been made in order to satisfy the workforce size condition. This provision is certainly one that is expected to generate many questions. The IRS may provide additional guidance and/or clarification in 2014 and our office will keep you posted of developments.

Additionally, the final regulations also modify the extent of required coverage. Proposed regulations required that the employer provide coverage to 95 percent of its full-time employees. The final regulations delay the 95 percent requirement until 2016 for larger employers. For 2015, larger employers need only provide coverage to 70 percent of their full-time employees.

Special types of employees

Since passage of the Affordable Care Act, questions have arisen about the treatment of certain types of employees. These include seasonal employees, short-term employees, volunteer workers, and student employees. The final regulations clarify some of the issues surrounding these employees.

Many industries employ seasonal workers. The final regulations describe who may qualify as a seasonal worker. The retail industry, which employs many workers for the holiday season, asked the IRS to specify which events or periods of time that would be treated as holiday seasons. The final regulations, however, do not indicate specific holidays or the length of any holiday season as these will differ for different employers, the IRS explained.

For volunteer workers, such as volunteer fire fighters and first responders, the final regulations provide that an individual's hours of service do not include hours worked as a "bona fide volunteer." This definition, the IRS explained, encompasses any volunteer who is an employee of a government entity or a Code Sec. 501(c)(3) organization whose compensation is limited to reimbursement of certain expenses or other forms of compensation.

Many college, university and vocational students are engaged in federal and state work-study programs. The final regulations provide that hours of service for purposes of the employer mandate do not include hours of service performed by students in federal or other governmental work-study programs. The IRS noted the potential for abuse by labeling individuals who receive compensation as "interns" to avoid the employer mandate. Therefore, the IRS did not adopt a special rule for student employees working as interns for an outside employer, and the general rules apply.

The final regulations also describe how the employer mandate may or may not apply to adjunct faculty, members of religious orders, airline industry employees, employees who must work “on-call” hours, short-term employees and others. Special rules may apply to these employees in some cases.

Waiting period limitation

The Affordable Care Act generally requires that an employee (or dependent) cannot wait more than 90 days before employer-provided coverage becomes effective. The IRS issued final regulations in February on the 90-day waiting period limitation. The IRS also issued proposed regulations generally allowing employers to require new employees to complete a reasonable orientation period. The proposed regulations set forth one month as the maximum length of any orientation period.

If you have any questions about the final regulations for the employer mandate, the transition relief, the 90-day waiting period, or any aspects of the Affordable Care Act, please contact our office.

TD 9655, TD 9656, NPRM REG-122706-12

The IRS's final "repair" regulations became effective January 1, 2014. The regulations provide a massive revision to the rules on capitalizing and deducting costs incurred with respect to tangible property. The regulations apply to amounts paid to acquire, produce or improve tangible property; every business is affected, especially those with significant fixed assets.

The IRS's final "repair" regulations became effective January 1, 2014. The regulations provide a massive revision to the rules on capitalizing and deducting costs incurred with respect to tangible property. The regulations apply to amounts paid to acquire, produce or improve tangible property; every business is affected, especially those with significant fixed assets.

Required and elective changes

There is a lot of work ahead for most taxpayers to comply with the new rules. There are three categories of changes under the regulations:

• Changes that are required and are retroactive, with full adjustments under Code Sec. 481(a), in effect applying the regulations to previous years;
• Required changes with modified or prospective Code Sec. 481(a) adjustment beginning in 2014; and
• Elective changes that do not require any adjustments under Code Sec. 481.

Required changes with full adjustments include unit of property changes, deducting repairs (including the routine maintenance safe harbor), deducting dealer expenses that facilitate the sale of property, the optional method for rotable spare parts, capitalizing improvements and capitalizing certain acquisition or production costs. Elective changes can include capitalizing repair and maintenance costs of they are capitalized for financial accounting purposes.

Rev. Proc. 2014-16

The IRS issued Rev. Proc. 2014-16, granting automatic consent to taxpayers to change their accounting methods to comply with the final regulations. Rev. Proc. 2014-16 applies to all the significant provisions in the final regulations, such as repairs and improvements; materials and supplies, including rotable and temporary spare parts; and costs that have to be capitalized as improvements. Rev. Proc. 2014-16 supersedes Rev. Proc. 2012-19, which applied to changes made under the temporary and proposed repair regulations issued at the end of 2011.

There are 14 automatic method changes provided by Rev. Proc. 2014-16 for the repair regulations. Taxpayers may file for automatic consent on a single Form 3115, even if they are making changes in more than area. The normal scope limitations on changing accounting methods do not apply to a taxpayer making one or more changes for any tax year beginning before January 1, 2015. Scope changes would normally apply if the taxpayer is under examination, is in the final year of a trade or business, or is changing the same accounting method it changed in the previous five years.

Filing deadlines

For past years, taxpayers can apply the 2011 proposed and temporary (TD 9564) regulations or the 2013 final regulations to either 2012 or 2013, and can do this on a section-by-section basis. Taxpayers that decide to apply the final or temporary regulations to 2013 must file for an automatic change of accounting method (Form 3115) by September 15, 2014. Taxpayers applying the regulations to 2014 must file for an automatic change by September 15, 2015. (Both dates apply to calendar-year taxpayers.) The government has indicated it is unlikely to postpone the effective date of the regulations.

Dispositions

Rev. Proc. 2014-16 does not apply to dispositions of tangible property. The government issued reproposed regulations in this area (NPRM REG-110732-13). Although these regulations may not be finalized until later in 2014, the IRS expects to issue Rev. Proc. 2014-17 before then to allow taxpayers to make automatic accounting method changes under the proposed regulations. The procedure will provide some relief by allowing taxpayers to revoke general asset account elections that they made under the temporary regulations. No comments were submitted on these proposed regulations; it is likely the final regulations will not have any significant changes.

Taxpayers must generally provide documentation to support (or to “substantiate”) a claim for any contributions made to charity that they are planning to deduct from their income. Assuming that the contribution was made to a qualified organization, that the taxpayer has received either no benefit from the contribution or a benefit that was less than the value of the contribution, and that the taxpayer otherwise met the requirements for a qualified contribution, then taxpayers should worry next whether they have the proper records to prove their claim.

Taxpayers must generally provide documentation to support (or to “substantiate”) a claim for any contributions made to charity that they are planning to deduct from their income. Assuming that the contribution was made to a qualified organization, that the taxpayer has received either no benefit from the contribution or a benefit that was less than the value of the contribution, and that the taxpayer otherwise met the requirements for a qualified contribution, then taxpayers should worry next whether they have the proper records to prove their claim.

Cash donations

The taxpayer must provide records to prove a donation of any amount of cash (including payments by cash, check, electronic funds transfer or debit, and credit card). Acceptable records for cash donations of less than $250 generally include:

• An account statement or canceled check;
• A written letter, e-mail or other properly issued receipt from the qualified organization bearing the name of the organization and the date and amount of the contribution; and/or
• A pay stub, Form W–2, or other payroll document showing the amount of a contribution made from payroll.

Caution: A taxpayer cannot substantiate deductions through written records it has prepared on its own behalf, such as a checkbook or personal notes.

Cash donations of more than $250. If a taxpayer donated $250 or more in cash at any one time, the taxpayer must provide a contemporaneous written acknowledgment of the donation from the qualified organization. For each donation of $250 or more, the taxpayer must obtain a separate written acknowledgment. Furthermore, this written acknowledgement must:

• State the amount of the contribution; and
• State whether the qualified organization provided the taxpayer with any goods or services in exchange for the donation, and if so estimate their value; and
• Be received by the taxpayer before the earlier of (1) the return’s filing date or (2) the due date of the return, plus any extensions.

Note: The written acknowledgment ideally would also show the date of the contribution. If it does not, the taxpayer must also provide a bank record that indicates the date.

The acknowledgment must contain a statement of whether or not a taxpayer received any goods or services as a result of the donation, even if no goods or services were received. Even if the donation was for tithes to a religious organization, such as a church, synagogue, or mosque, the acknowledgment should state that the only goods and services received were of intangible religious value. The Tax Court has upheld the disallowance of charitable contribution deductions where the written acknowledgment omitted such a statement regarding goods or services provided.

Noncash contributions

As with cash contributions, the requirements for substantiating noncash contributions increase with the value of the contribution. For example, to substantiate noncash contributions of less than $250, taxpayers must show a receipt or other written communication from the charitable organizations.

To substantiate a noncash contribution between $250 and $500, the taxpayer must obtain a written acknowledgment of the contribution from the qualified organization prior to the earlier of the filing date or due date of its return. The acknowledgment must also describe the type and value of the goods and services, if any, provided to the taxpayer as a result of the donation.

To substantiate noncash contributions totaling between $500 and $5,000 or donations of publically traded securities, a taxpayer must complete Section A of Form 8283, Noncash Charitable Contributions. To substantiate noncash contributions of $5,000 or more (for example, donations of art, jewelry, vehicles, qualified conservation contributions, or intellectual property) the taxpayer must complete Section B of Form 8283. Generally, this would also require the taxpayer to obtain a qualified appraisal of the property’s fair market value.

A word about valuation. A charity is not obligated to provide a value to any noncash contribution; its written receipt only needs to describe the item(s) and note the date of the contribution. The taxpayer, however, is not relieved from making a good-faith estimate of value, which of course the IRS may dispute on any audit. “Thrift-shop” value is often used to value donations of clothing and household goods.

Caution: Last year the Treasury Inspector General for Tax Administration (TIGTA) issued a report finding that the IRS was not accurately monitoring the reporting of noncash contributions requiring completion of Form 8283. The IRS responded that it agreed that it needed to initiate more correspondence audits with taxpayers claiming noncash contributions without the necessary Form 8283 and appraisal.

Vehicles. A taxpayer who donates a motor vehicle, boat, or airplane to charity must deduct either the gross proceeds from the qualified organization’s sale of the vehicle or, if the vehicle is used within the charity’s mission, the fair market value of the vehicle on the date of the contribution, whichever is smaller. The taxpayer must also obtain and attach Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes, to its return in addition to Form 8283.

The requirements for substantiating charitable contributions can be complicated. Please contact our office with questions.