The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.

The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.

PPP Loans
The CARES Act expanded the Small Business Administration’s (SBA’s) existing Section 7(a) loan program to include certain PPP loans. The PPP is made available from the SBA to provide small businesses with loans to help pay payroll costs, mortgages, rent, and utilities during the COVID-19 (coronavirus) crisis. All payments of principal, interest, and fees under the loans are deferred for at least 6 months. The loans are also forgiven for amounts payroll costs, mortgage or rent obligations, and certain utility payments incurred between February 15 and June 30. The loans are 100 percent guaranteed by the SBA.

Deductions Prohibited
If the SBA forgives a taxpayer’s PPP loan pursuant to Act. Sec. 1106(b) of the CARES Act, the amount of the loan is excluded from gross income. Under Reg. §1.265-1 taxpayers cannot deduct expenses that are allocable to income that is either wholly excluded from gross income or wholly exempt from the taxes. This rule exists in order to prevent double tax benefits. Thus, the IRS has determined that taxpayers who have their PPP loans forgiven may not deduct any business or interest expenses related to the income associated with the loan.

Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.

Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.

Additionally, SBA is expected to issue regulations and guidance to assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities, according to Treasury.

Measures included in the application and instructions intended to reduce compliance burdens and simplify the process for borrowers include:

• options to calculate payroll costs using an "alternative payroll covered period" that aligns with borrowers’ regular payroll cycles;
• flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan;
• step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness;
• borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30; and
• the addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.

Eligible individuals who are not otherwise required to file federal income tax returns for 2019 may use a new simplified return filing procedure to make sure they receive the Economic Impact Payments (EIPs) provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136).

Eligible individuals who are not otherwise required to file federal income tax returns for 2019 may use a new simplified return filing procedure to make sure they receive the Economic Impact Payments (EIPs) provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136).

Alternatively, these eligible individuals may use the "Non-Filers: Enter Payment Info Here" tool, available at www.irs.gov/coronavirus to submit the information the IRS needs to issue their payments.

EIPs and Recovery Rebate Credit
The CARES Act provides a fully refundable Recovery Rebate Credit for the 2020 tax year. However, the IRS is making EIPs during 2020 to refund the credit in advance, based on 2019 or 2018 information. Most individuals are eligible for the credit, except for nonresident aliens and individuals who qualify as another taxpayer’s dependent.

The maximum credit is $1,200 for each eligible individual, plus $500 for each qualifying child. There is no minimum income requirement, but the credit is phased out for higher-income individuals. Eligible individuals and qualifying children generally must have valid Social Security numbers.

Taxpayers who filed 2019 or 2018 returns automatically receive their Economic Payments. If the taxpayer identified an account for direct deposit of a refund, the Economic Impact Payment is direct deposited into the same account. Otherwise, the IRS mails a paper check to the taxpayer’s last known address.

Nonfilers who received Social Security and railroad retirement, survivor or disability benefits before 2020 also receive EIPs based on their Forms SSA-1099 or Form RRB-1099 via direct deposit or paper checks, in the same way they receive their benefits. Recipients of supplemental security income (SSI) or Veterans Administration Compensation and Pension (C&P) benefits also automatically receive EIPs in the same way they receive their benefits. These nonfilers may use the "Non-Filers: Enter Payment Info Here" tool to provide information about their qualifying children so that they also receive the $500 additional credit.

Other nonfilers who are not required to file returns, such as people with income below the filing threshold, may use the "Non-Filers: Enter Payment Info Here" tool to provide basic information that allows the IRS to calculate and issue their EIPs.

Simplified Filing Procedures
Rather than using the "Non-Filers: Enter Payment Info Here" tool, a simplified return filer may use a simplified procedure to file a paper or electronic return for 2019 on Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors. A simplified return filer is an eligible individual who:

• has not filed a federal income tax return for 2019;
• is not required to file a return for 2019, and
• has the required identification number.

Simplified returns are due by October 15, 2020. The IRS urges these individuals to file electronically to speed receipt of their payments.

Simplified Return Information
The simplified return should include only the following information:

• "EIP2020" written on the form;
• the individual’s filing status as of the end of tax year 2019;
• required identification information, including name, mailing address, and SSN for the individual (and spouse on a joint return);
• information regarding each dependent who was under the age of 17 at the end of tax year 2019; and
• the filer’s signature, using an IP PIN if applicable.

Generally lines 1 through 24 of the return are left blank, even if the values for these lines are in fact not zero, except as values are required for electronic returns.

The IRS will compute the Economic Impact Payment based on this information. The IRS will not challenge the accuracy of the items of income that are properly reported under these procedures.

To encourage businesses that have experienced an economic hardship due to COVID-19 to keep employees on their payroll, the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) has provided several new credits for employers, including a new employee retention credit. The IRS has issued a fact sheet summarizing a few key points about the new credit.

To encourage businesses that have experienced an economic hardship due to COVID-19 to keep employees on their payroll, the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) has provided several new credits for employers, including a new employee retention credit. The IRS has issued a fact sheet summarizing a few key points about the new credit.

Certain employers can claim the credit for wages paid after March 12, 2020, and before January 1, 2021. This includes tax-exempt organizations, employers with suspended operations due to a government order related to COVID-19, and those that have experienced a significant decline in gross receipts. The credit amount is 50 percent of up to $10,000 in qualified wages paid to an employee. This means that an employer’s maximum credit for qualified wages paid to any employee is $5,000.

Qualified wages include the cost of employer-provided health care, but not the amount of qualified sick leave wages or family leave wages for which the employer received tax credits under the Families First Coronavirus Response Act (FFCRA) ( P.L. 116-127). Qualified wages vary based on the average number of the employer’s full-time employees in 2019:

• If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not.
• If the employer had more than 100 employees on average in 2019, the credit is allowed only for wages paid to employees for time they did not work.

In each case, the wages that qualify are those paid for a calendar quarter in which the employer experiences an economic hardship.

To claim the credit, employers must report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return, beginning with the second quarter of 2020. If an employer does not have enough federal employment taxes to cover the amount of the credit (after they have deferred deposits of employer Social Security taxes), it may request an advance payment of the credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19, to the IRS.

The IRS has more information on the credit at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act and https://www.irs.gov/coronavirus-tax-relief-and-economic-impact-payments.

The Treasury Department and the IRS have provided tax relief to certain individuals and businesses affected by travel disruptions arising from the coronavirus (COVID-19) emergency.

The Treasury Department and the IRS have provided tax relief to certain individuals and businesses affected by travel disruptions arising from the coronavirus (COVID-19) emergency. Under the guidance:

• up to 60 consecutive calendar days of U.S. presence that are presumed to arise from COVID-19 travel disruptions will not be counted for determining U.S. tax residency under Code Sec. 7701(b), or determining whether an individual qualifies for tax treaty benefits for income from personal services performed in the United States;
• for certain U.S. citizens and residents, qualification for gross income exclusion of foreign earned income under Code Sec. 911 will not be impacted by days spent away from a foreign country due to the COVID-19 emergency; and
• certain U.S. business activities by a nonresident alien or foreign corporation will not be counted for determining whether the individual or entity is engaged in a U.S. trade or business or has a U.S. permanent establishment.

COVID-19 Medical Condition Travel Exception
Travel and related disruptions resulting from the COVID-19 emergency may cause foreign individuals who did not anticipate meeting the “substantial presence test” under Code Sec. 7701(b)(3) to become U.S. residents for federal tax purposes during 2020, and may impact an individual’s qualifications for certain treaty benefits. To address this, Rev. Proc. 2020-20 allows certain foreign individuals to claim a COVID-19 Medical Condition Travel Exception to becoming U.S. residents, and provides similar relief for determining whether an individual (whether or not an eligible for the medical travel exception) qualifies for U.S. income tax treaty benefits for income from dependent personal services performed in the United States.

An individual can claim a COVID-19 Medical Condition Travel Exception if he or she:

• was not a U.S. resident at the close of the 2019 tax year;
• is not a lawful permanent resident at any point in 2020;
• is present in the United States on each day of his or her COVID-19 Emergency Period; and
• does not become a U.S. resident in 2020 due to days of presence in the United States outside of the individual’s COVID-19 Emergency Period.

The COVID-19 Emergency Period is a period of up to 60 consecutive calendar days selected by an individual, starting on or after February 1, 2020, and on or before April 1, 2020, during which he or she is physically present in the United States on each day.

An eligible individual who intended to leave the United States during his or her COVID-19 Emergency Period but could not leave due to COVID-19 emergency travel disruptions can exclude up to 60 calendar days of presence in the United States for the substantial presence test. The COVID-19 emergency will be considered a medical condition that kept the individual from leaving the United States on each day during his or her COVID-19 Emergency Period, and will not be treated as a pre-existing medical condition.

Further, any days of presence during an individual’s COVID-19 Emergency Period on which he or she was unable to leave the United States due to COVID-19 emergency travel disruptions will not be counted in determining his or her eligibility for treaty benefits for income from employment or performing other dependent personal services within the United States.

The guidance provides details on claiming a COVID-19 Medical Condition Travel Exception and an exemption from income withholding under a U.S. income tax treaty.

Foreign Earned Income Exclusion Relief
Rev. Proc. 2020-27 provides a waiver for certain individuals who failed to meet the eligibility requirements of Code Sec. 911(d)(1) for the foreign earned income exclusion because adverse conditions in a foreign country kept the individual from meeting the requirements during 2019 and 2020. The COVID-19 emergency is an adverse condition that precluded the normal conduct of business in:

• the People’s Republic of China (excluding the Special Administrative Regions of Hong Kong and Macau (China)) as of December 1, 2019; and
• any other foreign country, as of February 1, 2020.

The covered period ends on July 15, 2020, unless the Treasury Department and IRS announce an extension.

Under this relief, an individual who left the particular foreign country on or after the dates stated above, but on or before July 15, 2020, will be treated as a qualified individual under the foreign earned income exclusion rules for the period when he or she was present in, or was a bona fide resident of, that foreign country if the individual establishes a reasonable expectation that he or she would have met the requirements of Code Sec. 911(d)(1) but for the COVID-19 Emergency. An individual who was first physically present or established residency in China after December 1, 2020, or another foreign country after February 1, 2020, is not eligible.

Individuals seeking to qualify for the foreign earned income exclusion because they could reasonably have been expected to have been present in a foreign country for 330 days but for the COVID-19 Emergency, and have met the other requirements to qualify, may use any 12-month period to meet the qualified individual requirement.

Previously issued revenue procedures under Code Sec. 911(d)(4) remain in full force and effect. Rev. Proc. 2020-14, 2020-16 I.R.B. 661, is supplemented.

U.S. Business Activities
Nonresident aliens who perform services or other activities in the United States, and foreign corporations that employ individuals to perform services or other activities in the United States, and are engaged in a U.S. trade or business are subject to federal tax on their business income from that trade or business. If the individuals performing those services or activities are temporarily in the United States solely due to COVID-19 emergency travel disruptions, the nonresident alien or foreign corporation might be treated as engaged in a U.S. trade or business even though it would not be if the individuals performing the services were not present in the United States.

IRS frequently asked questions (FAQs)—at https://www.irs.gov/newsroom/information-for-nonresident-aliens-and-foreign-businesses-impacted-by-covid-19-travel-disruptions—provide that certain U.S. business activities conducted by a nonresident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether the individual or entity is engaged in a U.S. trade or business or has a U.S. permanent establishment, if those activities would not have been conducted in the United States but for the COVID-19 travel disruptions.

The IRS and the Employee Benefits Security Administration are extending certain timeframes during the Outbreak Period for group health plans, disability and other welfare plans, pension plans, and participants and beneficiaries of these plans during the COVID-19 National Emergency. The beginning of the Outbreak Period is March 1, 2020. The end date is yet to be determined.

The IRS and the Employee Benefits Security Administration are extending certain timeframes during the Outbreak Period for group health plans, disability and other welfare plans, pension plans, and participants and beneficiaries of these plans during the COVID-19 National Emergency. The beginning of the Outbreak Period is March 1, 2020. The end date is yet to be determined.

Outbreak Period
Under the relief, all group health plans, disability and other employee welfare benefit plans, and employee pension benefit plans subject to ERISA or the IRC must disregard the period from March 1, 2020, until sixty days after the announced end of the National Emergency.

Affected Deadlines for Plan Participants
The following periods and dates for all plan participants, beneficiaries, qualified beneficiaries, or claimants:

• The 30-day period (or 60-day period, if applicable) to request special enrollment into any group plan under Code Sec. 9801(f) and ERISA Sec. 701(f);
• The 60-day election period for COBRA continuation coverage under Code Sec. 4980B(f)(5) and ERISA Sec. 605;
• The date for making COBRA premium payments under Code Sec. 4980B(f)(2)(B)(iii) and (C), and ERISA Sec. 602(2)(C) and (3);
• The date for individuals to notify the plan of a qualifying event or determination of disability under Code Sec. 4980B(f)(6)(C) and ERISA Sec. 606(a)(3);
• The date within which claimants may file a request for an external review after receipt of an adverse benefit determination or final internal adverse benefit determination pursuant to 26 Reg. §54.9815–2719(d)(2)(i) and 29 CFR 2590.715–2719(d)(2)(i), and
• The date within which individuals may file a benefit claim under the plan’s claims procedure pursuant to 29 CFR 2560.503–1, and the date within which claimants may file an appeal of an adverse benefit determination under the plan’s claims procedure pursuant to 29 CFR 2560.503–1(h).

Affected Dates for Group Health Plans
With respect to group health plans, and their sponsors and administrators, the Outbreak Period shall be disregarded when determining the date for providing a COBRA election notice under Code Sec. 4980B(f)(6)(D) and ERISA section 606(c).

Due to the 2019 Novel Coronavirus outbreak (COVID-19), the IRS has provided increased flexibility with respect to:

• 2020 mid-year elections under a Code Sec. 125 cafeteria plan related to employer-sponsored health coverage, health Flexible Spending Arrangements (health FSAs), and dependent care assistance programs; and
• grace periods to apply unused amounts in health FSAs to medical care expenses incurred through December 31, 2020, and unused amounts in dependent care assistance programs to dependent care expenses incurred through December 31, 2020.

Due to the 2019 Novel Coronavirus outbreak (COVID-19), the IRS has provided increased flexibility with respect to:

• 2020 mid-year elections under a Code Sec. 125 cafeteria plan related to employer-sponsored health coverage, health Flexible Spending Arrangements (health FSAs), and dependent care assistance programs; and
• grace periods to apply unused amounts in health FSAs to medical care expenses incurred through December 31, 2020, and unused amounts in dependent care assistance programs to dependent care expenses incurred through December 31, 2020.

This relief is retroactive to January 1, 2020.

An employer that decides to amend one or more of its Code Sec. 125 cafeteria plans to provide for mid-year election changes for employer-sponsored health coverage, health FSAs, or dependent care assistance programs, or to provide for an extended period to apply unused amounts remaining in a health FSA or a dependent care assistance program to pay or reimburse medical care expenses or dependent care expenses in a manner consistent with this relief, must adopt a plan amendment on or before December 31, 2021, which may be effective retroactively to January 1, 2020.

Cafeteria Plan Elections
Qualified benefits provided under a cafeteria plan include employer-provided accident and health plans excludable under Code Secs. 105(b) and 106, health FSAs excludable under Code Secs. 105(b) and 106, and dependent care assistance programs excludable under Code Sec. 129. Elections regarding these benefits are generally irrevocable, and must be made prior to the first day of the plan year. However, a cafeteria plan may permit an employee to revoke an election during a period of coverage and make a new election under certain circumstances, such as if the employee experiences a change in status or there are significant changes in the cost of coverage.

During 2020, a cafeteria plan may also permit eligible employees to:

• with respect to employer-sponsored health coverage: (a) make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage; (b) revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis; and (c) revoke an existing election on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer;
• revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA on a prospective basis; and
• revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.

To accept an employee’s revocation of an existing election for employer-sponsored health coverage, the employer must receive from the employee an attestation in writing that the employee is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer. The employer may rely on the written attestation provided by the employee, unless the employer has actual knowledge that the employee is not, or will not be, enrolled in other comprehensive health coverage not sponsored by the employer.

This relief may be applied retroactively to periods on or after January 1, 2020.

Health FSAs, Dependent Care Assistance
A cafeteria plan may permit the carryover of unused amounts remaining in a health FSA at the end of a plan year, subject to the carryover limit (currently $550). Additionally, cafeteria plan may permit a grace period to apply unused amounts (including amounts remaining in a health FSA or dependent care assistance program) at the end of a plan year to pay expenses incurred for those same qualified benefits during the period of up to two months and 15 days immediately following the end of the plan year. For a health FSA, a cafeteria plan may adopt a carryover or a grace period (or neither), but may not adopt both.

For unused amounts remaining in a health FSA or a dependent care assistance program at the end of a grace period or plan year ending in 2020, a cafeteria plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses incurred through December 31, 2020. For example, if an employer sponsors cafeteria plan with a health FSA that has a calendar year plan year and provides for a grace period ending on March 15 immediately following the end of each plan year, the employer may amend the plan to permit employees to apply unused amounts remaining in an employee’s health FSA as of March 15, 2020, to reimburse the employee for medical care expenses incurred through December 31, 2020.

This relief may be applied on or after January 1, 2020 and on or before December 31, 2020.

Impact of Health FSA Reimbursements
Code Sec. 223 permits eligible individuals to establish and contribute to health savings accounts (HSAs). With respect to any month, an eligible individual is any individual who:

• is covered under a high deductible health plan (HDHP) as of the first day of such month; and
• is not, while covered under an HDHP, covered under any health plan (a) which is not an HDHP, and (b) which provides coverage for any benefit which is covered under the HDHP.

An HDHP is a health plan that satisfies the minimum annual deductible requirement and maximum out-of-pocket expenses requirement under Code Sec. 223(c)(2)(A).

Coverage by a general purpose health FSA is coverage by a health plan that disqualifies an otherwise eligible individual from contributing to an HSA. Similarly, a telemedicine arrangement would generally disqualify an otherwise eligible individual from contributing to an HSA.

The government has previously provided relief for these issues. Notice 2020-15, I.R.B. 2020-14, 559, provides that a health plan that otherwise satisfies the requirements to be an HDHP will not fail to be an HDHP merely because the health plan provides medical care services and items purchased related to testing for and treatment of COVID-19. Likewise, Section 3701 of the CARES Act amends Code Sec. 223(c) to provide a temporary safe harbor for providing coverage for telehealth and other remote care services.

The new relief clarifies that Notice 2020-15 may be applied retroactively to January 1, 2020. For example, an otherwise eligible individual with coverage under an HDHP who also received coverage beginning February 15, 2020, for telehealth and other remote care services under an arrangement that is not an HDHP will not be disqualified from contributing to an HSA during 2020.

The IRS has released proposed regulations that address changes made to Code Sec. 162(f) by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). The proposed regulations provide operational and definitional guidance on the deductibility of fines and penalties paid to governmental entities.

The IRS has released proposed regulations that address changes made to Code Sec. 162(f) by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). The proposed regulations provide operational and definitional guidance on the deductibility of fines and penalties paid to governmental entities.

TCJA Changes
Under amended Code Sec. 162(f), businesses may not deduct fines and penalties that are paid or incurred after December 21, 2017, due to the violation of a law or the investigation of a violation of law, if a government or similar entity is a complainant or investigator. Exceptions are available in certain cases where the payment was made for restitution, remediation, taxes due, or to come into compliance with a law.

In order for the exceptions to apply, the taxpayer must identify the payment as restitution or compliance in a court order or settlement agreement. In addition, Code Sec. 6050X requires that the officer or employee that has control over the suit or agreement, or the individual designated by the government or entity, must file a return with the IRS.

Establishing Restitution or Remediation
Under the proposed regulations, a taxpayer can establish that a payment was made for restitution or remediation by providing documentary evidence showing:

• the taxpayer was legally obligated to pay the amount of the order or agreement identified as restitution, remediation, or to come into compliance with a law;
• the amount paid or incurred; and
• the date on which the amount was paid or incurred.

The proposed regulations provide a list of documents that taxpayers can use to satisfy the establishment requirement. The regulations also clarify that reporting of the amount by a government or governmental entity under Code Sec. 6050X alone does not satisfy the establishment requirement.

Identification Requirement
According to Code Sec. 162(f)(2)(A), an order or agreement must identify the amount paid or incurred as restitution, remediation, or to come into compliance with a law. The proposed regulations state that an order or agreement should identify a payment by stating both (1) the nature of, or purpose for, each payment, and (2) the amount of each payment identified. Reporting of the amount by a government or governmental entity under Code Sec. 6050X does not satisfy the identification requirement.

Taxes and Interest
Under Code Sec. 162(f)(4), taxpayers may still deduct any taxes due, including any related interest on the taxes. However, the proposed regulations clarify that taxpayers may not deduct interest related to penalties.

Reporting Requirements
The proposed regulations provide appropriate officials with operational, administrative, and definitional rules for complying with statutory information reporting requirements with respect to Code Sec. 162(f). If the aggregate amount a payor is required to pay equals or exceeds the threshold amount under Proposed Reg. §1.6050X-1(g)(5), the appropriate official must file an information return with the IRS with respect to the amounts or incurred paid and any additional information required.

According to the proposed regulations, they must provide this information by filing Form 1098-F, Fines, Penalties, and Other Amounts, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns, on or before the annual due date. However, the proposed regulations do not require an appropriate official to file information returns for each tax year in which a payor makes a payment pursuant to a single order or agreement. Instead, the appropriate official must file only one information return for the aggregate amount identified in the order or agreement.

The proposed regulations also require that the appropriate official furnish a written statement to each payor with respect to which it is required to file an information return. The written statement must include the information that was reported on the information return, and a legend that identifies the statement as important tax information that is being furnished to the IRS. They can satisfy this requirement by providing a copy of Form 1098-F to the payor.

Material Change
According to the TCJA, the amendments to Code Sec. 162(f) apply to agreements entered into on or after December 22, 2017. The proposed regulations clarify that if the parties to an agreement that was binding prior to December 22, 2017, make a material change to that agreement on or after the date that the proposed regulations become final, the regulations will apply to the agreement.

If there is a material change to the agreement, the proposed regulations require the appropriate official to update the IRS by filing a corrected Form 1098-F on or before January 31 of the year following the calendar year. The proposed rules also require the appropriate official to furnish an amended written statement to the payor.

Definitions
The proposed regulations also define key terms and phrases for purposes of Code Sec. 162(f) and Code Sec. 6050X. These include "government," "governmental entity," "nongovernmental entity treated as a governmental entity," "restitution," "remediation of property," "amounts paid to come into compliance with a law," "appropriate official," "payor," and "threshold amount."

Effective Date
Proposed Reg. §1.162-21 is proposed to apply to tax years beginning on or after the date the proposed regulations are published as final regulations, but those rules do not apply to amounts paid or incurred under any order or agreement which became binding under applicable law before such date. Prior to the effective date, taxpayers may rely on Proposed Reg. §1.162-21, but only if they apply the rules in their entirety and in a consistent manner.

Proposed Reg. §1.6050X-1 is proposed to apply to orders and agreements that become binding under applicable law on or after January 1, 2022.

Comments
Taxpayers may submit comments via the Federal eRulemaking Portal at www.regulations.gov by following the online instructions for submitting comments and indicating IRS and REG-104591-18. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. Hard copy submissions must be addressed to: CC:PA:LPD:PR (REG-104591-18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Until further notice, any comments submitted on paper will be considered only to the extent practicable.

A partnership was denied a charitable contribution deduction because it had entered in an conservation easement that violated the perpetuity requirement of Code Sec. 170(h)(5) and its regulations. The Tax Court held that if there is a judicial extinguishment of an easement the donee receives a proportionate value of any proceeds.

A partnership was denied a charitable contribution deduction because it had entered in an conservation easement that violated the perpetuity requirement of Code Sec. 170(h)(5) and its regulations. The Tax Court held that if there is a judicial extinguishment of an easement the donee receives a proportionate value of any proceeds.

Easement Deed
The taxpayer had donated a conservation easement to a land trust and claimed a charitable contribution deduction. The easement deed provided that if the conservation restriction were extinguished at some future date, the donee would receive a share of the proceeds equal to the fair market value (FMV) of the easement on the date the contribution was made. The deed further provided that the donee’s share as thus determined would be reduced by the value of any improvements made by the donor after granting the easement.

The taxpayer argued that Reg. §1.170A-14(g)(6) does not say that the donee is entitled to a proportionate "share" of any proceeds upon extinguishment of the easement but proportionate "value." It argued this means fixed value, and because the regulation requires that the value be fixed as of the donation date, the donee was not entitled to any proceeds attributable to the value of post-donation improvements.

Windfall for Donees?
The IRS disallowed the deduction, contending that the extinguishment clause violated the requirements of Reg. §1.170A-14(g)(6). The Tax Court concurred with the IRS’s reasoning and held that the easement deed violated the "protected in perpetuity" requirement of Code Sec. 170(h)(5), as interpreted in Reg. §1.170A-14(g)(6).

The court held that the donee’s share of the "proportionate value" as used in the regulation means a fraction of the proceeds from a judicial extinguishment, and not a fixed value.

The taxpayer argued that it was unfair for a donee to receive extinguishment proceeds attributable to the value of improvements made solely by the donor, because it would amount to an unintended charitable contribution for which it received no deduction. However, the Tax Court found that the purpose of the regulation is to avoid any windfalls to donors, not donees, if an easement was extinguished. The easement deed violated the regulation because the donee must be entitled to any proceeds from extinguishment or condemnation that were at least equal to the total proceeds multiplied by a fraction defined by the ratio of the FMV of the easement to the FMV of the unencumbered property determined as of the date of the easement deed.

The taxpayer was not liable for accuracy-related penalties, because it acted reasonably and in good faith. The partner was unfamiliar with the nuances of setting up a conservation easement and had relied on private letter rulings.

Regulation Valid
The taxpayer challenged the validity of Reg. §1.170A-14(g)(6), which the Tax Court addressed in a concurrent opinion. The taxpayer contended the "proportionate value" approach to division of proceeds from a judicial extinguishment of the easement does not take into account the possibility of donor improvements. The Tax Court held that the regulation was properly promulgated, as it substantially revised the text regarding the proportionate value in response to comments and had only received one comment on the possibility of improvements. The court therefore found that the regulation was valid under the Administrative Procedure Act, 5 U.S.C. Section 553.

The Tax Court further relied on the two-part test given in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984), and held that the construction of Code Sec. 170(h)(5) as set forth in Reg. §1.170A-14(g)(6) was valid. The Treasury exercised reasoned judgment by adhering to a simple rule that split sale proceeds in a direct proportional manner on the basis of a fraction determined as of the date the gift was made. Because the regulation as drafted ensures satisfaction of the statutory mandate that the conservation purpose be "protected in perpetuity," the regulation was not arbitrary, capricious, or manifestly contrary to the Code.

The IRS has released proposed regulations clarifying that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions:

The IRS has released proposed regulations clarifying that the following deductions allowed to an estate or non-grantor trust are not miscellaneous itemized deductions:

• costs paid or incurred in connection with the administration of an estate or non-grantor trust that would not have been incurred if the property were not held in the estate or trust;
• the personal exemption of an estate or non-grantor trust;
• the distribution deduction for trusts distributing current income; and
• the distribution deduction for estates and trusts accumulating income.

These deductions are not affected by the suspension of the deductibility of miscellaneous itemized deductions for tax years beginning after December 31, 2017, and before January 1, 2026. The proposed regulations also provide guidance on determining the character, amount, and allocation of deductions in excess of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust. Specifically, the proposed regulations clarify that the character of the deductions does not change when succeeded to by a beneficiary on termination of the estate or trust, and require the fiduciary to separately identify deductions that may be limited when claimed by the beneficiary. The proposed regulations affect estates, non-grantor trusts (including the S portion of an electing small business trust), and their beneficiaries.

Section 67(g)
Code Sec. 67(g), as added by the Tax Cuts and Jobs Act ( P.L. 115-97) (TCJA), prohibits individual taxpayers from claiming miscellaneous itemized deductions for any tax year beginning after December 31, 2017, and before January 1, 2026. The Treasury Department and the IRS had issued Notice 2018-61, 2018-31 I.R.B. 278, announcing that proposed regulations would address the effect of Code Sec. 67(g) on the deductibility of certain expenses described in Code Sec. 67(b) and (e) incurred by estates and non-grantor trusts. The notice states that regulations would clarify that expenses described in Code Sec. 67(e) remain deductible in determining the adjusted gross income of an estate or non-grantor trust during the tax years in which Code Sec. 67(g) applies.

Notice 2018-61 requested comments regarding the effect of Code Sec. 67(g) on the ability of the beneficiary to deduct amounts comprising the Code Sec. 642(h)(2) excess deduction on the termination of an estate or trust considering Code Sec. 642(h) and Reg. §1.642(h)-2(a), and expressed the intent to address this issue in regulations. The Treasury Department and IRS also requested comments on whether the separate deductions comprising the Code Sec. 642(h)(2) excess deduction (such as Code Sec. 67(e) deductions) should be analyzed separately when applying Code Sec. 67.

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.

Vacation homes offer owners many tax breaks similar to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income. The value of vacation homes are also on the rise again, offering an investment side to ownership that can ultimately be realized at a beneficial long-term capital gains rate.

Vacation homes offer owners many tax breaks similar to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income. The value of vacation homes are also on the rise again, offering an investment side to ownership that can ultimately be realized at a beneficial long-term capital gains rate.

Homeowners can deduct mortgage interest they pay on up to $1 million of "acquisition indebtedness" incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.

Vacation homeowners don't need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motor home so long as it includes sleeping, cooking, and toilet facilities.

Capital gain on vacation properties. Gains from selling a vacation home are generally taxed as long-term capital gains on Schedule D. As with a primary residence, basis includes the property's contract price (including any mortgage assumed or taken "subject to"), nondeductible closing costs (title insurance and fees, surveys and recording fees, transfer taxes, etc.), and improvements. "Adjusted proceeds" include the property's sale price, minus expenses of sale (real estate commissions, title fees, etc.). The maximum tax on capital gain is now 20 percent, with an additional 3.8 percent net investment tax depending upon income level. There's no separate exclusion that applies when selling a vacation home as there is up to $500,000 for a primary residence.

Vacation home rentals. Many vacation home owners rent those homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.

1. Income from rentals totaling not more than 14 days per year is nontaxable.
2. Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E of Form 1040. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
3. Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true "rental" property, which entitled them to a greater number of deductions.