Final regulations relating to the low-income housing tax credit revise and clarify requirements that low-income housing agencies must follow when conducting physical inspections of low-income units and reviewing low-income certifications and other documentation. The regulations finalize previously issued temporary regulations (T.D. 9753, February 25, 2016).
Final regulations relating to the low-income housing tax credit revise and clarify requirements that low-income housing agencies must follow when conducting physical inspections of low-income units and reviewing low-income certifications and other documentation. The regulations finalize previously issued temporary regulations (T.D. 9753, February 25, 2016).
Sample Inspection Size
The final regulations require the agency to inspect no fewer units than the number specified in the "Low-Income Housing Credit Minimum Unit Sample Size Reference Chart." The reference chart can be found in Rev. Proc. 2016-15, I.R.B. 2016-11, 435, and is borrowed from the U.S. Housing and Urban Development (HUD) Real Estate Assessment Center Protocol (the REAC protocol). Previously, an agency was permitted to inspect 20 percent of the low-income housing units in the project if this was lesser than the number required by the reference chart. This change addresses a concern that limiting physical inspections to 20 percent of units in small projects is not sufficient to ensure overall compliance with habitability and low-income requirements.
All-Buildings Requirement
No change is made to the requirement that an agency must inspect all buildings in a low-income housing project by the end of the second calendar year after the year in which the last building in the project is placed in service unless a project inspection is conducted under the REAC protocol. Suggestions that the IRS dispense with the all-buildings requirement for agencies not using the REAC protocol were not adopted.
Reasonable Notice Time Frame Shortened
A building owner and tenants are allowed a maximum 15 day advance notice that a project will be inspected. The temporary regulations allowed a 30-day notice period. The particular units to be inspected may only be identified on the day of the inspection. The 15 day advance notice limit will also apply to reviews of low-income certifications.
Amendment of Agency’s Qualified Allocation Plan
The final regulations are effective on February 26, 2019. However, an agency only needs to amend it qualified allocation plan by December 31, 2020, to reflect the requirements in the final regulations.
Rev. Proc. 2016-15 is obsolete with respect to an agency as of the date that on which the agency amends its qualified allocation plan.
The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).
The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).
Underpayment Penalty
The IRS announced in IRS News Release IR-2019-3 that it would waive the underpayment penalty for any taxpayer who paid at least 85 percent of their total tax liability during the 2018 tax year. The usual threshold is 90 percent. However, Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., has said that the IRS should "do more."
"Instead of penalizing those who paid less than 90 percent of what they owed in 2018, now they’re penalizing those who paid less than 85 percent," Wyden said on February 7 from the Senate floor. "That was one small step in the right direction," he added.
Before the IRS’s news release, Wyden wrote to Treasury and the IRS urging the waiver of underpayment penalties for withholding errors related to the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Although the IRS did lower the penalty threshold for the 2018 tax year, Wyden stated on February 7 that "nobody should be penalized for the Trump administration’s mistakes on tax withholding."
Democrats are largely opposed to the TCJA as a whole, and claim that Republicans’ tax code overhaul was rushed. Thus, significant tax withholding errors and underpayments are expected to be incurred. "Change the penalty thresholds. Extend safe harbors. Whatever needs to happen," Wyden said.
Additionally, several Republicans have also voiced their concern about the expected increase in underpayment related to withholding. SFC Chairman Chuck Grassley, R-Iowa, recently urged the IRS to be "lenient" on underpayment penalties for 2018, as it is the first tax year since tax reform implementation.
AICPA
The American Institute of Certified Public Accountants (AICPA) has likewise urged Treasury and the IRS to provide more extensive penalty relief. "The substantial uncertainty surrounding the implementation of the TCJA and the updated federal tax withholding tables presented a challenge for many taxpayers in understanding and accounting for their tax liability," Annette Nellen, chair of the AICPA’s Tax Executive Committee said in a recent letter to Treasury and the IRS. The AICPA has recommended an 80 percent threshold for the underpayment penalty waiver.
Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.
Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.
Craft Beverage Tax Reform
The Craft Beverage Modernization and Tax Reform Bill of 2019 was introduced on February 6 by Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., and Sen. Roy Blunt, R-Mo.
"By modernizing burdensome rules and taxes for craft beverage producers, this legislation will level the playing field and allow these innovators to further grow and thrive," Wyden said in a press release. The comprehensive measure is supported by the entire craft beverage industry, according to a summary of the bill.
Generally, the Craft Beverage Modernization and Tax Reform Bill of 2019 would implement the following provisions:
For Brewers:
- Reduce excise taxes to provide more cash flow to reinvest in personal business growth.
- Simplify rules for ingredient approval and brewery collaboration.
For Vintners:
- Expand the wine producer tax credit.
- Expand allowances for tax purposes on carbonation and alcohol content for certain wines.
For Distillers:
- Establish reduced excise taxes for small craft distilleries.
- Reduce restrictions on tax-free transfers of spirits between distillers.
The bill would also exempt beverage producers from certain capitalization rules for aged products.
"The craft beverage industry is driven by small businesses that support thousands of jobs and contribute billions in economic output," Blunt said in the press release.
As of February 6, the bill has 10 bipartisan cosponsors.
The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.
The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.
50-Percent Locational Rule
Many stakeholders have urged the IRS to reconsider its proposed rule requiring that at least 50-percent of gross income of a Qualified Opportunity Zone (QOZ) business is derived from the active conduct of a trade or business within the QOZ. The IRS heard from several of these stakeholders at a full house public hearing on the proposed regulations held last week at IRS headquarters in Washington, D.C.
"[W]e’re concerned that manufacturing businesses, e-commerce enterprises, and others that have the potential to spur significant economic activity could be excluded inadvertently because of this rule," Stefan Pryor, Rhode Island Secretary of Commerce said at the hearing. Additionally, other stakeholders commented that the proposed rule would go against congressional intent.
Comment. There is no locational-related rule for gross income of QOZ businesses included in the law’s statutory language. However, the statutory language does provide a tangible property test to ensure qualifying businesses are predominantly located within the QOZ.
QOZ Business Congressional Intent
To that end, the bipartisan, bicameral tax writers who drafted the original QOZ bill language, too, have urged the IRS to remove the 50-percent gross income locational requirement.
The Opportunity Zone program was enacted under the Tax Cuts and Jobs Act ( P.L. 115-97) in 2017. The program is housed under new Code Secs. 1400Z-1 and 1400Z-2. Although not a single Democrat voted for the TCJA, the Opportunity Zone program was based on a bicameral measure sponsored by a group of bipartisan tax writers.
"Since many businesses derive income from the sale of goods and services outside of a single census tract, this would significantly limit the ability for local operating businesses to qualify for Opportunity Fund investment, contrary to congressional intent," the lawmakers wrote in a recent letter to Treasury Secretary Steven Mnuchin. "Even for those businesses who might qualify under this rule, it would impose immense new administrative burdens to track and report the location of each source of business income," they added.
Second Round of Proposed Regulations
Currently, the IRS is working on a second batch of proposed regulations for Opportunity Zones. Those proposed rules "hopefully will see the light of day shortly," Scott Dinwiddie, an IRS official in the Income Tax and Accounting division said at last week’s hearing.
The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.
The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.
IRS Cybersecurity
The IRS announced in IRS News Release IR-2018-256 last December that it would stop its tax transcript faxing service for individuals and businesses on February 4, 2019. The IRS cited to reasons of taxpayer security for the change in procedure. To that end, ceasing the IRS’s transcript faxing service would better prohibit cybercriminals from obtaining taxpayer data, according to the IRS.
Grassley, Wyden Urge Delay
SFC Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., sent IRS Commissioner Charles Rettig a letter earlier this week expressing concern with the IRS’s original timeline for discontinuing the tax transcript faxing service. The bipartisan leaders did not ask the IRS to eliminate its plan to discontinue the particular service. However, they did encourage the IRS to extend the date of discontinuation for the sake of taxpayers and practitioners in light of the recent partial government shutdown, which included the IRS.
"[W]e encourage the IRS to delay its planned discontinuation of faxing taxpayer information until such time that the agency can reasonably resolve the legitimate concerns of the tax-practitioner community about alternatives to the IRS faxing taxpayer information," Grassley and Wyden wrote. "Of course, such a delay should not compromise the security or privacy of taxpayer information."
IRS Extends Transcript Faxing Service
The IRS’s Wage & Investment Division issued a January 30 statement stating that the IRS will extend its transcript faxing service beyond February 4. Additionally, the IRS said it is reviewing options for a new timeline and will provide taxpayers and practitioners advance notice of the new date.
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.
- Income from rentals totaling not more than 14 days per year is nontaxable.
- 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.
- 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.
