The IRS has released proposed regulations for determining business tax deductions for certain non-corporate enterprises (e.g., sole proprietorships, partnerships, S corporations) which pass through business income to an owner’s individual income tax return.
The Tax Cuts and Jobs Act of 2017 (federal tax reform legislation) altered the taxation not only of corporations, but also of such pass-through-taxed business entities. These businesses generally can deduct 20 percent of their qualified business income. These regulations are intended to aid in determining this tax deduction, which will be available to eligible taxpayers for the first time when filing their 2018 tax returns.
In addition to the proposed regulations, the IRS has also issued Notice 2018-64, which contains a proposed revenue procedure that provides guidance on methods for calculating W-2 wages for such business owners receiving pass-through income, and determining their tax obligations under the tax reform provisions.
The IRS has issued News Release CA-2018-11 announcing tax-related deadline relief for certain California residents who are victims of recent wildfires. In addition to postponement of tax return deadlines falling within dates identified in the news release, the relief includes postponement of deadlines for completing certain time-sensitive tax-related acts specified in Treasury Regulation 301.7508A-1(c)(1).
These acts include completion of rollovers or recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under this regulation. For those who qualify, such deadlines falling on or after July 23, 2018, and on or before November 30, 2018, are postponed to November 30, 2018.
The area identified as directly qualifying for relief is currently limited to Shasta County. The relief applies specifically to residents of the identified area, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area who is injured or killed as a result of the disaster events is also entitled to deadline relief.
Affected taxpayers who reside or have a business located outside the covered disaster area are required to call the IRS disaster hotline at 1-866-562-5227 to request relief to which they feel they may be entitled.
Published in the August 3, 2018, Federal Register are final regulations providing rules on the automatic and non-automatic extensions of time to file certain information returns. Initially proposed in August 2015, the regulations sought to remove the automatic 30-day extension—obtained by filing Form 8809, Application for Extension of Time to File Information Returns—of time to file the Form W-2 series (excluding Form W-2G, Certain Gambling Winnings), replacing it with an additional, non-automatic 30-day extension. This non-automatic extension would require filers to submit requests for the extension to the IRS, subject to approval (whereas filing Form 8809 results in an automatic extension). The final regulations expand the list of forms subject to the updated non-automatic extensions to include forms reporting nonemployee compensation (i.e., Form 1099-MISC, Miscellaneous Income).
Forms Retaining Automatic Extension
Forms retaining the automatic extension include Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, forms that report employee compensation in the Form 1099 series (including Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.), and forms in the Form 5498 series (including Form 5498, IRA Contribution Information). The final regulations are effective as of August 3.
Following is the complete list of forms mentioned in the final regulations and whether they are allowed the automatic extension.
Automatic 30-day extension retained
Form 1097 series
Form 1098 series
Form 1099 series (for forms reporting employee compensation)
Form 5498 series
1099-MISC (reporting of nonemployee compensation)
Form W-2 series (excluding Form W-2G)
The House of Representatives passed two bills that would make changes to health savings accounts (HSAs), Archer medical savings accounts (MSAs), flexible spending accounts (FSAs), and health reimbursement arrangements (HRAs). There currently is no timetable for their being taken up by the Senate, nor certainty that they will be, during the 2018 session. HSAs are increasingly high profile savings vehicles, given the significant shift toward high-deductible health plans (HDHPs) as an employer health care benefit.
H.R. 6199, Restoring Access to Medication and Modernizing Health Savings Accounts Act of 2018, would do the following.
- Allow HSA-eligible health plans to provide first-dollar coverage (coverage prior to satisfying a deductible) of a non-preventive nature in amounts up to $250 for those with individual coverage, $500 for those with family coverage
- Allow treatment at an on-site employer or retail (e.g., pharmacy) clinic without the recipient being considered covered by an HSA-disqualifying health plan
- HSA contribution eligibility under specified circumstances would not be affected by a spouse who is covered by a health FSA
- A newly-established HSA could receive amounts transferred from a health FSA or HRA in an amount not to exceed the maximum annual FSA contribution limit ($2,650 for an individual and $5,300 for family for 2018)
- Treat certain health and fitness expenses as qualified medical expenses for HSA, MSA, FSA, and HRA purposes
- Allow individuals covered by a “direct primary care arrangement,” under which they receive ongoing care under a fixed periodic fee, as HSA-eligible, in the absence of any other HSA-disqualifying factor
- Treat certain non-prescription medications and health aids (e.g., Ibuprofen, menstrual care products) as qualified medical expenses for HSA, MSA, HRA, and FSA purposes
H.R. 6311, Increasing Access to Lower Premium Plans and Expanding Health Savings Accounts Act of 2018, would do the following.
- Increase the maximum annual HSA contribution to $6,650 for single coverage, $13,300 for family coverage (indexed)
- If both spouses are eligible for the $1,000 HSA annual catch-up contribution, both amounts could be allocated to the account of one spouse
- Treat individuals enrolled in Medicare Part A-only as HSA contribution-eligible, if no other disqualifying factors
- If an HSA is established within 60 days after an individual is covered by an HSA-eligible HDHP, that HSA will be treated as if it was established on the date coverage began, for purposes of covering medical expenses
- Treat certain catastrophic and bronze-level health plans (as defined under the Patient Protection and Affordable Care Act, “Obamacare”) as HSA-eligible HDHP plans
- Allow FSA year-to-year carryover of up to three times the annual FSA contribution limit (currently $2,650 for individual)
Watch the Ascensus News for further developments.
Senator Rob Portman (R-OH) and Senator Ben Cardin (D-MD), who in several previous sessions of Congress have introduced legislation primarily focused on retirement plan enhancement and simplification, have teamed up to introduce “The Protecting Taxpayers Act.”
This legislation primarily is intended to make the IRS more responsive and accountable to taxpayers. Most of the bill’s provisions are of that nature. But one provision included in the legislation could have a significant effect on employer-sponsored retirement plan administration. This provision would “allow retirement plan administrators, except as otherwise provided in regulation, to self-correct all inadvertent plan violations without additional submissions to the IRS.”
This could have a dramatic effect on the number of retirement plan operational failures that would require formal submission and payment of fees for plan corrections. Given the prominence of these senators and the popular concept of a more responsive and accountable IRS, the bill is likely to have bipartisan support. Working against it in this session of Congress, however, is the short remaining schedule of Congressional work days.
The IRS has released the finalized version of the 2018 tax year Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The form reports distribution amounts from retirement savings arrangements and certain other investments, as well as the associated reasons or circumstances for distributions (e.g., early, normal or death distributions).
One notable change is the addition of Code M for certain retirement plan loan amounts that are offset and treated as distributed. Under the Tax Cuts and Jobs Act of 2017, a retirement plan loan that is offset due to plan termination or the plan participant’s separation from employment has an extended time period during which it may be made up and rolled over to an IRA or another employer-sponsored retirement plan. That extended deadline is the individual’s tax return filing deadline for the year of offset, including any tax filing extension.
Earlier this month, the Instructions for Forms 1099-R and 5498 were released. The IRS also released an updated version of the 2018 General Instructions for Certain Information Returns.
A “House GOP Listening Session Framework” document, released by the Ways and Means Committee, hints at retirement savings provisions to be included in another round of tax reform legislation, referred to as “Tax Reform 2.0.” The document contains only broad, general descriptions, but many expect significantly more retirement savings provisions to be in the full legislative package when released.
Included in the document is a provision to create a “universal savings account,” a new tax-favored savings account that could be used for general purposes. Another provision would create a “new baby” early distribution exception. Amounts withdrawn from retirement savings arrangements when a new child is born to or adopted by parents with such accounts would not be subject to the 10 percent early distribution penalty tax. In addition, withdrawn amounts could be repaid under the legislation’s terms.
More details on this second round of tax cut legislation are expected to be released soon. Many feel, however, that passage in the Senate is less likely than in the House.
The IRS and Department of the Treasury have issued final regulations amending the definitions of qualified nonelective contribution (QNEC) and qualified matching contribution (QMAC), settling the issue of whether participant forfeitures can be used to fund QNECs and QMACs.
QNECs and QMACs are types of employer contributions to qualified retirement plans commonly used to correct certain contribution testing failures in 401(k)-type plans. Unless certain safe harbor exemptions apply, 401(k) plans generally must satisfy rules that limit the disparity between the average deferrals of highly compensated employees (HCEs) and nonhighly compensated employees (nonHCEs). Similarly, in nonsafe harbor situations, 401(k) plans must satisfy rules that limit the disparity between average matching contributions of HCEs and nonHCEs. To correct testing failures under these rules, employers can make QNECs and QMACs.
These final regulations finalize the proposed regulations issued by the IRS in January 2017, which first altered the definitions of QNEC and QMAC to allow the use of forfeitures in funding QNEC and QMAC contributions. Before 2017, the IRS and Treasury Department interpreted the 401(k) regulations in a manner that did not permit the use of participant forfeitures to fund these employer contributions.
The final regulations are scheduled to be published as early as July 20 in the Federal Register, and will take effect on that publication date.
The IRS has released the 2018 tax year Instructions for Forms 1099-R and 5498. This release was much anticipated because of tax law changes resulting from the Tax Cuts and Jobs Act in December 2017 and the Bipartisan Budget Act in February 2018. The release of these detailed instructions was delayed substantially from prior years.
The following changes are included in the 2018 Instructions.
- No recharacterizing of 2018 or later Roth IRA conversions, or 2018 or later retirement plan-to-Roth IRA rollovers
- Special rules for victims of 2016 and 2017 natural disasters
- New Form 1099-R reporting code for a qualified plan loan offset distribution due to severance from employment or termination of a plan
- New Form 5498 reporting code for rollover of offset retirement plan loans
- Special reporting for U.S. Armed Forces in designated combat zones
Although the IRS previously released the 2018 version of Form 5498, IRA Contribution Information, as of this writing, the IRS had not released the 2018 version of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
The IRS has issued News Release TX-2018-05, describing tax-related deadline relief available to victims of severe storms and flooding in Texas. In addition to postponement of tax return deadlines falling within dates identified in the news release, the relief includes postponement of deadlines for completing certain time-sensitive tax-related acts specified in Treasury Regulation 301.7508A-1(c)(1). These acts include completion of rollovers or recharacterizations, correction of certain excess contributions, making plan loan payments, filing Form 5500, and certain other acts under this regulation.
Such deadlines falling on or after June 19, 2018, and on or before October 31, 2018, are postponed to October 31, 2018.
The Texas counties included in the relief at this time include Cameron and Hidalgo. The relief applies specifically to residents of these identified areas, to those whose businesses or records necessary to meet a covered deadline are located there, and to certain relief workers providing assistance following the disaster events. Any individual visiting a covered disaster area who is injured or killed as a result of the events is also entitled to deadline relief. Affected taxpayers who reside or have a business located outside the covered disaster area are required to call the IRS disaster hotline at 866-562-5227 to request relief.