Tax Reform

IRS Issues FAQs for Qualified Business Income Deduction

The IRS has published on its website a list of frequently asked questions relating to the qualified business income (QBI) deduction. The deduction was created by the 2017 Tax Cuts and Jobs Act, under Internal Revenue Code Section 199A. It permits noncorporate taxpayers to deduct up to 20 percent of QBI, plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. Individuals and some trusts and estates with QBI, qualified real estate investment trust dividends, or qualified publicly traded partnership income may be eligible for the deduction.

The IRS explains in the FAQs that deductible contributions that the taxpayer makes to a qualified retirement plan, savings incentive match plan for employees of small employers (SIMPLE) IRA plan, or simplified employee pension (SEP) plan are accounted for when determining QBI.


Newly Introduced Retirement Reform Bill Has Better Chance of Progressing

Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) have announced the introduction of the Retirement Enhancement and Savings Act (RESA) of 2019.

This legislation is a version of similar legislation introduced several times dating back to 2016. This year, however, the prospect of enacting major retirement enhancement legislation seems especially promising, given indications of bipartisan support in both the House and Senate.

RESA 2019 includes these retirement changes and enhancements.

  • Enhance the ability of employers to participate in multiple employer plans (MEPs)
  • Remove the 401(k) automatic enrollment safe harbor deferral cap entirely (now 10 percent)
  • Simplify 401(k) safe harbor rules and give employers more flexibility in electing to implement a safe harbor design
  • Increase the maximum tax credit for small employer plan start-up costs
  • Create a small employer tax credit for implementing automatic enrollment in 401(k) and SIMPLE IRA plans
  • Treat taxable non-tuition fellowship and stipend payments as compensation for IRA contribution purposes
  • Repeal the maximum age for making Traditional IRA contributions
  • Permit IRAs to hold shares of S Corporation banking entities
  • Generally prohibit credit card loans from employer plans
  • Enhance the preservation and portability of lifetime income features
  • Allow 403(b) participants to retain individual tax-favored custodial accounts upon a 403(b) plan termination
  • Clarify certain retirement plan rules relating to church controlled organizations
  • Extend the deadline to adopt a retirement plan to the employer’s tax return due date (including extensions) for that year
  • Allow combined Form 5500 reports for certain similar plans
  • Require benefit statements to defined contribution plan participants to include an annual lifetime income disclosure based on participant balance
  • Provide a fiduciary safe harbor to employers for selection of a lifetime income provider
  • Protect older, longer service employees in defined benefit plans by providing nondiscrimination relief to plans that are closed to new participants
  • Modify the Pension Benefit Guaranty Corporation premiums for single-employer, multi-employer, and cooperative and small employer charity (CSEC) plans
  • Reinstate, for one year, certain tax benefits for volunteer firefighters and emergency medical responders
  • Require most nonspouse beneficiaries of defined contribution plans and IRAs to withdraw inherited balances within 5 years of the death of the account owner; would not apply to the first $400,000 of inherited balances
  • Increase penalties for failure to file certain information returns and IRS Form 5500
  • Allow the IRS to share certain returns and return information with other governmental agencies for tax administration purposes

IRS Releases Guidance on Tax Reform’s Pass-Through Income Provisions

The Treasury Department and Internal Revenue Service have issued several elements of guidance for pass-through income taxation provisions of the Tax Cuts and Jobs Act (TCJA) of 2017. Many of the legislation’s provisions took effect for 2018 tax years. In addition to significantly reducing the corporate tax rate, TCJA provided special tax treatment for certain taxpayers who receive what is known as “pass-through income.” This includes sole proprietors and partners. Also some S-Corporation businesses generate pass-through income.

Pass-through income is “passed through” to a recipient’s individual income tax return and taxed at their individual tax rate, which under changes wrought by TCJA may now range from 10 to 37 percent. This taxable pass-through income may be reduced, however, by a Qualified Business Income Deduction. Calculation of this deduction is highly complex, but considering several potential variables, including payment of W-2 income to employees, it generally is not greater than 20 percent of Qualified Business Income. (While W-2 income does have a bearing on the magnitude of a retirement plan contribution in many cases, it has particular relevance in determining the general business income deduction available to pass-through businesses.)

Of significant concern during the TCJA legislative process was whether new pass-through income taxation rules might create a disincentive for those who receive such income to establish—or continue to maintain—an employer-sponsored retirement plan. By all indications, such disincentives have not materialized. In fact, under certain circumstances, it can be highly advantageous for a pass-through business owner to establish and contribute to a retirement plan, and thereby qualify for a greater Qualified Business Income Deduction.

Following are four pieces of guidance released by the IRS affecting pass-through income taxation. Note that the final and proposed regulations below are released in pre-published form, and minor editorial changes could be made when the final versions are released in the Federal Register (no publication date has been announced).

Final Regulations on Qualified Business Income Deduction
These final regulations provide guidance on the deduction for Qualified Business Income under TCJA’s new pass-through taxation rules. They are effective upon publication in the Federal Register, and generally apply to taxable years ending after their publication. However, the guidance further states that they—or the proposed version issued in August of 2018—generally can be relied upon for tax years ending in calendar year 2018.

Proposed Regulations for Those With Mutual Fund or Trust Interests, etc.
These new proposed regulations provide guidance on deductions available to pass-through income recipients with interests in certain regulated investment companies (mutual funds) or certain trusts, and for certain “previously suspended losses” considered Qualified Business Income. They amend certain elements of the August 2018 proposed regulations and provide anti-avoidance guidance relevant to applying TCJA’s new pass-through income taxation rules. These new proposed regulations generally are applicable for taxable years ending after their publication in the Federal Register, but may be relied upon until finalized. Public comments on these new proposed regulations and requests for a public hearing must be received within 60 days of their publication in the Federal Register.

IRS Revenue Procedure 2019-11
Revenue procedure 2019-11 provides a method for calculating W-2 wages paid by an employer—a factor that influences taxable Qualified Business Income. It generally is effective for 2018 and later tax years.

IRS Notice 2019-07
Notice 2019-07 is narrow, special-purpose guidance that addresses real estate rentals that may qualify as trades or businesses for pass-through income taxation purposes. It is effective for 2018 and later tax years.


House Passes Bill With Many Savings Arrangement Enhancements

The U.S. House of Representatives passed two of three bills that collectively comprise “Tax Reform 2.0” this week, and is expected to vote on the third today, September 28. One of these bills passed this week—the Family Savings Act of 2018—would make significant changes to the landscape of tax-advantaged savings arrangements. Included in it are provisions affecting employer-sponsored retirement plans, IRAs, 529 college savings programs, as well as a new all-purpose tax-free savings arrangement known as the Universal Savings Account.

Tax Reform 2.0

The Tax Reform 2.0 package is intended to be a follow-up to the Tax Cuts and Jobs Act, enacted in December of 2017. The primary objective of Tax Reform 2.0 has been to make permanent the individual income tax cuts in the 2017 legislation, which currently are set to expire in 2026. In addition to individual tax cut permanence and savings arrangement enhancements, a third component of Tax Reform 2.0 relates to “business innovation.” The business innovation component also was passed by the House this week; the individual income tax permanence bill is expected to be voted on by the House today (Friday, September 28).

Senate Opposition

Prospects for making the 2017 individual income tax cuts permanent, however, are considered poor because of opposition in the U.S. Senate. In light of this, there has been increasing focus on the possibility of advancing stand-alone legislation to enhance tax-advantaged savings arrangements. Some speculate that the House’s passage of the Family Savings Act could lead to a counter-move by the Senate with its own savings enhancement proposals, with the potential for a compromise bill containing a blend of House and Senate provisions.

Family Savings Act Details

The Family Savings Act bill that just passed virtually mirrors the legislation as first described at ascensus.com News early in September. Added to this are the addition of a fiduciary safe harbor for employers who include lifetime income investments in their retirement plans, and a provision allowing 529 education savings program accounts to be established for unborn children. Watch this Ascensus.com News for further details.


Ways & Means Committee Reveals Savings Details in Tax Reform 2.0 Legislation

The House Ways and Means Committee has released the text of three separate bills that collectively comprise what is being called “Tax Reform 2.0.”  One of these bills, if enacted by Congress, would make significant changes to tax-advantaged savings arrangements.

The legislative package is intended to be a follow-up to the Tax Cuts and Jobs Act, which was enacted in December of 2017. The primary objective of Tax Reform 2.0 is to make permanent the individual tax cuts in the 2017 legislation, which are set to expire in 2026 (unlike the corporate tax cuts, which are permanent). In addition to individual tax cut permanence and changes to savings arrangements, a third component relates to “business innovation.”

The House Ways and Means Committee is expected to consider the legislation this week, and amendments are possible. House Speaker Paul Ryan (R-WI) has indicated that a vote by the full House chamber can be expected by the end of September. Finally, it should be emphasized that any legislation that is passed in the House must also be passed in the Senate in identical form.  Under rules expected to govern any consideration of Tax Reform 2.0 in the Senate, a simple majority would not suffice, and the support of some Democrats would be required. This makes enactment of the legislation an uncertain outcome, at best.

Following is a general description of the savings provisions in Tax Reform 2.0. The legislation will continue to be analyzed for all its potential effects, and further details will be forthcoming.

  1. Multiple employer plans (MEPs)  — Also referred to as “Pooled Employer Plans,” the legislation would enhance the ability of employers to jointly participate in a common plan, the purpose being to reduce administrative burden and expense. Effective for plan years beginning after December 31, 2019.
  2. Extend the period to adopt 401(k) safe harbor design — 401(k) plans could elect ADP/ACP testing safe harbor status after the plan year begins if the employer makes non-elective contributions to all eligible employees (versus matching contributions) and satisfies simplified safe harbor notice requirements. Effective for plan years beginning after December 31, 2018.
  3. Graduate student IRA eligibility — Graduate student stipend or fellowship payments would qualify as compensation for IRA contribution purposes. Effective for tax years beginning after December 31, 2018.
  4. Traditional IRA contributions at any age — Anyone with earned income (or with spouse earned income) could make Traditional IRA contributions, thus would no longer be limited to those under age 70½. Effective for contributions for tax years beginning after December 31, 2018.
  5. Prohibition on qualified plan credit card loans — Loans from employer plans that are taken under a credit card arrangement would be considered distributions for tax and other purposes. Effective for loans taken after the date of enactment.
  6. Portability of lifetime income investments — Would allow a retirement plan participant to distribute and roll over to an IRA or other employer plan a lifetime income investment—even in the absence of a distribution triggering event—if the investment is no longer available under the plan. Effective for plan years beginning after December 31, 2018.
  7. 403(b) custodial accounts to become IRAs with plan termination — A current obstacle to 403(b) plan termination is liquidating accounts to complete the termination process. This would be overcome for certain plans by deeming 403(b) custodial accounts to be IRAs. Effective for plan terminations after December 31, 2018.
  8. 403(b) participation by employees of qualifying church controlled organizations (QCCOs) — The legislation would clarify which employees of such organizations are eligible to participate in such plans. Effective (retroactively) for plan years beginning after December 31, 2008.
  9. Exempt small balances from required minimum distribution (RMD) rules — The annual requirement to receive an RMD would be waived for any year if the required distribution would reduce an individual’s aggregate balance below $50,000 (would combine balances in IRAs, qualified plans, 403(b) plans and governmental 457(b) plans). Effective for calendar years beginning more than 120 days after enactment.
  10. Government employer contributions — Would clarify rules for certain “government pick-up” retirement plan contributions for new and existing employees. Effective for plan years beginning after the date of enactment.
  11. Armed Forces Ready Reserve contributions — Would allow members of the Armed Forces Ready Reserve to make certain additional elective deferrals beyond the limitation in Internal Revenue Code Section 402(g). Effective for plan years beginning after December 31, 2018.
  12. More time to establish a plan — An employer would have until the business’s tax return deadline, including extensions, to establish a plan, rather than the last day of the business’s tax year. This grace period would not apply to adding a 401(k) component to a qualified plan. Effective for plans adopted for taxable years beginning after December 31, 2018.
  13. Relief for closed defined benefit (DB) plans — Nondiscrimination rules would be modified so that a business could continue to operate a defined benefit pension plan that is closed to new employees; such employers typically offer a defined contribution (DC) plan to new employees instead. Effective generally as of the date of enactment.
  14. PBGC DB insurance program evaluation — A study of the PBGC’s pension plan insurance program and its premiums would be required; to be completed by an independent organization. The study to begin no later than six months after date of enactment.
  15. Universal Savings Accounts — Would create an account similar to a Roth IRA (no tax deduction, tax-free earnings) with the ability to remove any amount at any time for any reason, tax free (no ordering rules or qualified distribution rules as in a Roth IRA), and subject to a $2,500 per year maximum contribution. Effective for tax years beginning after December 31, 2018.
  16. Expansion of 529 Plans — Would amend the definition of qualified expenses to include those related to apprenticeship programs and homeschooling. Would also allow up to $10,000 (total) to be used to repay student loan debt, and would expand the definition of qualified expenses for K-12 education (currently limited to tuition). Effective for distributions made after December 31, 2018.
  17. Birth or adoption excise tax exemption — Would exempt (from the 10 percent early distribution excise tax) up to $7,500 for expenses related to the birth or adoption of a child. Such amounts withdrawn could be repaid. Effective for distributions made after December 31, 2018.

This legislation will continue to be followed as it progresses through the House of Representatives. Watch this ascensus.com News for more details.


Ways & Means Committee Identifies Savings-Related Provisions in Tax Reform 2.0

The House Ways & Means Committee has released a brief outline of proposals to enhance retirement and other tax-advantaged savings programs. These are to be included in what House GOP leadership calls Tax Reform 2.0, to be tax cuts beyond those contained in the Tax Cuts and Jobs Act of 2017.

The most high-profile element of Tax Reform 2.0 is to make permanent individual taxpayer tax cuts, which under the terms of the 2017 legislation will otherwise expire in 2026. Corporate tax cuts, on the other hand, are permanent under the terms of the Tax Cuts and Jobs Act.

Capitol Hill watchers differ in their assessment of the seriousness of the House Tax Reform 2.0 proposal, since relatively few believe such legislation can garner the necessary votes to be passed by the Senate; that would be necessary for it to become law. Some see the House effort as being of potential political benefit in the run-up to the November midterm elections—an effort to depict House Republicans as favoring individual tax cut permanence and House Democrats in opposition.

Actual legislative text of Tax Reform 2.0, including its savings-related provisions, has not yet been released. This is expected as early as the week of September 10. Based on the brief descriptions in the latest Ways & Means Committee news release, the following provisions are expected to be included in Tax Reform 2.0.

  • Enhance the ability of individual employers to join in commonly-administered multiple employer plans (MEPs)
  • Extend the deadline by which a new retirement plan can be established for a given tax year
  • Simplify the rules for participation in employer plans
  • Allow small retirement account balances to be exempt from required minimum distribution (RMD) requirements
  • Allow Traditional IRA contributions at any age (no longer ending eligibility at age 70½)
  • Liberalize rules to better allow military reservists to maximize retirement savings contributions
  • A Universal Savings Account—usable for any purpose and with no required distributions—would resemble a Roth IRA; no tax deduction, but tax-free earnings
  • Section 529 education savings program qualified expenses would to include apprenticeship fees, home schooling, and student loan expenses
  • A “new baby” provision would allow excise-tax-free early distributions from retirement accounts, with the option to later replenish such amounts

As noted above, despite likely bipartisan support for a number of these provisions, the odds of enactment are uncertain at best. Watch this Ascensus.com News for updates.

 


IRS Issues Proposed Regulations and Notice on Pass-Through Income Taxation

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.


Second Round of Tax Reform Could Include Retirement Savings Provisions

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.


Dan Kravitz Explains the Impact of Tax Reform on Employer-Sponsored Retirement Plans

In an article​ published by PLANADVISER, Dan Kravitz, head of Kravitz, discussed ​his most recent webinar, which ​​​explained the impact of the Ta​​x Cuts and Jobs Act on employer-sponsored​​ retirement plans. ​​The tax bill will allow many ​​clients to have a lower tax rate, directly impacting ​​small business owners’ decisions ​about running retirement plans. ​“Many but not all of these owners can now deduct up to 20% of qualified business income,” Kravitz noted. “There are many limitations and phase-outs that have to be considered, but pass-through entities are taxed at the individual level, as we know, so it is important to understand the new individual rates, because it will directly impact plan design decisions that do fall within our purview.”​