In our first post on the proposed regulation under section 1446(f), we discussed which party is the withholding agent and outlined the various exceptions to withholding that could apply. Sections 864(c)(8) and 1446(f) were adopted as part of tax reform. Section 864(c)(8) was enacted to reverse the holding of the Tax Court in Grecian Magnesite Mining v. Commissioner, which was affirmed by the U.S. Court of Appeals for the DC Circuit. This post addresses the amount the transferee is required to withhold. Our third post on the proposed regulations under section 1446(f) addresses the withholding requirements and “backstop withholding” rules.
Continue Reading IRS Proposes Regulations under Section 1446(f) — Determining the Withholding Amount (Post 2 of 3)

This post is the first of three installments providing an overview of recent proposed regulations under section 1446(f) that address withholding on certain sales of partnership interests by foreign partners of a partnerships engaged in the conduct of a U.S. trade or business (a “U.S. trade or business”). Sections 864(c)(8) and 1446(f) were adopted as part of tax reform.  Section 864(c)(8) was enacted to reverse the holding of the Tax Court in Grecian Magnesite Mining v. Commissioner, which was affirmed by the U.S. Court of Appeals for the DC Circuit.  This post focuses on which party is required to withhold under section 1446(f). The second post focuses on determining the appropriate amount to withhold. Finally, the third post focuses on the withholding requirements and the “backstop withholding” rules.
Continue Reading IRS Proposes Regulations under Section 1446(f) — Which Party is Required to Withhold? (Post 1 of 3)

Yesterday, the IRS released final regulations that aim to prevent identity theft by permitting, but not requiring, employers to truncate the taxpayer identification numbers (TINs) on copies of Forms W-2 and Forms W-2c furnished to employees.  The regulations finalize proposed rules issued in 2017.  Generally, this rule applies to Forms W-2 required to be filed or furnished after December 31, 2020, so employers still have time to decide whether to implement the change.  The delayed effective date is intended to allow states and local governments time to update their rules to permit the use of truncated TINs, if they do not already do so.

The TIN for most individuals (and all employees whose income is required to be reported on Form W-2) is his or her social security number (SSN); therefore, instead of including an individual’s full nine-digit SSN, the final rule permits employers to truncate this sensitive personal identifying information.  In place of the full SSN, employers may use a truncated TIN, which is in the format of XXX-XX-#### or ***-**-#### with the #’s replaced by the final four digits of the employee’s social security number.  Full TINs are still required on copies of Form W-2 filed with the Social Security Administration, however.  In addition, payers of third-party sick pay must include full TINs on statements to employers of employees to whom the third-party paid sick pay.  However, truncated TINs may be used on Forms W-2 that report third-party sick pay issued by employers to employees.

Continue Reading New Rule Permits Employers to Include Truncated TINs on Forms W-2 and Forms W-2c

On February 14, 2019, Senator Roy Blunt (R-Mo.) introduced bill S. 503 “to provide the opportunity for responsible health savings to all American families.”  The bill would increase the annual maximum amount that can be contributed to health flexible spending accounts (“FSAs”) as well as permit unused benefits to carry forward by amending section 125(i) of the Internal Revenue Code.  Currently, the bill has been referred to the Senate Finance Committee.

A health FSA is an arrangement between an employer and employee in which an employee elects to set aside wages for the upcoming year to pay for out-of-pocket health expenses with pre-tax dollars.  Permissible health expenses are those medical expenses treated as deductible under section 213 of the Code, which includes insurance copays and deductibles, qualified prescription drugs, medical devices, etc.

Continue Reading Proposed Senate Bill Would Expand Health FSA Limits

On March 7, 2019, Senator John Thune (R-SD) reintroduced legislation aimed at simplifying worker classification and requiring additional wage reporting under certain circumstances.  Senator Thune introduced the New Economy Works to Guarantee Independence and Growth Act (the “New GIG Act”) for the first time in 2017.  It was included in the chairman’s mark of the Tax Cuts and Jobs Act, but was ultimately removed because the bill was passed using the reconciliation procedure.  Rep. Tom Rice (R-SC) introduced the bill in the House.

Worker classification has long created headaches for service recipients, who may be unsure if they are required to withhold taxes from payments owed to service providers.  Under the Code and regulations, a service recipient’s withholding obligations depend on a common law worker classification test, which is often difficult to apply to gig economy service relationships.

Continue Reading Bill Seeks to Provide Worker Classification Safe Harbor and Update Reporting Thresholds

Yesterday, the full House passed its tax reform proposal, the Tax Cuts and Jobs Act (H.R. 1), on a party-line vote, 227-205.  In addition to the headline changes to the corporate and individual tax systems, the bill would make numerous changes to various fringe benefit exclusions, employer deductions for fringe benefits and executive compensation, cross-border

Yesterday, the House Ways and Means Committee released the Tax Cuts and Jobs Act (H.R. 1) (the “Bill”), a bill that, if enacted, would represent the most substantial overhaul of the U.S. tax code in decades.  Section 3307 of the Bill makes several changes to the deduction limitations under section 274 related to meals and entertainment expenses.  The Bill also expands the reach of the deduction limitations to disallow deductions for de minimis fringe benefits excluded from income under Code section 132(e), unless the employer includes such amounts in the employee’s taxable income. With respect to tax-exempt entities, section 3308 of the Bill would treat funds used to provide employees transportation fringe benefits and on-premises gyms and other athletic facilities as unrelated business taxable income.

Total Disallowance of Deductions for Entertainment Expenses.  Under Code section 274(a), a taxpayer may not deduct expenses for entertainment, amusement, or recreation (“entertainment expenses”), unless the taxpayer establishes that the item was directly related to the active conduct of the taxpayer’s business, subject to a number of exceptions in Code section 274(e) (e.g., reimbursed expenses; expenses treated as compensation to (or included in the gross income of) the recipient; recreational, social, and similar activities primarily for the benefit of employees other than highly compensated employees; entertainment sold to customers).  If the taxpayer establishes that the entertainment expenses were directly related to the active conduct of its trade or business, section 274(n) limits the deduction to 50 percent of expenses relating to entertainment, subject to a number of exceptions, many of which are the same exceptions that apply to the 100 percent disallowance under Code section 274(a) (e.g., reimbursed expenses; expenses treated as compensation to (or included in the gross income of) the recipient; recreational, social, and similar activities primarily for the benefit of employees other than highly compensated employees; entertainment sold to customer).

The Bill would amend section 274(a) to eliminate the exception for entertainment expenses directly related to the active conduct of the taxpayer’s business.  Accordingly, deductions for entertainment expenses would be fully disallowed unless one of the exceptions under Code section 274(e) applies.  The Bill would also make changes to some of the exceptions under Code section 274(e), described below.
Continue Reading Impact of Tax Cuts and Jobs Act: Part II – Deduction Disallowances for Entertainment Expenses and Certain Fringe Benefits

Yesterday, the House Ways and Means Committee released the Tax Cuts and Jobs Act (H.R. 1) (the “Bill”), a bill that, if enacted, would represent the most substantial overhaul of the U.S. tax code in decades.  We are releasing a series of posts to highlight the provisions of the Bill affecting the topics pertinent to our readers, where each post will cover a different area of importance.  In Part I of this series, we covered potential changes to employer-provided benefits, and in Part II, we addressed entertainment expenses and other fringe benefits.  In Part III, we discussed the Bill’s potential impact on various retirement provisions.  In this Part IV of the series, we address proposed changes to the deduction limitation for executive compensation under Code section 162(m).

Currently, Code section 162 allows as a deduction all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.   This includes a deduction for reasonable compensation for personal services actually rendered.   However, Code section 162(m) limits the deduction of any publicly held corporation with respect to compensation paid to a “covered employee” to $1 million.   However, certain types of compensation—such as qualified performance-based compensation and commissions—are not subject to the deduction limitation.  Covered employees are defined to include the chief executive officer (“CEO”), as of the close of the taxable year and the officers whose compensation is required to be reported to shareholders by reason of being among the three most highly compensated officers for the taxable year (other than the CEO).

Section 3802 of the Bill would amend section 162(m) in three key ways: (1) it would eliminate the exceptions for qualified performance-based pay and commissions; (2) it would extend the deduction disallowance to a broader array of companies; and (3) it would amend the definition of covered employee to more closely align with current SEC disclosure requirements and make covered employee status permanent.
Continue Reading Impact of Tax Cuts and Jobs Act: Part IV – Changes to the Section 162(m) Deduction Limitation for Executive Compensation

The IRS today released Notice 2017-09 providing guidance on the de minimis safe harbor for errors in amounts reported on information returns.  The safe harbor was added to Sections 6721 and 6722 by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act).

Under the statute, filers are not subject to penalties under either Section 6721 and 6722 if an amount reported on the return is within $100 of correct amount or within $25 if the amount is an amount of tax withheld.  However, if the payee requests a corrected return, the filer must file and furnish one or the payee is liable for potential penalties.  Prior to the enactment of the PATH Act, any error in an amount was considered consequential and could result in a penalty—even if the error was only one cent.  With this change, de minimis errors no longer necessitate corrected information returns or payee statements.  The safe harbor is effective for information returns and payee statements required to be filed after December 31, 2016.

Notice 2017-09 specifies that the safe harbor will not apply in the event of an intentional error or if a payor fails to file a required information return or furnish a required payee statement.  In other words, a filer cannot use the safe harbor to increase the filing threshold for reporting by arguing that the amount that should have been reported was within $25 of a threshold.  Accordingly, if a filer determines that a Form 1099-MISC was not required because the amount paid to the payee was $550 and later determines the amount paid was actually $650, the safe harbor would not apply.  Similarly, filers cannot apply the safe harbor to avoid penalties for payees of interest of less than $100 for whom they did not file a Form 1099-INT because the filer incorrectly believed the interest paid was less than $10.

The notice also clarifies the process by which a payee may request a corrected information return by electing that the safe harbor not apply.  If the payee makes such an election and the payor furnishes a corrected payee statement and files a corrected information return within 30 days of the election, the error will be deemed to be due to reasonable cause and neither Section 6721 or 6722 penalties shall apply unless specific rules specify a time in which to provide the corrected payee statements, such as for Forms W-2. The notice leaves unanswered, however, how this rule will apply when a payee has an ongoing election not to apply the safe harbor in effect as described below.
Continue Reading IRS Provides Guidance on De Minimis Safe Harbor for Errors in Amounts on Information Returns