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.

Q:  One of my children received a full scholarship for all expenses to attend college this year.  I had heard that this amount may not be required to be reported on his tax return if certain conditions were met and the funds were used specifically for certain types of her expenses.  Is this true and what amounts spent on my child's education will be treated as qualified expenses?

Q: One of my children received a full scholarship for all expenses to attend college this year. I had heard that this amount may not be required to be reported on his tax return if certain conditions were met and the funds were used specifically for certain types of her expenses. Is this true and what amounts spent on my child's education will be treated as qualified expenses?

A: Any amount received as a "qualified scholarship" or fellowship is not required to be reported as income if your child is a candidate for a degree at an educational institution. For the college that your child attends to be treated as an educational organization, it must (1) be an institution that has as its primary function the presentation of formal instruction, (2) normally maintain a regular faculty and curriculum, and (3) have a regularly enrolled body of students in attendance at the place where the educational activities are regularly carried on. Your child has received a qualified scholarship if he or she can establish, that in accordance with the conditions of the scholarship, the funds received were used for qualified tuition and related expenses.

Qualified tuition and related expenses include tuition and fees required for enrollment or attendance at the educational institution, as well as any fees, books, supplies, and equipment required for courses of instruction at the educational institution. To be treated as related expenses, the fees, books supplies, and equipment must be required of all students in the particular course of instruction. Incidental expenses, such as expenses for room and board, travel, research, equipment, and other expenses that are not required for either enrollment or attendance at the educational institution are not treated as related expenses. Any amounts that are used for room, board and other incidental expenses are not excluded from income.

Example: Assume this year your son received a scholarship in the amount of $20,000 to pay for expenses at a qualified educational institution. His expenses included $12,000 for tuition; $1,100 for books; $900 for lab supplies and fees; and $6,000 for food, housing, clothing, laundry, and other living expenses.

The $14,000 that your son paid for tuition, books and lab supplies and fees are considered to be qualified educational expenses and therefore would not have to be reported as income. The $6,000 that he spent on housing and the other living expenses is considered to be incidental expenses and would have to be reported in his income.

Note: This tax exclusion for qualified scholarships should not be confused with the Hope Scholarship Tax Credit, which has been temporarily renamed the American Opportunity Tax Credit and enhanced for 2009 and 2010 by the American Recovery and Reinvestment Act of 2009. The American Opportunity Tax Credit can reach as high as $2,500 for 2009 and 2010 for tuition expenses paid by you for yourself, a spouse or a dependent. Scholarship money that is excluded from income cannot be used in computing your costs for the American Opportunity Tax Credit (i.e. Hope Scholarship Tax Credit). "Financial aid" in the form of student loans, however, is not counted as a scholarship and any money applied to pay tuition can qualify for the Hope Scholarship Tax Credit.

There can be all sorts of complicating factors in assessing whether a particular scholarship will be taxed, such as the treatment of work-study scholarships, educational sabbaticals, scholarships paid by an employer, and stipends to cover the tax on the non-tuition portion of attending a university. If you need additional assistance in determining the taxability of scholarships funds, please contact the office.

Q:The holidays are approaching and I would like to consider giving gifts of appreciation to my employees. What kinds of gifts can I give my employees that they would not have to declare as income on their tax returns? I also would like to make sure my company would be able to deduct the costs of these gifts.

A:First of all, anything given in the business setting is presumed, until proven otherwise, not to be a gift (e.g., is taxable income) -- that is, you are either rewarding an employee for work done or providing an incentive in which he or she will be inclined to do more work in the future. However, the Tax Code and related IRS regulations still allow many gifts to remain tax-free to the employee while being tax deductible to the business. Here is a short list of the rules:

$25 gift rule

A business may deduct up to $25 in gifts given to each recipient during any given year. However, you can't get around this limit by giving to each family member of the intended recipient: they all share in one $25 limit. Items clearly of an advertising nature such as promotional items do not count as long as the item costs $4 or less.

No dollar limit exists on a deduction if the gift is given to a corporation or a partnership. The cost of gifts such as baseball tickets that will be used by an unidentified group of employees also qualifies for the unlimited deduction. However, once again, if the gift is intended eventually to go to a particular individual shareholder or partner, the deduction is limited to $25.

Separate "de minimis" rules

A "de minimis" fringe benefit from employer to employee is considered to be made tax-free to the employee. "De minimis" fringe benefits are not restricted by the $25 per recipient limit otherwise applicable outside of the employer-employee context. However, de minimis fringe benefits must be small "within reason." Typical de minimis gifts include holiday gifts such as a turkey or ham, the occasional company picnic, occasional use of the photocopy machine, occasional supper money, or flowers sent to a sick employee.

The general guidelines for de minimis fringe benefits are:

• the value of the gift must be nominal,
• accounting for all such gifts would be administratively nitpicking,
• the gifts are only occasional, and
• they are given "to promote health, good will, contentment, or efficiency" of employees.

Unfortunately, "gifts of nominal value" exclude such perks as use of a company lodge, season theater tickets, or country club dues. These cannot be given tax-free to an employee. But they do include occasional theater or sports tickets or group meals.

What's more, fringe benefits such as the use of an on-premise athletic facility or subsidized cafeteria are specifically included under IRS rules as de minimis fringe benefits. The traditional gold retirement watch -- or similar gift-- to commemorate a long period of employment is also treated as de minimis. However, cash or items readily convertible into cash, such as gift certificates, are taxable, no matter what the amount.

Dual-income families are commonplace these days, however, some couples are discovering that their second income may not be worth the added aggravation and effort. After taking into consideration daycare expenses, commuting expenses, the countless take-out meals, and additional clothing costs, many are surprised at how much (or how little) of that second income is actually hitting their bank account.

Dual-income families are commonplace these days, however, some couples are discovering that their second income may not be worth the added aggravation and effort. After taking into consideration daycare expenses, commuting expenses, the countless take-out meals, and additional clothing costs, many are surprised at how much (or how little) of that second income is actually hitting their bank account.

Before you and your spouse head off for yet another hectic workweek, it may be worth your time to take a few moments to do a few simple calculations. After assessing what expenditures are necessary in order for both parents to work outside of the home, many couples quickly realize that their second income is essentially paying for the second person to be working.

Crunch the numbers. To determine whether your second income is worth the energy, you will need to calculate the estimated value of the second income. First determine how much the second income brings in after taxes. Then subtract expenses incurred due to the second person working, such as dry cleaning expenses, childcare bills, transportation costs, housecleaning services, landscaping services, and outside dining expenses. The result will be the estimated value of the second person working.

Consider the long-term. Even if your result turns out to be small, you may find that having the second person working will be beneficial to the household in the long run. However, don't forget to consider that, by losing the second income, you may also be losing future retirement benefits and social security earnings.

Take a "dry run". Before reducing down to one income, try living on the person's income you intend to keep for six months, stashing the other income into an emergency savings account. If you are able to do this, chances are you will be able to endure for the long haul.

Many different factors can affect a family's decision to have both parents work - including the fulfillment each parent may get from working regardless of whether their income is adding significantly to the household. However, if trying to make ends meet is the major reason, it may pay off to spend some time analyzing the real net benefit from that second income. If you need any assistance while determining if both spouses should work or not, please feel free to contact the office.

Employers are required by the Internal Revenue Code to calculate, withhold, and deposit with the IRS all federal employment taxes related to wages paid to employees. Failure to comply with these requirements can find certain "responsible persons" held personally liable. Who is a responsible person for purposes of employment tax obligations? The broad interpretation defined by the courts and the IRS may surprise you.

Employers are required by the Internal Revenue Code to calculate, withhold, and deposit with the IRS all federal employment taxes related to wages paid to employees. Failure to comply with these requirements can find certain "responsible persons" held personally liable. Who is a responsible person for purposes of employment tax obligations? The broad interpretation defined by the courts and the IRS may surprise you.

Employment taxes such as federal income tax, social security (FICA) tax, unemployment (FUTA) tax and various state taxes (note that state issues are not addressed in this article) are all required to be withheld from an employee's wages. Wages are defined in the Code and the accompanying IRS regulations as all remuneration for services performed by an employee for an employer, including the value of remuneration, such as benefits, paid in any form other than cash. The employer is responsible for depositing withheld taxes (along with related employer taxes) with the IRS in a timely manner.

Although the employer entity is required by law to withhold and pay over employment taxes, the penalty provisions of the Code are enforceable against any responsible person who willfully fails to withhold, account for, or pay over withholding tax to the government. The trust fund recovery penalty -- equal to 100% of the tax not withheld and/or paid over -- is a collection device that is normally assessed only if the tax can't be collected from the employer entity itself. Once assessed, however, this steep penalty becomes a personal liability of the responsible person(s) that can wreak havoc on their personal financial situation -- even personal bankruptcy is not an "out" as this penalty is not dischargeable in bankruptcy.

A corporation, partnership, limited liability or other form of doing business won't insulate a "responsible person" from this obligation. But who is a responsible person for purposes of withholding and paying over employment taxes, and ultimately the possible resulting penalty for noncompliance? Also, what constitutes "willful failure to pay and/or withhold"? To give you a better understanding of your potential liability as an employer or employee, these questions are addressed below.

Typically, the types of individuals who are deemed "responsible persons" for purposes of the employment tax withholding and payment are corporate officers or employees whose job description includes managing and paying employment taxes on behalf of the employer entity.

However, the type of responsibility targeted by the Code and regulations includes familiarity with and/or control over functions that are involved in the collection and deposit of employment taxes. Unfortunately for potential targets, Internal Revenue Code Section 6672 doesn't define the term, and the courts and the IRS have not formulated a specific rule that can be applied to determine who is or is not a "responsible person." Recent cases have found the courts ruling both ways, with the IRS generally applying a broad, comprehensive standard.

A Texas district court, for example, looked at the duties performed by an executive -- and rejected her argument that responsibility should only be assigned to the person with the greatest control over the taxes. Responsibility was not limited to the person with the most authority -- it could be assigned to any number of people so long as they all had sufficient knowledge and capability.

The Fifth Circuit Court of Appeals has delineated six nonexclusive factors to determine responsibility for purposes of the penalty: whether the person: (1) is an officer or member of the board of directors; (2) owns a substantial amount of stock in the company; (3) manages the day-to-day operations of the business; (4) has the authority to hire or fire employees; (5) makes decisions as to the disbursement of funds and payment of creditors; and (6) possesses the authority to sign company checks. No one factor is dispositive, according to the court, but it is clear that the court looks to the individual's authority; what he or she could do, not what he or she actually did -- or knew.

The Ninth Circuit recently cited similar factors, holding that whether an individual had knowledge that the taxes were unpaid was irrelevant; instead, said the court, responsibility is a matter of status, duty, and authority, not knowledge. Agreeing with the Texas district court, above, the court held that the penalty provision of Code section 6672 doesn't confine liability for unpaid taxes to the single officer with the greatest control or authority over corporate affairs.

Suffice it to say that, under the various courts' interpretations -- or that of the IRS -- many corporate managers and officers who are neither assigned nor assume any actual responsibility for the regular withholding, collection or deposit of federal employment taxes would be surprised to find that they could be responsible for taxes that should have been paid over by the employer entity but weren't.

Once it has been established that an individual qualifies as a responsible person, he must also be found to have acted willfully in failing to withhold and pay the taxes. Although it may be easier to establish the ingredients for "responsibility," some courts have focused on the requirement that the individual's failure be willful, relying on various means to divine his or her intent.

An Arizona district court, for example, found that a retired company owner who had turned over the operation of his business to his children while maintaining only consultant status was indeed a responsible person -- but concluded that his past actions indicated that he did not willfully cause the nonpayment of the company's employment taxes. Since he had loaned money to the company in the past when necessary, his inaction with respect to the taxes suggested that he believed the company was meeting its obligations and the taxes were being paid.

A Texas district court found willfulness where an officer of a bankrupt company knew that the taxes were due but paid other creditors instead.

The Fifth Circuit has determined that the willfulness inquiry is the critical factor in most penalty cases, and that it requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent. "A responsible person acts willfully if [s]he knows the taxes are due but uses corporate funds to pay other creditors, or if [s]he recklessly disregards the risk that the taxes may not be remitted to the government, or if, learning of the underpayment of taxes fails to use later-acquired available funds to pay the obligation.

Is there any way for those with access to the inner workings of an employer's finances or tax responsibilities -- but without actual responsibility or knowledge of employment tax matters -- to protect themselves from the "responsible person" penalty? It may depend on which jurisdiction you're in -- although a survey of the courts suggests most are more willing than not to find liability. Otherwise, the wisest course may be to enter into an employment contract that carefully delineates and separates the duties and responsibilities -- and the expected scope of knowledge -- of an individual who might find himself with the dubious distinction of being responsible for a distinctly unexpected and undesirable drain on his finances.

The laws and requirements related to employment taxes can be complex and confusing with steep penalties for non-compliance. For additional assistance with your employment related tax issues, please contact the office for additional guidance.

How quickly could you convert your assets to cash if necessary? Do you have a quantitative way to evaluate management's effectiveness? Knowing your business' key financial ratios can provide valuable insight into the effectiveness of your operations and your ability to meet your financial obligations as well as help you chart your company's future.

How quickly could you convert your assets to cash if necessary? Do you have a quantitative way to evaluate management's effectiveness? Knowing your business' key financial ratios can provide valuable insight into the effectiveness of your operations and your ability to meet your financial obligations as well as help you chart your company's future.

Acid Test: determines your company's ability to convert assets to cash to pay current obligations.

Current liabilities

Current Ratio measures your company's liquidity and ability to pay short-term debts.

Current liabilities

Debt to Assets Ratio determines the extent to which your company is financed by debt.

Total assets

Gross Profit Margin Rate: measures how much of each sales dollar can go for operating expenses and profit.

Net Sales

Return on Assets (ROA): measures how much income is generated from your company's assets.

Total assets

Once you have calculated the ratios, you will need to be able to translate the numbers into results that relate to your business. Below are some examples of how you can use these ratios in your business:

Acid Test: A result of 2:0:1 means you have a two dollars' worth of easily convertible assets for each dollar of current liabilities.

Current Ratio A ratio of 2.0:1 means that the value of your current assets are twice that of what your current obligations are, a good indicator to a potential lender that your company is in sound financial condition.

Debt to Assets Ratio This ratio shows how many cents per dollar of assets are financed. An 82% ratio would indicate that your company's assets are heavily financed and may be a troubling sign to a potential lender.

Gross Profit Margin Ratio A ratio of .45:1 indicates that for every dollar of sales, your company has 45 cents to cover operating expenses and profit. This information can be used when setting pricing for your company's products and services.

Return on Assets Ratio (ROA): A ratio of .08:1 would mean that the company is bringing in 8 cents for every dollar of assets. These results can be used to determine the effectiveness of management's efforts to utilize assets.

Take the results from the current period (e.g., this month) and deduct from the results of the previous period (e.g., last month). The result will be the net change in the ratio from one period to another. Because increases from period to period are good for one ratio (e.g., acid test) but maybe not so good for another (e.g., debt to assets ratio) it's important to analyze each ratio separately.

While changes in ratios don't always mean your company is getting off track, analyzing the cause of the changes can help uncover potential problem areas that need your attention.

There are many applications for key financial ratios to help you and your management team identify your company's strengths and weaknesses. If you would like any additional assistance with the calculation or analysis of your company's ratios, please contact the office.

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

A. Small business owners have long adhered to the practice of hiring family members to help them run their businesses -- results have ranged from very rewarding to absolutely disastrous. From a purely financial aspect, however, it is very important for you as a business owner to consider the tax advantages and potential pitfalls of hiring -- or continuing to employ -- family members in your small business.

Pay your family -- not Uncle Sam. Hiring family members can be a way of keeping more of your business income available for you and your family. The business gets a deduction for the wages paid -- as long as the family members are performing actual services in exchange for the compensation that they are receiving. This is true even though the family member will have to include the compensation received in income.

Some of the major tax advantages that often can be achieved through hiring a family member -- in this case, your spouse -- include:

Health insurance deduction. If you are self-employed and hire your spouse as a bona fide employee, your spouse -- as one of your employees -- can be given full health insurance coverage for all family members, including you as the business owner. This will convert the family health insurance premiums into a 100% deductible expense.

Company retirement plan participation. You may be able to deduct contributions made on behalf of your spouse to a company sponsored retirement plan if they are employees. The tax rules involved to put family members into your businesses retirement plan are quite complex, however, and generally require you to give equal treatment to all employees, whether or not related.

Travel expenses. If your spouse is an employee, you may be able to deduct the costs attributable to her or him accompanying you on business travel if both of you perform a legitimate business function while travelling.

IRA contributions. Paying your spouse a salary may enable them to make deductible IRA contributions based on the earned income that they receive, or Roth contributions that will accumulate tax-free for eventual tax-free distribution.

In order for a business owner to realize any of the advantages connected with the hiring family members as discussed above, it is imperative for the family member to have engaged in bona fide work that merits the compensation being paid. Because this area has such a high potential for abuse, it's definitely a hot issue with the IRS. If compensation paid to a family member is deemed excessive, payments may be reclassified as gifts or as a means of equalizing payments to shareholders.

As you decide on how much to pay your spouse working in your business, keep in mind the reasonable compensation issue. Consider the going market rate for the work that is being done and pay accordingly. This conservative approach could save you money and headaches in the event of an audit by the IRS.

Hiring your spouse can be a rewarding and cost effective solution for your small business. However, in order to get the maximum benefit from such an arrangement, proper planning should be done. For additional guidance, please feel free to contact the office.

Stock options have become a common part of many compensation and benefits packages. Even small businesses have jumped on the bandwagon and now provide a perk previously confined to the executive suites of large publicly held companies. If you are an employee who has received stock options, you need to be aware of the complicated tax rules that govern certain stock options -- several potential "gotchas" exist and failing to spot them can cause major tax headaches.

Stock options have become a common part of many compensation and benefits packages. Even small businesses have jumped on the bandwagon and now provide a perk previously confined to the executive suites of large publicly held companies. If you are an employee who has received stock options, you need to be aware of the complicated tax rules that govern certain stock options -- several potential "gotchas" exist and failing to spot them can cause major tax headaches.

Over the past few years, the rules governing stock options have become increasingly complicated. More than ever, it is important that employees who receive stock options have a good understanding about how they are taxed -- on receipt of the option, at its exercise, or pursuant to the sale of the underlying stock -- as well as the potential consequences of their decisions regarding the timing of the taxation of those options.

The most common type of stock option that employees receive is called a nonstatutory stock option (NSO). The other, less common type of stock option is generically referred to as an incentive stock option (ISO). ISOs are governed by very specific rules and are subjected to strict statutory requirements; NSOs, on the other hand, are subject to more general rules and guidelines.

Incentive stock options (ISOs) give the employee the right to purchase stock from the employer at a specified price. The employee is not taxed on the ISO at the time of its grant or at the time of the exercise of the option. Instead, he or she is taxed only at the time of the disposition of the stock acquired through exercise of the option. Note, however, the exercise of an ISO does give rise to an alternative minimum tax item in the amount of the difference between the option price and the market price of the stock.

Note. The IRS temporarily suspended the collection of ISO alternative minimum tax (AMT) liabilities through September 30, 2008.

NSOs also give the employee the right to purchase stock from the employer at a specified price. When and how an NSO is taxed depends on several factors including whether the underlying stock is substantially vested, and whether or not the fair market value of the stock is readily ascertainable.

Vesting. If an employee receives options from his employer, the tax consequences depend on whether the stock is vested. Stock you receive from your employer is "substantially vested" if it is either "transferable" by the employee or it is no longer subject to a "substantial risk of forfeiture". Property is "transferable" if you can sell, assign or pledge your interest in the option without the risk of losing it. A "substantial risk of forfeiture" exists if the rights in the property transferred depend on the future performance (or refraining from performance) of substantial services by any person, or the occurrence of a certain condition related to the transfer.

Readily ascertainable fair market value. An NSO always has a readily ascertainable fair market value when the option is publicly traded. When an option is not publicly traded, it can have a readily ascertainable fair market value if its value can be measured with reasonable accuracy. IRS rules spell out when fair market value can be measured with reasonable accuracy.

Generally, an employee who receives an NSO that has a readily ascertainable fair market value is subject to special tax rules under the Internal Revenue Code that apply to property received by a taxpayer in exchange for services when the option is granted. Under these rules, the option must be included in the employee's income as ordinary income in the amount of the fair market value in the year the option becomes substantially vested. If the employee paid for the option, he recognizes the value of the option minus its cost. The employee is not taxed again when he exercises the option and buys the corporate stock; he is taxed when the stock is sold. The gain or loss recognized when the employee sells the stock is capital in nature.

No readily ascertainable fair market value. Employees who receive NSOs from privately held companies are most likely to receive an NSO without a readily ascertainable fair market value. In general, when an NSO does not have a readily ascertainable fair market value, taxation occurs at the time when the option is exercised or transferred. The employee will recognize ordinary income in the amount of the value of the stock when it becomes substantially vested minus any amounts paid for the option or stock. The gain or loss recognized when the employee sells the stock is capital in nature. However, employees who have NSOs without a readily ascertainable fair market value also have the ability to elect to have the transaction taxed differently,

Employees who exercise options that did not have a readily ascertainable fair market value when they were granted may elect to report income from the stock underlying the option at the time of the exercise rather than waiting until the stock is substantially vested. This election is referred to as a "Section 83(b) election" and is non-revocable. Once the election is made, any later subsequent appreciation when the stock becomes substantially vested would not be includible in income.

As you can see, the rules and tax laws related to stock options are indeed complicated and require some advance planning in order to avoid a big tax "gotcha". If you are contemplating entering into any transactions that involve stock options, please contact the office for additional guidance.

All of us will, at one time or another, incur financial losses - whether insubstantial or quite significant -- in our business and personal lives. When business fortunes head South -- either temporarily or in a more prolonged slide, it is important to be aware of how the tax law can limit the actual amount of your losses and your ability to deduct them. Here are some of the types of losses your business may experience and the related tax considerations to keep in mind in the event of a business downturn.

All of us will, at one time or another, incur financial losses - whether insubstantial or quite significant -- in our business and personal lives. When business fortunes head South -- either temporarily or in a more prolonged slide, it is important to be aware of how the tax law can limit the actual amount of your losses and your ability to deduct them. Here are some of the types of losses your business may experience and the related tax considerations to keep in mind in the event of a business downturn.

Bad debts

One loss that occurs frequently when business slows down is bad debt. A bad debt is simply a technical term used to describe a debt that has become totally or partially worthless. Different strategies apply depending upon whether you are the borrower or the lender.

As borrower. If you are the borrower, the "forgiveness" of all or part of the debt by the lender will generally trigger taxable income on that amount, unless the business is insolvent (debts exceed liabilities).

Note. The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) allows some business to elect to recognize cancellation of indebtedness income over five years, beginning in 2014. The temporary benefit applies to specific types of business debt repurchased by the business after December 31, 2008 and before January 1, 2011. Under this provision, an applicable debt instrument includes a bond, note, certificate, debenture, or other instrument that constitutes indebtedness issued by a C corporation or any other "person" in connection with the conduct of trade or business by that person. This election is irrevocable. Moreover, the liquidation or sale of substantially all the taxpayer's assets can result in acceleration of deferred items.

Although recognizing income may not be an immediate problem for a business that has plenty of losses to net against current income, additional income may wash out a net operating loss carryover that can either provide an immediate refund for a past tax year or shelter from income in the future. As a result, some businesses re-define debt "forgiveness" into a non-taxable event, such as a refinancing or a business-generated settlement.

As lender. If you are the lender, your major tax concern will be proving that a real debt exists, and then determining how fast you can deduct the bad debt and whether the deduction can offset ordinary income, as opposed to just capital gains.

Loans between corporations and their shareholders are scrutinized to make sure that they are really debts rather than disguised dividends or contributions to the corporation's capital. You can protect yourself by taking the steps that an arm's-length lender would take, such as putting it in writing and charging a reasonable rate of interest.

The IRS sometimes requires taxpayers to play a guessing game about which tax year a debt becomes sufficiently worthless to support the deduction. Because of potential statute of limitations problems, tax experts generally recommend that you claim the loss in the earliest possible year that it can reasonably be argued to be worthless.

Finally, you must determine whether a business or nonbusiness bad debt exists. A business bad debt must be created or acquired, or become worthless, in the course of your trade or business. If you conduct a business in the form of a corporation, generally any debt held by the corporation is a business debt. Any debt not falling into the business category is a nonbusiness debt.

As guarantor. If you take out a loan on behalf of your corporation or you personally guarantee the loan and then must make good on it, you are usually considered to have either made a contribution to capital or created a nonbusiness bad debt to protect your position as an investor. A nonbusiness debt must be completely worthless before a loss can be taken. Furthermore, nonbusiness bad debts are subject to limits on capital losses. Business bad debts, on the other hand, are deductible as ordinary losses in full against your other income.

Net operating losses

If you show a net operating loss for the year, it normally may be carried back two years or carried forward up to 20 years until it can be netted against current taxable income. A net operating loss (NOL) for this purpose has some complexity built in to strip it of most personal tax characteristics. An individual's NOL, for example, does not include any offset for personal or dependency exemptions, for net nonbusiness capital losses, or for nonbusiness itemized deductions that exceed nonbusiness income. Another choice in dealing with an NOL is to elect to immediately carryforward the loss. This can be advantageous when high rate-bracket income is anticipated in the following year.

Note. The 2009 Recovery Act provides a five-year carryback of 2008 NOLs for qualified small businesses only. These are small businesses with average gross receipts of $15 million or less. Businesses can choose to carryback NOLs three, four or five years. This treatment applies only to NOLs for any tax year beginning or ending in 2008. The normal NOL carryback period returns in for NOLs incurred in 2009.

Pass-through losses

One of the advantages of investing in a business as a partner or a subchapter S shareholder is that losses on the business level get passed-through to your individual tax return. Regular corporations, on the other hand, file separate returns and the shareholder cannot "realize" a tax loss until he or she actually sells stock.

For both partners and S shareholders, however, the ability to deduct pass-through losses is determined by the amount of tax basis the partner has in his partnership interest or the S shareholder has in his shares. This, in turn, depends upon a variety of factors, including the original price paid, the amount of losses already passed through, cash or property distributed, and any later contributions.

If you have such a stake in a business, a tax strategy for both adding to basis and preventing its diminution is critical to your ability to be able to deduct business losses as a partner or S shareholder.

Section 1244 Stock

If you sell stock at a loss and that stock had been designated on its issuance to be "Section 1244 stock," you are more fortunate than most investors who bail out during a business downturn. Reason: you are entitled to an ordinary loss deduction rather than a capital loss. This special loss treatment is limited to $50,000 for any one year ($100,000 for joint returns). Other requirements are that the stock was issued for no more than $1 million, less than 50% of corporate receipts were from passive sources for the first five years of operation, and the shareholder claiming the treatment must be an individual.

Dealing with and making the most of losses related to a business downturn can get complicated. Because the preceding discussion is meant to be general, is limited in nature and does not cover all the tax rules involved, you are encourage to contact the office for additional guidance with this issue.