President Donald Trump signed into law the bipartisan Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142) on June 5. The legislation aims to expand usability of the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s ( P.L. 116-136) headliner small business loan program.

President Donald Trump signed into law the bipartisan Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142) on June 5. The legislation aims to expand usability of the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s ( P.L. 116-136) headliner small business loan program.

PPP in the House
The bipartisan, bicameral-crafted P.L. 116-142 makes several changes to the rapidly implemented Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). The bill, authored by House Reps. Chip Roy, R-Tex., and Dean Phillips, D-Minn., was approved in the House by a 417-to-1 vote on May 27. After a brief stall in the Senate, P.L. 116-142 cruised through the upper chamber by voice vote on June 3.

Most notably, the legislation includes some of the following PPP changes:

• Extends the expense forgiveness period from eight weeks to 24 weeks;
• Reduces the 75 percent payroll ratio requirement to 60 percent;
• Eliminates the two-year loan repayment restrictions for future borrowers;
• Allows payroll tax deferment for PPP recipients; and
• Extends the June 30, 2020, rehiring deadline to December 31, 2020.

Questions Remain
However, riding shotgun with the measure’s increased PPP flexibility is a list of remaining unanswered questions and potential issues. While policymakers and stakeholders alike await more Treasury and SBA guidance, additional legislative text is already in the works to iron out certain wrinkles in past PPP legislation and related IRS guidance.

"Our colleagues have continued to track the program’s [PPP] operation and recommend further tweaks where necessary. In recent days, Senator Collins helped strengthen and improve the House’s proposed PPP modifications before they passed the bill and sent it to us. And I know the senior Senator from Maine has already identified several more technical fixes for the new legislation that I hope Congress will address," Senate Majority Leader Mitch McConnell, R-Ky., said on June 4 from the Senate floor.

Looking Ahead to PPP Technical Corrections, Enhancements
Although the ink may still be drying on the PPP Flexibility Act, Sen. Susan Collins, R-Me., co-architect of the small business loan program, said on June 4 that her staff is currently drafting a PPP technical corrections bill. The next bill is expected to address concerns with P.L. 116-142 60 percent "cliff", among other items.

"Two of my priorities would be to correct what I believe to be a drafting error in the House bill that eliminates partial forgiveness for small businesses with PPP loans who have been unable to retain, recall, or pay their full number of employees due to circumstances beyond the employer’s control," Collins said in a June 4 statement. "The House bill contains a cliff: even if a small employer spent 59 percent out of the 60 percent of the funding designated to pay their employees, none of the loan would be forgiven. The employer would be saddled with debt." Additionally, Collins noted the next PPP bill would allow for overhead funding to be used for masks and other protective gear for employees.

Fellow PPP policy architect Senate Small Business Committee Chair Marco Rubio, R-Fla., on June 4 also alluded to another PPP bill. "I appreciate the Administration’s flexibility and commitment to address the bill’s inadvertent technical errors that could create unintended consequences for small businesses as they seek forgiveness," Rubio said in a June 4 statement. "If the Administration cannot address these issues, Congress will need to fix them through additional legislation…," Rubio said.

Tax Treatment of Ordinary Business Expenses
Additionally, Sen. John Cornyn, R-Tex., told reporters on June 4 that Senate leadership is trying to take up the bipartisan Small Business Expense Protection Bill (S. 3612). The bill would clarify that receipt and forgiveness of a PPP loan does not affect the tax treatment of ordinary business expenses.

However, according to controversial IRS Notice 2020-32, businesses that qualify for PPP loan forgiveness will not be able to deduct certain expenses, including wages, paid for by the loan. "The money coming in the PPP is not taxable. So, if the money that is coming is not taxable, you cannot double dip," Mnuchin said. But Congress’s top, bipartisan tax writers immediately voiced disapproval of IRS and Treasury’s position, stating that the IRS guidance goes against congressional intent.

"[A]s was expressed to Treasury during the development of the PPP, we did not intend to deny the deductibility of ordinary and necessary business expenses, nor did these small businesses expect to lose deductions for their business expenses when they applied for a PPP loan," Senate Finance Committee Chairman Chuck Grassley, R-Iowa, ranking member Ron Wyden, D-Ore., and House Ways and Means Committee Chair Richard Neal, D-Mass., wrote in a recent letter to Mnuchin.

And while many business groups are also commending Congress’s approval of P.L. 116-142, their leadership is also calling for more PPP-related legislation. "The PPP changes passed by both chambers are another important step in providing relief to small businesses that otherwise will not survive until the economic recovery phase," U.S. Travel Association Executive Vice President of Public Affairs and Policy Tori Emerson Barnes said in a statement. However, the Travel Association, similar to other industry trade groups, has called for additional PPP enhancements.

"While this measure does a good job making the PPP work better for businesses that are eligible, other PPP enhancements will be needed to make sure all the key pieces are in place when the recovery begins—in particular, extending eligibility to non-profit and quasi-governmental entities that are vital drivers of local and regional economic development," Barnes said.

To that end, it remains unclear at this time whether additional PPP changes, enhancements, and clarifications will come by way of Treasury and SBA guidance, another stand-alone bill, or catch a ride with the next round of economic relief legislation. However, prior to the Senate’s approval of P.L. 116-142, McConnell submitted to the congressional record per Sen. Ron Johnson's, R-Wisc., hold on the bill, a letter from the measure’s bipartisan, bicameral authors and policy architects clarifying congressional intent for PPP loans covered period extension.

"The extension of the covered period in P.L. 116-142 is to allow borrowers who received PPP loans before June 30, 2020, to continue to make expenditures for allowable uses until December 31, 2020," the record states. "The extension of the covered period does not authorize the [SBA] to issue any new PPP loans after June 30, 2020, as this date remains fixed by section 1102(b) of the CARES Act."

PPP Disclosures
Meanwhile, in the spirit of PPP transparency, Rubio and Senate Small Business Committee ranking member Ben Cardin, D-Md., sent a letter this week to Treasury Secretary Mnuchin and SBA Administrator Jovita Carranza calling for more public disclosures of information related to PPP loans and borrowers. "Given the grave nature of this crisis and the unprecedented level of funding that has been appropriated, it is critical that the public and Congress have timely and complete information about where these funds are going, and the committee expects an increased level of transparency and accountability from the SBA," Rubio and Cardin wrote.

Some of the items Rubio and Cardin have requested be made publicly available on the SBA’s website include the following:

• name of business or nonprofit borrower and address,
• business type,
• lender and address,
• loan or grant amount,
• congressional district, and
• number of jobs supported.

In consultation with Treasury Department, the Small Business Administration (SBA) has issued...

In consultation with Treasury Department, the Small Business Administration (SBA) has issued:

• new and revised guidance for the Paycheck Protection Program (PPP);
• revised PPP application forms;
• a revised PPP loan forgiveness application; and
• a new "EZ" PPP loan forgiveness application.

New, Revised PPP Guidance
The guidance implements the Paycheck Protection Program Flexibility Act (PPPFA) ( P.L. 116-142), which President Trump signed on June 5, 2020. The PPPFA aims to expand usability of the PPP for small businesses provided in the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136).

The updated guidance expands PPP eligibility for business owners who have past felony convictions. Further, to implement the PPPFA, the SBA revised its first PPP interim final rule that was issued in April. As noted in Treasury’s recent announcement issued on June 8, the new rule reflects updates related to loan maturity, deferral of loan payments, and forgiveness.

The new and revised PPP guidance can be found at https://home.treasury.gov/system/files/136/PPP-IFR--Additional-Revisions-to-First-Interim-Final-Rule.pdf.

Revised PPP Applications
The SBA has issued revised the PPP application forms to conform with the changes in the guidance.

The revised Borrower application form can be found at https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form-Revised-June-12-2020.pdf.

For the revised Lender application form, see https://home.treasury.gov/system/files/136/PPP-Lender-Application-Form-Revised-June-12-2020.pdf.

Senators Request PPP Forgiveness Simplification
In a bipartisan effort, a group of over 40 senators have requested that Treasury and the SBA simplify the PPP loan forgiveness application for certain small business loans. Specifically, the senators urged Treasury and the SBA to revise the form so that it is no longer than one page for any loan under $250,000.

"While the Small Business Administrator was also given the ability to require additional documentation necessary to verify proper use of PPP funds, we believe it is beyond the program’s intent to require the information solicited in the 11-page forgiveness application that the SBA recently released," the senators wrote in a recent letter addressed to Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza. "We appreciate the interest in appropriately auditing the use of government money. However, the loan forgiveness application – which understandably needs more information for loans worth significantly more than $250,000 – is three times longer than the original application for the PPP."

On the heels the senators’ request, the SBA has released both a revised, full PPP loan forgiveness application, and a new "EZ" forgiveness application (Form 3508EZ). The new EZ loan forgiveness application can be used by:

• borrowers that are self-employed and have no employees;
• borrowers that did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; or
• borrowers that experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

Both the full forgiveness application and the EZ forgiveness application give borrowers the option of using the original 8-week covered period (if their loan was made before June 5, 2020) or the PPPFA’s extended 24-week covered period. The EZ application requires fewer calculations and less documentation for eligible borrowers.

The new EZ forgiveness application can be found at https://home.treasury.gov/system/files/136/PPP-Forgiveness-Application-3508EZ.pdf.

The revised, full forgiveness application can be found at https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf.

The IRS is postponing deadlines for certain time-sensitive actions due to the Coronavirus Disease 2019 (COVID-19) emergency. This relief affects employment taxes, employee benefit plans, exempt organizations, individual retirement arrangements (IRAs), Coverdell education savings accounts, health savings accounts (HSAs), and Archer and Medicare Advantage medical saving accounts (MSAs).

The IRS is postponing deadlines for certain time-sensitive actions due to the Coronavirus Disease 2019 (COVID-19) emergency. This relief affects employment taxes, employee benefit plans, exempt organizations, individual retirement arrangements (IRAs), Coverdell education savings accounts, health savings accounts (HSAs), and Archer and Medicare Advantage medical saving accounts (MSAs).

With certain exceptions, the relief postpones deadlines for certain actions due to be performed on or after March 30, 2020, and before July 15, 2020. The revised deadline for an affected taxpayer to perform a time-sensitive action described in the relief is July 15, 2020, unless a different revised deadline is specified.

Qualified Retirement Plans
For employee benefit plans (including a section 403(b) plan, a governmental section 457(b) plan, a SEP plan described in section 408(k), or a SIMPLE IRA plan described in section 408(p)), or any sponsor, administrator, participant, beneficiary, disqualified person, or other person with respect to the plan, the relief affects applying for a funding waiver under Code Sec. 412(c) for a defined benefit pension plan that is not a multiemployer plan.

For multiemployer defined benefit pension plans, the relief affects actions due to be performed on or before the dates in (1) Code Sec. 432(b)(3) for certification of funded status and related notice to interested parties; (2) Code Sec. 432(c)(1) and (e)(1) for adopting a funding improvement plan or rehabilitation plan (and the notification to the bargaining parties of the schedules thereunder); or (3) Code Sec. 432(c)(6) and (e)(3) for the annual update of a funding improvement plan or a rehabilitation plan, and its contribution schedules, and the filing of those updates with the Form 5500 annual return.

For cooperative and small employer charity pension (CSEC) plans, the relief affects actions to be performed on or before the dates in (1) Code Sec. 433(c)(9) for making the contribution required to be made for the plan year; (2) Code Sec. 433(f)(3)(B) for making required quarterly installments; (3) Code Sec. 433(j)(3) for the adoption of a funding restoration plan; or (4) Code Sec. 433(j)(4) for the certification of funded status.

For filing Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and payment of the associated excise taxes, the period beginning on March 30, 2020, and ending on July 15, 2020, will be disregarded in calculating any interest or penalty for failure to file the Form 5330 or pay the excise tax postponed under the relief. Interest and penalties on postponed filing and payment obligations will begin to accrue on July 16, 2020.

Other relief related to qualified retirement plans affects:

• extension of initial remedial amendment period for section 403(b) plans;
• certain actions affecting pre-approved defined benefit plans;
• the Employee Plans Compliance Resolution System (EPCRS); and
• requests for approval of a substitute mortality table.

Form 5498 Series
For filers of Form 5498, IRA Contribution Information, Form 5498-ESA, Coverdell ESA Contribution Information, and Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, the due date for filing and furnishing the forms is postponed to August 31, 2020, and the period beginning on the original due date of those forms and ending on August 31, 2020, will be disregarded in calculating any penalty for failure to file those forms. Penalties on the postponed filing will begin to accrue on September 1, 2020.

Employers and CPEOs
The relief applies to employers who perform correct employment tax reporting errors using the interest-free adjustment process under Code Secs. 6205 and 6413.

For certified professional employer organizations (CPEOs), the relief provides a temporary waiver of the requirement that CPEOs must file certain employment tax returns and their accompanying schedules electronically. The relief for CPEOs applies only to (1) Forms 941 filed for the second, third, and fourth quarter of 2020; and (2) Forms 943 filed for calendar year 2020. CPEOs can file paper versions of these forms and their schedules if they so choose. The waiver applies to all CPEOs, and individual waiver requests do not need to be submitted.

Exempt Organizations
For exempt organizations, the relief applies to electronic submissions of Form 990-N under Code Sec. 6033(i), and filing suits for declaratory judgment under Code Sec. 7428.

Effect on Other Documents
Rev. Proc. 2017-18, I.R.B. 2017-5, Rev. Proc. 2017-55, I.R.B. 2017-43, Announcement 2018-5, I.R.B. 2018-13, Rev. Proc. 2019-19, I.R.B. 2019-19, Rev. Proc. 2019-39, I.R.B. 2019-42, and Rev. Proc. 2020-10, I.R.B. 2020-10, are modified. Notice 2020-18, I.R.B. 2020-15, Notice 2020-20, I.R.B. 2020-16, and Notice 2020-23, I.R.B. 2020-18, are amplified.

The IRS has issued guidance on coronavirus-related distributions and plan loans.

The IRS has issued guidance on coronavirus-related distributions and plan loans. The guidance

• presents the rules set out in Act Sec. 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136);
• adds three new categories to the list of individuals who qualify due to adverse financial consequences;
• provides analysis and examples of repayments reporting; and
• includes safe harbors for employee certification and the plan loan payment suspension period.

Background: Coronavirus-Distributions and Plan Loan Relief
The CARES Act provides that qualified individuals may treat up to $100,000 in distributions made from their eligible retirement plans (including IRAs) between January 1, 2020, and December 30, 2020, as "coronavirus-related" distributions. A coronavirus-related distribution is not subject to the 10-percent additional tax that otherwise generally applies to distributions made before an individual reaches age 59-1/2. In addition, a coronavirus-related distribution can be included in income in equal installments over a three-year period, and an individual has three years to repay a coronavirus-related distribution to a plan or IRA and undo the tax consequences of the distribution.

In addition, the CARES Act provides that plans may implement certain relaxed rules for qualified individuals relating to plan loan amounts and repayment terms. In particular, plans may suspend loan repayments that are due from March 27, 2020, through December 31, 2020, and the dollar limit on loans made between March 27, 2020, and September 22, 2020, is raised from $50,000 to $100,000.

New Categories of Qualified Individuals
One of the categories of individuals who qualify for coronavirus-related distributions are those who experience adverse financial consequences as a result of coronavirus. As laid out in the CARES act, these consequences may include:

• being quarantined, being furloughed or laid off, or having work hours reduced due to such virus or disease;
• being unable to work due to lack of child care due to such virus or disease; or
• closing or reducing hours of a business owned or operated by the individual due to such virus or disease.

The CARES Act authorizes the Treasury Department to add to this list. Under the guidance, a qualified individual also includes an individual who experiences adverse financial consequences as a result of:

• a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
• the individual’s spouse or a member of the individual’s household being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
• closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.

Recontributions: Recognizing Income in Year of Distribution
The new guidance goes into detail on recontributions. Individuals have up to three years to recontribute qualified distributions. Recontributed dollars are not taxed, so earlier returns may have to be amended. The rules differ depending on whether the individual is recognizing income over three years or entirely in the year of distribution.

If a taxpayer includes all coronavirus-related distributions received in a year in gross income for that year and recontributes any portion during the three-year recontribution period, the amount of the recontribution will reduce the amount of the related distribution included in gross income for the year of the distribution.

Example 1. Bob receives a $45,000 coronavirus distribution from his employer plan on November 1, 2020. Bob recontributes $45,000 to an IRA on March 31, 2021. Bob reports the recontribution on Form 8915-E, and files the 2020 federal income tax return on April 10, 2021. No portion of the coronavirus-related distribution is includible as income for the 2020 tax year. [Note: The guidance states that Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments, is expected to be available before the end of 2020.]

Example 2. The facts are the same as in Example 1, except that Bob timely requests an extension of time to file the 2020 federal income tax return and makes a recontribution on August 2, 2021, before filing the 2020 federal income tax return. Bob files the 2020 federal income tax return on August 10, 2021. As in Example 1, no portion of the coronavirus-related distribution is includible in income for the 2020 tax year because Bob made the recontribution before the timely filing of the 2020 federal income tax return.

Example 3. Cynthia receives a $15,000 distribution from an employer plan on March 30, 2020. Cynthia elects out of the 3-year ratable income inclusion on Form 8915-E and includes the entire $15,000 in gross income for the 2020 tax year. On December 31, 2022, she recontributes $15,000 to her employer plan. Cynthia will need to file an amended federal income tax return for the 2020 tax year to report the amount of the recontribution and reduce the gross income by $15,000 with respect to the coronavirus-related distribution included on the 2020 original federal income tax return.

Recontributions: Recognizing Income Over Three Years
If a qualified individual includes a coronavirus-related distribution ratably over a three-year period and the individual recontributes any portion to an eligible retirement plan at any date before the timely filing of the individual’s federal income tax return (that is, by the due date, including extensions) for a tax year in the three-year period, the amount of the recontribution will reduce the ratable portion of the coronavirus-related distribution that is includible in gross income for that tax year.

Example 4. Dan receives $75,000 from his employer plan on December 1, 2020. Dan uses the three-year ratable income inclusion method. Dan makes one recontribution of $25,000 to the plan on April 10, 2022. Dan files his 2021 federal income tax return on April 15, 2022. Without the recontribution, Dan should include $25,000 in income with respect to the coronavirus-related distribution on each of his 2020, 2021, and 2022 federal income tax returns. However, as a result of the recontribution, Dan should include $25,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return, $0 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return, and $25,000 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.

Example 5. The facts are the same as in Example 4, except Dan recontributes $25,000 to the plan on August 10, 2022. Dan files the 2021 federal income tax return on April 15, 2022, and does not request an extension of time to file that federal income tax return. As a result of the recontribution, Dan should include $25,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return, $25,000 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return, and $0 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.

Carryovers. If the taxpayer recontributes an amount for a tax year in the three-year period that exceeds the amount that is otherwise includible in gross income for that tax year, the excess amount of the recontribution may be carried forward to reduce the amount of the distribution includible in gross income in the next tax year in the three-year period. Alternatively, the qualified individual is permitted to carry back the excess amount of the recontribution to a prior tax year or years in which the individual included income attributable to a coronavirus-related distribution. The individual will need to file an amended federal income tax return for the prior tax year or years to report the amount of the recontribution on Form 8915-E and reduce his or her gross income by the excess amount of the recontribution.

Example 6. Eliza receives a distribution of $90,000 from her IRA on November 15, 2020. Eliza ratably includes the $90,000 distribution in income over a three-year period. Without any recontribution, Eliza will include $30,000 in income with respect to the coronavirus-related distribution on each of the 2020, 2021, and 2022 federal income tax returns. Eliza includes $30,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return. Eliza then recontributes $40,000 to an IRA on November 10, 2021 (and makes no other recontribution in the three-year period). Eliza may do either of the following:

• Option 1: Include $0 in income with respect to the coronavirus-related distribution on the 2021 federal income tax return. Carry forward the excess recontribution of $10,000 to 2022, and include $20,000 in income with respect to the coronavirus-related distribution on the 2022 federal income tax return.
• Option 2: Include $0 in income with respect to the coronavirus-related distribution on the 2021 tax return and $30,000 in income on the 2022 federal income tax return. Also, file an amended federal income tax return for 2020 to reduce the amount included in income as a result of the coronavirus-related distribution to $20,000 (that is, the $30,000 original amount includible in income for 2020 minus the remaining $10,000 recontribution that is not offset on either the 2021 or 2022 federal tax return).

Safe Harbor for Plan Loans
The CARES Act provides that in the case of a qualified individual with a loan from a qualified employer plan outstanding on or after March 27, 2020, if the due date for any repayment with respect to the loan occurs during the period beginning on March 27, 2020, and ending on December 31, 2020, the due date shall be delayed for one year.

Under a safe harbor provided in the guidance, a qualified employer plan will satisfy this requirement if a qualified individual’s obligation to repay a plan loan is suspended under the plan for any period beginning not earlier than March 27, 2020, and ending not later than December 31, 2020. The loan repayments must resume after the end of the suspension period, and the term of the loan may be extended by up to one year from the date the loan was originally due to be repaid.

The IRS has released guidance that provides temporary administrative relief to help certain retirement plan participants or beneficiaries who need to make participant elections by allowing flexibility for remote signatures. Specifically, the guidance provides participants, beneficiaries, and administrators of qualified retirement plans and other tax-favored retirement arrangements with temporary relief from the physical presence requirement for any participant election (1) witnessed by a notary public in a state that permits remote notarization, or (2) witnessed by a plan representative using certain safeguards. The guidance accommodates local shutdowns and social distancing practices and is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, as permitted by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136).

The IRS has released guidance that provides temporary administrative relief to help certain retirement plan participants or beneficiaries who need to make participant elections by allowing flexibility for remote signatures. Specifically, the guidance provides participants, beneficiaries, and administrators of qualified retirement plans and other tax-favored retirement arrangements with temporary relief from the physical presence requirement for any participant election (1) witnessed by a notary public in a state that permits remote notarization, or (2) witnessed by a plan representative using certain safeguards. The guidance accommodates local shutdowns and social distancing practices and is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, as permitted by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136).

Conditions for Participant Elections
Reg. §1.401(a)-21 sets forth standards for the use of an electronic medium to provide applicable notices to recipients or to make participant elections with respect to a retirement plan, an employee benefit arrangement, or an individual retirement plan. Reg. §1.401(a)-21(e)(6) defines a participant election as any consent, election, request, agreement, or similar communication made by or from a participant, beneficiary, alternate payee, or an individual entitled to benefits under a retirement plan, employee benefit arrangement, or individual retirement plan. Reg. §1.401(a)-21(d) sets forth the following conditions for participant elections:

• The individual must be effectively able to access the electronic medium used to make the participant election;
• The electronic system must be reasonably designed to preclude any person other than the appropriate individual from making the participant election;
• The electronic system must provide the individual making the participant election with a reasonable opportunity to review, confirm, modify, or rescind the terms of the election before it becomes effective; and
• The individual making the participant election, within a reasonable time, must receive confirmation of the election through either a written paper document or an electronic medium under a system that satisfies the applicable notice requirements under Reg. §1.401(a)-21.

Applicability
While this temporary relief, which covers the period from January 1, 2020, through December 31, 2020, is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, as permitted by section 2202 of the CARES Act, the temporary relief applies to any participant election that requires the signature of an individual to be witnessed in the physical presence of a plan representative or notary.

The IRS has released a revenue procedure that describes temporary safe harbors for the purpose of determining the federal tax status of certain arrangements that hold real property as trusts in response to the COVID-19 emergency. Specifically, the Service has provided temporary relief to arrangements that are treated as trusts under Reg. §301.7701-4(c) which are, or have tenants who are, experiencing financial hardship as a result of COVID-19, to allow them to make certain modifications to their mortgages loans and their lease agreements, and to accept additional cash contributions without jeopardizing their tax status as grantor trusts. This revenue procedure also indicates that a cash contribution from one or more new trust interest holders to acquire a trust interest or a non-pro rata cash contribution from one or more current trust interest holders must be treated as a purchase and sale under Code Sec. 1001 of a portion of each non-contributing (or lesser contributing) trust interest holder’s proportionate interest in the trust’s assets.

The IRS has released a revenue procedure that describes temporary safe harbors for the purpose of determining the federal tax status of certain arrangements that hold real property as trusts in response to the COVID-19 emergency. Specifically, the Service has provided temporary relief to arrangements that are treated as trusts under Reg. §301.7701-4(c) which are, or have tenants who are, experiencing financial hardship as a result of COVID-19, to allow them to make certain modifications to their mortgages loans and their lease agreements, and to accept additional cash contributions without jeopardizing their tax status as grantor trusts. This revenue procedure also indicates that a cash contribution from one or more new trust interest holders to acquire a trust interest or a non-pro rata cash contribution from one or more current trust interest holders must be treated as a purchase and sale under Code Sec. 1001 of a portion of each non-contributing (or lesser contributing) trust interest holder’s proportionate interest in the trust’s assets.

Applicability
This revenue procedure applies to arrangements that are trusts under Reg. §301.7701-4(c) and Rev. Rul. 2004-86, 2004-2 CB 191, and that hold real property and engage in one or more of the actions described in sections 6.02, 6.03, or 6.04 of this revenue procedure.

Background
The IRS and the Treasury Department received comments addressing arrangements organized as trusts under Reg. §301.7701-4(c) and Rev. Rul. 2004-86 that hold rental real property. The commenters reported that many of these arrangements and their tenants are experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency.

Rev. Proc. 2020-26
The IRS and the Treasury Department issued certain safe harbors in Rev. Proc. 2020-26, I.R.B. 2020-18, 753. Under the safe harbors, certain modifications of mortgage loans in connection with forbearance programs described in that guidance are not treated as replacing the unmodified obligation with a newly issued obligation, as giving rise to prohibited transactions, or as manifesting a power to vary.

In the case of mortgage loans held by real estate mortgage investment conduits (REMICs) and investment trusts, Rev. Proc. 2020-26 applies to—

• Forbearance (and all related modifications) of a federally backed mortgage loan or a federally backed multifamily mortgage loan, if the forbearance is provided under section 4022 or 4023, respectively, of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) ( P.L. 116-136) (CARES Act Forbearances); and
• Forbearances (and all related modifications) that are not CARES Act Forbearances, that are agreed to by the borrower of any Federally backed or non-Federally backed mortgage loan, and that are provided by a holder or servicer of the loan under a forbearance program for borrowers experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency.

The forbearance programs covered are those (a) which are identical or similar to those described in section 2.07 of Rev. Proc. 2020-26; and (b) pursuant to which, between March 27, 2020, and December 31, 2020, inclusive, the borrower requests or agrees to the forbearance (and all related modifications).

The IRS has announced various extensions of deadlines for qualified opportunity funds and their investors due to the Coronavirus pandemic.

The IRS has announced various extensions of deadlines for qualified opportunity funds and their investors due to the Coronavirus pandemic.

180-Day Investment Period
Generally taxpayers must reinvestment capital gain in a qualified opportunity fund (QOF) within 180 days after the gain is realized from a sale or exchange. Under the guidance, if the last day of the 180-day investment period falls on or after April 1, 2020, and before December 31, 2020, the last day of the investment period is automatically postponed to December 31, 2020.

90-Percent Investment Standard
The guidance also provides that a QOF’s failure to hold 90 percent of its assets in qualified opportunity zone property on any semi-annual testing date that falls on or after April 1, 2020 and ends on or before December 31, 2020 is due to reasonable cause on account of the COVIS-19 pandemic. Therefore, the failure to satisfy the 90-percent test does not affect an entity’s status as a QOF or prevent an investment in the entity from being a qualified investment. Penalties due to failure to satisfy the 90-percent investment standard during this period are waived.

30-month Substantial Improvement Period Tolled
The 30-month period during which property held by a QOF or qualified opportunity zone business must be substantially improved is tolled during the period beginning on April 1, 2020, and ending on December 31, 2020.

24-Month Extension of Working Capital Safe Harbor Spending Deadline
Qualified opportunity zone businesses holding working capital intended to be covered by the 31-month working capital safe harbor before December 31, 2020, receive up to an additional 24 months to spend the working on qualifying property. This extension is allowed under the QOF regulations on account of the prior declaration of a Federally declared disaster relating to the pandemic effective on January 20, 2020.

12-Month Extension of Reinvestment Period for QOFs
Finally, if any part of the 12-month period during which a QOF may reinvest returns of capital and proceeds from the sale of qualified opportunity property in other qualified opportunity zone property includes January 20, 2020, the reinvestment period is extended up to an additional 12 months. Again, this extension is allowed under the QOF regulations due to the disaster declaration.

Notice 2020-23, I.R.B. 2020-18, 742 is modified.

The IRS has issued proposed regulations clarifying the definition of a qualifying relative for various tax benefits for tax years 2018 through 2025 in which the dependent exemption amount is zero. During these years, the exemption amount will be inflation adjusted as provided in annual IRS guidance in determining whether an individual is a qualifying relative such as for head of household filing status and $500 child tax credit.

The IRS has issued proposed regulations clarifying the definition of a qualifying relative for various tax benefits for tax years 2018 through 2025 in which the dependent exemption amount is zero. During these years, the exemption amount will be inflation adjusted as provided in annual IRS guidance in determining whether an individual is a qualifying relative such as for head of household filing status and $500 child tax credit.

Qualifying Relative
A taxpayer may claim a qualifying relative as a dependent on his or her return provided certain requirements are met, including that the individual’s gross income is less than the exemption amount for the tax year. The exemption amount is zero (-$0-) for tax years beginning in 2018 through 2025 and no deduction may be claimed for a dependency exemption. However, the rules for determining who is a qualifying relative remain applicable for claiming other tax benefits in 2018 through 2025.

Inflation-Adjustment Exemption Amount
Consistent with Notice 2018-70, I.R.B. 2018-38, 441, the proposed regulations provide that in determining whether an individual is a qualifying relative for purposes of various tax provisions in 2018 through 2025 the exemption amount will be the inflation-adjusted. The IRS will publish the exemption amount annually in guidance. For example, the exemption amount is $4,200 for 2019 ( Rev. Proc. 2018-57, I.R.B. 2018-49, 827) and $4,300 for 2020 ( Rev. Proc. 2019-44, I.R.B. 2019-47, 1093).

Proposed regulations provide guidance regarding the elimination of the deduction for expenses related to qualified transportation fringe benefits (QTFs) provided to an employee. The Tax Cuts and Jobs Act (P.L. 115-97) eliminated the deduction, effective for amounts paid or incurred after December 31, 2017.

Proposed regulations provide guidance regarding the elimination of the deduction for expenses related to qualified transportation fringe benefits (QTFs) provided to an employee. The Tax Cuts and Jobs Act (P.L. 115-97) eliminated the deduction, effective for amounts paid or incurred after December 31, 2017.

In general, the proposed regulations refine guidance previously provided in Notice 2018-99, 2018-52 I.R.B. 1067. They provide a general rule and three simplified methodologies to determine the amount of QTF parking expense that is nondeductible when a parking facility is owned or leased by an employer. Additionally, the proposed regulations address the disallowance of deductions for expenses related to providing employees transportation in a commuter highway vehicle and transit passes.

The proposed regulations include definitions from Notice 2018-99, with modifications in response to public comments, as well as new definitions to clarify application of the rules.

If an employer pays a third party for its employee’s QTF, the disallowance is generally calculated as the taxpayer’s total annual cost of the QTF paid to the third party.

In valuing a QTF relating to employee-owned or leased parking facilities, an employer may choose to apply the general rule or any of the three simplified methods for each tax year and each parking facility: the "qualified parking limit methodology," the "primary use methodology," or the "cost per space methodology." Statistical sampling may be used with the general rule or simplified methodologies.

The general rule allows a taxpayer to calculate the disallowed amount based on a reasonable interpretation of the statute. However, the actual expense paid or incurred in providing the QTF must be used. The value of the QTF to the employee is ignored. In addition, the employee must allocate parking expenses to reserved employee spaces, and properly apply the exception for parking made available to the general public. Parking spaces may be aggregated by geographical location.

Special rules explain how to allocate mixed parking expenses, aggregate parking spaces by geographic location, and remove inventory/unusable spaces from available parking spaces. Five or few reserved parking spaces may be disregarded if the reserved spaces are 5 percent or less of total parking spaces.

Effective Date
The proposed regulations will apply in tax years beginning on or after the date they are published as final regulations. However, a taxpayer may rely on the proposed regulations for expenses paid or incurred in tax years beginning after December 31, 2017. Alternatively, a taxpayer may rely on the guidance provided in Notice 2018-99 until the regulations are published as final.

Proposed regulations would define expenditures for direct primary care arrangements and health care sharing ministry memberships as amounts paid for medical care. Thus, amounts paid for those arrangements may be deductible medical expenses. The proposed regulations also clarify that amounts paid for certain arrangements and programs, such as health maintenance organizations (HMO) and certain government-sponsored health care programs, are amounts paid for medical insurance.

Proposed regulations would define expenditures for direct primary care arrangements and health care sharing ministry memberships as amounts paid for medical care. Thus, amounts paid for those arrangements may be deductible medical expenses. The proposed regulations also clarify that amounts paid for certain arrangements and programs, such as health maintenance organizations (HMO) and certain government-sponsored health care programs, are amounts paid for medical insurance.

President Trump's Executive Order 13877, "Improving Price and Quality Transparency in American Healthcare to Put Patients First" (84 FR 30849) directed Treasury to treat expenses related to these types of arrangements as eligible medical expenses.

These regulations are proposed to apply for tax years that begin on or after the date of publication of a Treasury Decision adopting these rules as final regulations.

Caution: Characterization of direct primary care arrangements and health care sharing ministry memberships as medical insurance may affect eligibility to contribute to a health savings account (HSA). For an individual in a direct primary care arrangement, the type of coverage provided by the arrangement will affect eligibility. Membership in a health care sharing ministry would preclude an individual from contributing to an HSA.

Direct Primary Care Arrangement
A direct primary care arrangement is a contract between an individual and one or more primary care physicians under which the physician or physicians agree to provide medical care for a fixed annual or periodic fee without billing a third party.

The IRS requests comments on whether to expand the definition to include a contract with nurse practitioners, clinical nurse specialists, or physician assistants who provide primary care services. The IRS also requests comments on whether the final regulations should clarify the treatment of other types of arrangements that are similar to direct primary care arrangements, such as an agreement between a dentist and a patient to provide dental care, or a physician and patient to provide specialty care.

Health Care Sharing Ministry
The proposed regulations define a health care sharing ministry as an organization:

• that is described in Code Sec. 501(c)(3) and is exempt from taxation under Code Sec. 501(a);
• members of which share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs and without regard to the state in which a member resides or is employed;
• members of which retain membership even after they develop a medical condition;
• which (or a predecessor of which) has been in existence at all times since December 31, 1999, and medical expenses of its members have been shared continuously and without interruption since at least December 31, 1999; and
• that conducts an annual audit performed by an independent certified public accounting firm in accordance with generally accepted accounting principles and that is made available to the public upon request.

The proposed regulations provide that medical insurance under Code Sec. 213(d)(1)(D) includes health care sharing ministries that share expenses for medical care under Code Sec. 213(d)(1)(A). This proposal does not affect whether a health care sharing ministry is considered an insurance company, insurance service, or insurance organization (health insurance issuer) for other purposes of the Code, ERISA, the Public Health Service Act (PHS Act), or any other federal or state law.

Fees for HMO Membership and Government-Sponsored Programs
The proposed regulations incorporate the longstanding IRS position of treating amounts paid for membership in an HMO as medical insurance premiums. Amounts paid to an HMO or a provider to cover coinsurance, copayment, or deductible obligations under an HMO’s terms are payments for medical care. In either case, such payments are eligible for the medical expense deduction.

Amounts paid for coverage under certain government-sponsored health care programs are also treated as amounts paid for medical insurance. The proposed regulations:

• incorporate the guidance in Code Sec. 213(d)(1)(D) and Rev. Rul. 79-175 that Medicare Parts A and B are medical insurance;
• clarify that Medicare Parts C and D are medical insurance; and
• provide that Medicaid, the Children’s Health Insurance Program (CHIP), TRICARE, and certain veterans’ health care programs are medical insurance.

Thus, to extent individuals pay premiums or enrollment fees for coverage under these programs, those amounts would be eligible for deduction as a medical expense.

The IRS requests comments on whether amounts paid for other government-sponsored health care programs should be treated as amounts paid for medical insurance.

Proposed reliance regulations clarify the definitions of "real property" that qualifies for a like-kind exchange, including incidental personal property. Under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), like-kind exchanges occurring after 2017 are limited to real property used in a trade or business or for investment. Comments are requested.

Proposed reliance regulations clarify the definitions of "real property" that qualifies for a like-kind exchange, including incidental personal property. Under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), like-kind exchanges occurring after 2017 are limited to real property used in a trade or business or for investment. Comments are requested.

Real Property Defined for Like-Kind Exchanges
Under the proposed regulations, real property includes:

• land and improvements to land,
• unsevered crops and other natural products of land, and
• water and air space superjacent to land.

This real property definition language is very similar to the language in many other regulations, but it also includes necessary differences. As under pre-TCJA law, local law definitions are not controlling.

Real Property Includes Improvements and Inherently Permanent Structures
As mentioned above, real property includes improvements to land. Improvements include:

• inherently permanent structures, and
• the structural components of inherently permanent structures.

Each distinct asset must be analyzed separately to determine if it land, an inherently permanent structure, or a structural component of an inherently permanent structure. The regs identify several specific items, assets and systems as distinct assets, and provides factors for identifying other distinct assets.

Inherently Permanent Structures: Buildings and Machinery
Inherently permanent structures include any building or other structure that is permanently affixed to real property and that will ordinarily remain affixed for an indefinite period of time. A building is any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. Buildings also include several distinct assets if permanently affixed, such as houses, hotels, enclosed stadiums shopping malls, factory and office buildings, and warehouse.

The proposed regulations also identify other structures that qualify as inherently permanent structures, and provide factors that must be used to determine if other property is an inherently permanent structure.

Property that is in the nature of machinery or is essentially an item of machinery or equipment is generally not an inherently permanent structure unless it serves the inherently permanent structure and does not produce or contribute to the production of income other than for the use or occupancy of space.

Inherently Permanent Structures: Structural Components
Structural components of inherently permanent structures are improvements to land and, thus, are real property. A structural component is any distinct asset that is a constituent part of, and integrated into, an inherently permanent structure. If interconnected assets work together to serve an inherently permanent structure (for example, systems that provide a building with electricity, heat, or water), the assets are analyzed together as one distinct asset that may qualify as a structural component.

However, a structural component may qualify as real property only if the taxpayer holds its interest in the component together with a real property interest within the physical space of the inherently permanent structure. Customization of a distinct asset in connection with the rental of space does not affect whether the asset is a structural component.

The proposed regulations list properties that are structural components, and provide factors for determining whether other components are structural components. The proposed regs also address tenant improvements to a building, and property produced for sale that is not real property in the hands of the producing taxpayer.

Unsevered Natural Products are Real Property
The proposed regulations provide that unsevered natural products of land are generally real property. These include growing crops, plants, and timber, as well as mines, wells and other natural deposits. Natural products and deposits, such as crops, timber, water, ores, and minerals, cease to be real property when they are severed, extracted, or removed from the land.

Intangible Assets as Real Property
An intangible asset is real property or an interest in real property to the extent that the asset:

• derives its value from real property or an interest in real property,
• is inseparable from that real property or interest in real property, and
• does not produce or contribute to the production of income other than consideration for the use or occupancy of space.

For instance, a license, permit, or other similar right generally is an interest in real property if (1) it is solely for the use, enjoyment, or occupation of land or an inherently permanent structure, and (2) it is in the nature of a leasehold, easement, or fee ownership. In contrast, a license or permit is not an interest in real property if it produces or contributes to the production of income other than consideration for the use and occupancy of space.

Incidental Personal Property and Qualified Intermediaries
The proposed regs provide that personal property that is incidental to replacement real property is disregarded in determining whether a taxpayer's rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by a qualified intermediary are expressly limited as provided in Reg. §1.1031(k)-1(g)(6).

Personal property is incidental to real property acquired in an exchange if:

• in standard commercial transactions, the personal property is typically transferred together with the real property; and
• its aggregate fair market value does not exceed 15 percent of the aggregate fair market value of the replacement real property.

This incidental property rule in the proposed regulations is based on the existing rule in Reg. §1.1031(k)-1(c)(5), which provides that certain incidental property is ignored in determining whether a taxpayer has properly identified replacement property.

Effective Dates
The regulations are proposed to apply to like-kind exchanges that begin on or after the date they are published as final regs. However, taxpayers may rely on them for exchanges of real property beginning after December 31, 2017, if the proposed regs are followed consistently and in their entirety.

With the April 15th filing season deadline now behind us, it’s not too early to turn your attention to next year’s deadline for filing your 2014 return. That refocus requires among other things an awareness of the direct impact that many "ordinary," as well as one-time, transactions and events will have on the tax you will eventually be obligated to pay April 15, 2015. To gain this forward-looking perspective, however, taking a moment to look back … at the filing season that has just ended, is particularly worthwhile. This generally involves a two-step process: (1) a look-back at your 2013 tax return to pinpoint new opportunities as well as "lessons learned;" and (2) a look-back at what has happened in the tax world since January 1st that may indicate new challenges to be faced for the first time on your 2014 return.

Your 2013 Form 1040

Examining your 2013 Form 1040 individual tax return can help you identify certain changes that you might want to consider this year, as well encourage you to continue what you’re doing right. These "key ingredients" to your 2014 return may include, among many others considerations, a fresh look at:

Your refund or balance due. While it is nice to get a big refund check from the IRS, it often indicates unnecessary overpayments over the course of the year that has provided the federal government with an interest-free loan in the form of your money. Now’s the time to investigate the reasons behind a refund and whether you need to take steps to lower wage withholding and/or quarterly estimated tax payments.

If on the other hand you had to pay the IRS when filing your return (or requesting an extension), you should consider whether it was due to a sudden windfall of income that will not repeat itself; or because you no longer have the same itemized deductions, you had a change in marital status, or you claimed a one-time tax credit such as for energy savings or education. Likewise, examining anticipated changes between your 2013 and 2014 tax years—marriage, the birth of a child, becoming a homeowner, retiring, etc.—can help warn you whether your're headed for an underpayment or overpayment of your 2014 tax liability.

Investment income. One area that blindsided many taxpayers on their 2013 returns was the increased tax bill applicable to investment income. Because of the "great recession," many investors had carryforward losses that could offset gains realized for a number of years as markets gradually improved. For many, however, 2013 saw not only a significant rise in investment income but also a rise in realized taxable investment gains that were no longer covered by carryforward losses used up during the 2010–2012 period.

Furthermore, dividends and long-term capital gains for the first time in 2013 were taxed at a new, higher 20 percent rate for higher income taxpayers and an additional 3.8 percent net investment income tax surtax for those in the higher income brackets. Short-term capital gains saw the highest rate jump, from 35 percent to 43.4 percent rate, which reflected a new 39.6 percent regular rate and the new 3.8 percent net investment income tax rate. This tax structure remains in place for 2014.

Personal exemption/itemized deductions. Effective January 1, 2013, the American Taxpayer Relief Act (ATRA) revived the personal exemption phaseout (PEP). The applicable threshold levels are $250,000 for unmarried taxpayers; $275,000 for heads of households; $300,000 for married couples filing a joint return (and surviving spouses); and $150,000 for married couples filing separate returns (adjusted for inflation after 2013). Likewise, for it revived the limitation on itemized deductions (known as the "Pease" limitation after the member of Congress who sponsored the original legislation) for those same taxpayers.

Medical and dental expenses. Starting in 2013, the Affordable Care Act (ACA) increased the threshold to claim an itemized deduction for unreimbursed medical expenses from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI. However, there is a temporary exemption for individuals age 65 and older until December 31, 2016. Qualified individuals may continue to deduct total medical expenses that exceed 7.5 percent of adjusted gross income through 2016. If the qualified individual is married and only one spouse is age 65 or older, the taxpayer may still deduct total medical expenses that exceed 7.5 percent of adjusted gross income.

Recordkeeping. If you cannot find the paperwork necessary to prove your right to a deduction or credit, you cannot claim it. An organized tax recordkeeping system—whether on paper or computerized–therefore is an essential component to maximizing tax savings.

Filing Season Developments

So far this year, the IRS, other federal agencies and the courts have issued guidance on individual and business taxation, retirement savings, foreign accounts, the ACA, and much more. Congress has also been busy working up a "tax extenders" bill as well as tax reform proposals. All these developments can impact how you plan to maximize benefits on your 2014 income tax return.

Tax reform. President Obama, the chairs of the House and Senate tax writing committees, and individual lawmakers all made tax reform proposals in early 2014. The proposals range from comprehensive tax reform to more piece-meal approaches. Although only small, piecemeal proposals have the most promising chances for passage this year, taxpayers should not ignore the broader push toward tax reform that will be taking shape in 2015 and 2016.

Tax extenders. The Senate Finance Committee (SFC) approved legislation (EXPIRE Act) in April that would extend nearly all of the tax extenders that expired after 2013. Included in the EXPIRE Act are individual incentives such as the state and local sales tax deduction, the higher education tuition deduction, transit benefits parity, and the classroom teacher’s deduction; along with business incentives such as enhanced Code 179 small business expensing, bonus depreciation, the research tax credit, and more. Congress may now move quickly on an extenders bill or it may not come up with a compromise until after the November mid-term elections. Many of these tax benefits are significant and will directly impact the 2014 tax that taxpayers will pay.

Individual mandate. The Affordable Care Act’s individual mandate took effect January 1, 2014. Individuals failing to carry minimum essential coverage after January 1, 2014 and who are not exempt from the requirement will make an individual shared responsibility payment when they file their 2014 federal income tax returns in 2015. There are some exemptions, including a hardship exemption if the taxpayer experienced problems in signing up with a Health Insurance Marketplace before March 31, 2014. Further guidance is expected before 2014 tax year returns need to be filed, especially on how to calculate the payment and how to report to the IRS that an individual has minimum essential coverage.

Employer mandate. The ACA’s shared responsibility provision for employers (also known as the “employer mandate”) will generally apply to large employers starting in 2015, rather than the original 2014 launch date. Transition relief provided in February final regulations provides additional time to mid-size employers with 50 or more but fewer than 100 employees, generally delaying implementation until 2016. Employers that employ fewer than 50 full-time or full time equivalent employees are permanently exempt from the employer mandate. The final regulations do not change this treatment under the statute.

Other recent tax developments to be aware of for 2014 planning purposes include:

• IRA rollovers. The IRS announced that, starting in 2015, it intends to follow a one-rollover-per-year limitation on Individual Retirement Account (IRA) rollovers as an aggregate limit.
• myRAs. In January, President Obama directed the Treasury Department to create a new retirement savings vehicle, “myRA,” to be rolled out before 2015.
• Same-sex married couples. In April, the IRS released guidance on how the Supreme Court’s Windsor decision, which struck down Section 3 of the Defense of Marriage Act (DOMA), applies to qualified retirement plans, opting not to require recognition before June 26, 2013.
• Passive activity losses. The Tax Court found in March that a trust owning rental real estate could qualify for the rental real estate exception to passive activity loss treatment.
• FATCA deadline. The IRS has indicated that it is holding firm on the July 1, 2014, deadline for foreign financial institutions (FFIs) to comply with the FATCA information reporting requirements or withhold 30 percent from payments of U.S.-source income to their U.S. account holders.
• Vehicle depreciation. The IRS announced that inflation-adjusted limitations on depreciation deductions for business use passenger autos, light trucks and vans first placed in service during calendar year 2014 are relatively unchanged from 2013 (except for first year $8,000 bonus depreciation that may be removed if Congress does not act in time.
• Severance payments. In March, the U.S. Supreme Court held that supplemental unemployment benefits (SUB) payments made to terminated employees and not tied to the receipt of state unemployment benefits are wages for FICA tax purposes.
• Virtual currency. The IRS announced that convertible virtual currencies, such as Bitcoin, would be treated as property and not as currency, thus creating immediate tax consequences for those using Bitcoins to pay for goods.

Please contact this office if you’d like further information on how an examination of your 2013 return, and examination of recent tax developments, may point to revised strategies for lowering your eventual tax bill for 2014.

Code Sec. 162 permits a business to deduct its ordinary and necessary expenses for carrying on the business. However, Code Sec. 274 restricts the deduction of entertainment expenses incurred for business by disallowing expenses of entertainment activities and entertainment facilities. Many expenses are totally disallowed; other amounts, if allowed under Code Sec. 274, are limited to 50 percent of the expense.

The income tax regulations define entertainment as any activity of a type generally considered to be entertainment, amusement, or recreation, such as entertaining at night clubs, lounges, theaters, country clubs, golf and athletic clubs, and sports events, as well as hunting, fishing, vacation and similar trips. There are special rules for the costs of facilities used to entertain the customer, such as a boat or a country club membership. Dues or fees for any social, athletic or sporting club or organization are treated as items involving facilities.

Deduction allowed

Expenses are allowed if the expense was either "directly related" to the active conduct of the taxpayer’s trade or business, or "associated with" the conduct of the trade or business. An activity is "associated with" business if the activity directly precedes or follows a substantial and bona fide business discussion.

Entertainment expenses are not directly related to the business if the activity occurred under circumstances with little or no possibility of engaging in the active conduct of the trade or business. These circumstances include an activity where the distractions are substantial, such as a meeting or discussion at a night club, theater, or sporting event. However, taking a customer to a meal at a restaurant or for drinks at a bar can be considered conducive to a business discussion, if there are no substantial distractions to a discussion.

Substantial business discussion

For expenses that are either directly related to or associated with business, the taxpayer must establish that the he or she conducted a substantial and bona fide business discussion with the customer. The IRS has said that there is no specified length for a discussion to be substantial; all facts and circumstances will be considered. The discussion is substantial if the active conduct of the business was the principal character of the combined business and entertainment activity, but it is not necessary that more time be devoted to business than to entertainment.

For an activity that is associated with, the discussion can directly precede or follow the activity. For a discussion to be directly before or after the activity, it generally must be on the same day as the activity. However, facts and circumstances may allow the entertainment and the discussion to be on consecutive days, for example if the customer is from out of town.

Season tickets

The special rules for facilities do not apply to season tickets. Instead, the taxpayer must allocate the cost of the season tickets to each separate entertainment event. The amount deductible is limited to the face value of the ticket. For a "skybox" or other area leased and used exclusively by the taxpayer and guests, the amount deductible is limited to the face value of non-luxury seats for the area covered by the lease.

Under these rules, it appears that the deductible costs of baseball season tickets must be determined separately for each baseball game. Attendance at a baseball game would involve a "distracting" activity that is not conducive to a business discussion, so the cost of the game would not be directly related to the conduct of the trade or business. However, attendance at a game before or after the conduct of a substantial business discussion could qualify as being associated with the business; in these circumstances, the cost of the event would be deductible.

If the taxpayer provided food to the customer at the baseball game, the cost of the food would be deductible as part of the cost of the event. Some "luxury" seats include food provided by the baseball team to the ticket user. It appears that the taxpayer would have to determine the fair market value of the ticket and the food separately, although the costs of food actually provided to the customer may still be deductible.