2017 Third Quarter Federal Tax Developments

 
The third quarter of 2017 brought many tax developments from Washington, the IRS and the courts, including a much anticipated outline from President Trump regarding tax reform. For this blog posting, we have summarized some of the more important tax developments for our clients and friends. As always, contact our office if you have any questions, using the Contact Us section of our website or call our office at 904-396-5831.

Tax reform

President Trump and Congressional Republicans released a framework for tax reform in September. The framework proposes three individual tax rates (12, 25 and 35 percent) and a 20 percent corporate tax rate. The framework leaves open the possibility that “an additional top rate may apply to the highest-income taxpayers.” The framework also calls for eliminating most individual and business tax breaks, raising the standard deduction, repealing the federal estate tax and abolishing the alternative minimum tax (AMT). A special 25 percent tax rate for non-corporate businesses, with yet undetermined provisions to prevent “gaming” that benefit, has also been proposed. Some groups are already lobbying against restricting the state and local tax itemized deduction, as well as any restrictions on the mortgage interest deduction.

As we post this blog, details and/or draft legislation is not available to assess the details of the tax law changes contemplated in the framework issued by President Trump.

Tax legislation

In September, the House approved the bipartisan Clyde-Hirsch-Sowers RESPECT Bill (HR 1843). If enacted, the bill would limit the IRS’s authority in conducting civil asset seizure and forfeiture relating to structuring transactions under the Bank Secrecy Act (BSA).

Disaster relief

President Trump signed the Disaster Tax Relief Act in September. The new law provides targeted and temporary tax relief to victims of Hurricanes Harvey, Irma and Maria. Among other measures, the new law enhances the deduction for personal casualty losses, allows penalty-free access to retirement funds, creates a tax credit for employers, and permits taxpayers to use prior year income for the earned income tax credit and the child tax credit. Legislation to create permanent disaster tax relief has also been introduced in Congress. Included in the relief measures is a waiver of the 10% adjusted gross income floor that typically applies to casualty losses, the ability to deduct losses in the tax year of the event or the preceding year and a provision to allow for an increased standard deduction equal to the casualty loss for taxpayers who do not itemize deductions.

In response to Hurricanes Harvey, Irma and Maria, the IRS announced the postponement of certain tax deadlines for affected taxpayers. The IRS has also issued guidance to encourage leave donations and more. Additionally, the IRS cautioned taxpayers to be on guard for scams that surface after disasters.

Tax regulations

Since taking office, President Trump has issued several Executive Orders (EO) on regulations. EO 13789 directed the Treasury Department to review all significant tax regulations issued since January 1, 2016. In July, the Treasury Department identified eight recent tax regulations for reevaluation under EO 13789. In early October, the Treasury Department followed-up with news that it plans to withdraw, revoke and/or modify some of these regulations.

Audit coverage

The Treasury Inspector General for Tax Administration (TIGTA) reported in September that the IRS examined one of every 143 individual income tax returns in fiscal year (FY) 2016. This reflected a 16 percent decline compared to FY 2015, according to TIGTA. The IRS examined one in 17 returns in FY 2016 with more than $1 million in income, which, according to TIGTA, represented a decline of 29 percent compared to FY 2015. TIGTA also reviewed the IRS’s examinations of other taxpayers, including corporations, S corporations and partnerships.

Partnerships

The IRS held a hearing in September on proposed rules for partnership audits. The hearing focused on the centralized partnership audit regime put in place by the Bipartisan Budget Act of 2015 (BBA). The BBA’s centralized partnership audit regime replaces the TEFRA procedures, under which the IRS currently conducts partnership audits.

Per diem rates

The IRS announced the 2017-2018 special per diem travel rates to be used in substantiating as ordinary and necessary an employer’s reimbursement of amounts incurred while traveling away from home. The IRS-approved per diem rate for high-cost areas is $284 (up from $282 for the previous per diem). The IRS-approved per diem rate for all other areas is $191 (up from $189).

Income

The Tax Court found in September that the IRS failed to show a nexus between payments from renting farmland and the agricultural arrangement requiring the taxpayer’s material participation ( Martin 149 TC No. 12). Therefore, the payments were excluded from the taxpayer’s self-employment income, the court held.

Losses

In August, the Tax Court found that a casual gambler taxpayer was not engaged in the trade or business of gambling ( Viso, TC Memo. 2017-154). Therefore, the taxpayer could not deduct his gambling losses against his gambling winnings above-the-line. For nonprofessional gamblers, losses are itemized deductions, which means they are deductible only from adjusted gross income, and only if the taxpayer foregoes the standard deduction, the court reiterated.

Medical expenses

Affirming the Tax Court, the Court of Appeals for the Eleventh Circuit upheld in September the IRS’s disallowance of a claimed medical deduction related to in vitro fertilization (IVF) ( Morrissey, CA-11, September 25, 2017). The appellate court found that the plain language of Code Sec. 213 prevented the taxpayer’s deduction.

Conservation easements

In contrast to recent efforts by IRS examiners to restrict conservation easement deductions. the Court of Appeals for the Fifth Circuit found in August that a homesite adjustment provision did not prevent a conservation easement from satisfying the perpetuity requirement of Code Sec. 170(h)(2)(C) ( BC Ranch II, L.P., CA-5, August 11, 2017). Modifications (or “tweak’s” as the court characterized them) would not violate the perpetuity requirement. The appellate court vacated the Tax Court’s decision and remanded the case back to the Tax Court.

Virtual currency

Bipartisan legislation has been introduced in Congress to allow consumers to make small purchases with cryptocurrency (also known as virtual currency) of up to $600 without needing to satisfy current reporting requirements (the Cryptocurrency Tax Act of 2017).

FATCA

In August, the Sixth Circuit Court of Appeals affirmed a district court’s dismissal of a suit to enjoin enforcement of the Foreign Account Tax Compliance Act (FATCA); related intergovernmental agreements (IGAs); and foreign bank account reporting requirements (FBAR), also known as FinCEN Form 114 ( Crawford, CA-6, August 18, 2017). The diverse group of plaintiffs, including a U.S. lawmaker and several U.S. citizens and expatriates who lived abroad, lacked standing because they did not allege a present or potential legal injury.

Micro-captive insurance

The Tax Court addressed micro-captive insurance arrangements in August. The court found that a micro-captive insurance entity did not operate like an insurance company ( Avrahami, 149 TC No. 7). As a result, the entity’s election to be taxed as a small insurance company under Code Sec. 831(b) was invalid. Premium payments were not for insurance, were not an ordinary and necessary business expenses and were not deductible under Code Sec. 162(a), the court held. Federal Tax Weekly No. 35, August 31, 2017.

Retirement

The Treasury Department announced in July that the myRA savings program will be discontinued. Treasury attributed the end of the program to low demand. Account holders could build savings for 30 years or until their myRA reached $15,000, whichever would come first.

Social Security

In August, the Social Security Administration’s Board of Trustees released is annual report. The Board of Trustees estimated that the Social Security wage base for 2018 will be $130,500. The Social Security wage base for 2017 is $127,200. The Social Security Administration will announce the official wage base for 2018 before year-end.

ITINs

Some one million taxpayers can expect to receive Individual Tax Identification Number (ITIN) renewal notices by mail, the IRS announced in August. Legislation passed in 2015 provided that any ITIN not used on a federal tax return for three consecutive tax years expires on December 31 of the third consecutive tax year of nonuse. For ITINs issued before 2013, ITINs will no longer be in effect according to a certain schedule, unless the ITIN has already expired due to nonuse for three consecutive years.

Smoak, Davis & Nixon LLP is a full service Jacksonville, Florida CPA firm. Established in 1924, we provide tax, accounting and attestation services. Our affiliated companies, River Capital Advisors, L.C. (an independent, SEC registered, investment advisory and financial planning firm) and SDN Computer Consultants LLC (helping clients accelerate growth through successful, cost effective technology and systems implementation, along with software and infrastructure support) allows us to provide integrated financial solutions for our clients.

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