A "phase two" tax reform outline could be unveiled by House GOP tax writers by August. Republicans have started to increase their tax meetings related to the effort, House Ways and Means Committee Chairman Kevin Brady, R-Tex., told reporters on June 13.

A "phase two" tax reform outline could be unveiled by House GOP tax writers by August. Republicans have started to increase their tax meetings related to the effort, House Ways and Means Committee Chairman Kevin Brady, R-Tex., told reporters on June 13.

Tax Reform "2.0" Timeline

The precise timing of a "phase two" tax reform bill or discussion draft release remains "to-be-determined," a House Ways and Means Committee spokesperson told Wolters Kluwer on June 14. However, Brady told reporters he expects to see a legislative package outlined before the House’s August recess.

Previously, White House Legislative Affairs Director Marc Short predicted a late-summer release of the House’s tax bill. Further, House Majority Leader Kevin McCarthy, R-Calif., has predicted that the House will approve the measure before midterm elections in November.

Individual Tax Cuts

Brady reiterated to reporters that "phase two" will focus on the individual side of the tax code. Moreover, making permanent the individual tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) will be the "centerpiece" of a " phase two" bill, Brady reportedly said. Additionally, Republican tax writers are considering proposals that would streamline the retirement savings process, a Ways and Means spokesperson previously told Wolters Kluwer.

Phase Two Fate Uncertain

The next major tax bill’s fate in the Senate remains uncertain. At least nine Democratic votes will be needed to reach the Senate’s 60-vote threshold. Brady has said he is hopeful for Democratic support.

However, Democratic lawmakers in the House and Senate remain largely opposed to the TCJA. Democrats have criticized the TCJA for primarily benefiting corporations. However, House Republicans are hopeful for bipartisan support on a new measure that focuses primarily on individual tax cuts.

A bipartisan group of House and Senate lawmakers have introduced companion Historic Rehabilitation Tax Credit (HTC) bills. The measure aims to strengthen the HTC by encouraging investment and minimizing administrative burdens, according to the lawmakers.

A bipartisan group of House and Senate lawmakers have introduced companion Historic Rehabilitation Tax Credit (HTC) bills. The measure aims to strengthen the HTC by encouraging investment and minimizing administrative burdens, according to the lawmakers.

Rehabilitation Credit

As amended by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), the rehabilitation credit under Code Sec. 47 is limited to 20 percent of qualified rehabilitation expenditures (QREs) of the taxpayer for qualified rehabilitated buildings. The credit is claimed ratably over a five-year period beginning in the tax year in which the rehabilitated building is placed in service. A "qualified rehabilitated building" (QRB) is a building and its structural components for which depreciation is allowable, and that has been substantially rehabilitated and placed in service before the beginning of the rehabilitation. The building must be a certified historic structure, but any expenditure attributable to rehabilitation of the structure is not a QRE unless it is a certified rehabilitation.

Property is considered substantially rehabilitated only if the expenditures during an elected 24-month measurement period (60-month period for phased rehabilitations) ending with or within the tax year are greater than the adjusted basis of the property or $5,000.

Basis-Adjustment Requirement

The bipartisan Historic Tax Credit Enhancement Bill, introduced June 13, would eliminate the existing basis-adjustment requirement. Eliminating this requirement would "bring the HTC in line with other tax credits claimed over multiple years," according to a joint press release by the bill’s sponsors.

The measure was introduced by Sens. Bill Cassidy, R-La., Ben Cardin, D-Md., and Susan Collins, R-Me., and Reps. Darin LaHood, R-Ill., and Earl Blumenauer, D-Ore. "Protecting this credit was one of my top priorities in tax reform, and I’m glad there is bipartisan support for making it even better," Cassidy said in the joint press release. Cardin praised the measure for helping to create economic growth.

Improved HTC

Likewise, Collins said the bill would make the HTC easier to use as well as create economic development across the country. Additionally, an improved HTC would create jobs, according to Blumenauer. "Strengthening the Historic Tax Credit will further revitalize American cities while creating local jobs and spurring economic development in communities large and small," Blumenauer said.

An individual shareholder of an S corporation restaurant operator was not allowed to claim FICA tip credits under Code Sec. 45B that the S corporation did not claim. The shareholder could not unilaterally and retroactively nullify the S corporation’s election to deduct FICA tip taxes.

An individual shareholder of an S corporation restaurant operator was not allowed to claim FICA tip credits under Code Sec. 45B that the S corporation did not claim. The shareholder could not unilaterally and retroactively nullify the S corporation’s election to deduct FICA tip taxes.

Background

The restaurants owned by the S corporation had hired “tipped employees” whose earnings came partly from customer tips. The S corporation was required to pay taxes on these tips as part of its FICA tax payments. For the two tax years at issue, the S corporation did not claim any FICA tip credits. Instead, the S corporation deducted its payments of the FICA tip taxes on its Forms 1120S, and did not later amend those returns.

On his amended Forms 1040 for those tax years, the shareholder claimed he was entitled to flowthrough FICA tip credits with respect to his interest in the S corporation.

FICA Tip Credit

Code Sec. 45B allows an employer working in the food and beverage industry to claim business tax credits for the portion of the FICA taxes—i.e., social security and Medicare taxes—that it paid on employee tips in excess of the minimum wage. The employer must have employees who receive tips from customers for providing food or beverages for consumption, and must be deemed to have paid FICA taxes on the tips in excess of the minimum wage. The employer must not have already claimed a deduction for the FICA tax payment. An employer claims its FICA tip credits on Form 8846.

Here, when the S corporation chose to deduct its FICA tax payments, it had made an election not to claim any FICA tip credits. The S corporation never claimed or intended to claim FICA tip credits. Based on this reporting position, the shareholder was not entitled to any flowthrough FICA tip credits for either tax year.

S Corporation Elections

Under Code Sec. 1363(c) and its regulations, elections that affect the computation of items derived from an S corporation generally must be made by the S corporation, not separately by its shareholders. There are two exceptions: the shareholder claims any elections (1) for the deduction and recapture of certain mining exploration expenditures, and (2) for foreign tax credits.

In this case, the shareholder argued in effect that the S corporation’s election to deduct FICA tax payments could be changed unilaterally by his request, made in his capacity as a shareholder, that the S corporation amend its returns to claim the FICA tip credit. The shareholder’s position was rejected based on the plain text of Code Sec. 1363(c), and of Code Sec. 45B(d), which states that the credit does not apply to a taxpayer if the taxpayer elects to have the credit provision not apply.

Further, the Tax Court stated that it refused to create a new precedent that would give each individual shareholder the power to change an S corporation’s tax election unilaterally. Such a change, stated the court, would not only affect the tax liabilities of the requesting shareholder, but could also affect the tax liabilities of the shareholders who have not consented to the change.

Participants in the Son of BOSS tax shelter have maintained their perfect losing record in the Tax Court. Thus, another Son-of-Boss deal has failed to produce its promised loss deductions.

Participants in the Son of BOSS tax shelter have maintained their perfect losing record in the Tax Court. Thus, another Son-of-Boss deal has failed to produce its promised loss deductions.

Son-of-BOSS Arrangements

Son-of-BOSS is a variation of a slightly older tax shelter known as the "bond and options sales strategy," or BOSS. Son-of-BOSS transactions take many forms, but they all have one thing in common: Assets that are encumbered by significant liabilities must always be transferred to a partnership. The goal is to increase basis in that partnership or in the assets themselves.

The liabilities are usually obligations to buy securities. However, they are typically not completely fixed when they are transferred to the partnership.

This contingency is supposed to let the partnership treat the liabilities as uncertain. This, in turn, is supposed to let the partnership ignore the liabilities in computing basis. The result is supposed to give the partners basis in the partnership or in the assets themselves. This increased basis is supposed to translate into large loss deductions for the partners, all with no actual economic losses.

The Tax Court has yet to fall for the scheme.

Invalid Partnerships

The court has used several theories to reject Son-of-Boss losses. In this case, the court once again relied on the fact that the two partnerships involved in the transactions did not actually exist.

The partnerships were invalid because they were created only to carry out tax avoidance schemes. Thus, their members never intended to run any business through them.

The partnerships also failed the “prongified” test for determining whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise. One managed to scrupulously adhere to the formal requirements for looking like a partnership. However, it did not display any objective indication of a mutual combination for the conduct of an ongoing enterprise.

The second partnership barely even went through the motions. It filed partnership returns and issued K-1s to its purported partners. However:

• There was no evidence the purported partners made any contributions to the partnership;
• The partnership did not have a formal operating agreement;
• The partnership did not conduct any business in its own name;
• There was no real profit for the partners to control or withdraw; and
• The partnership did not keep any books or records.

Since the partnerships were invalid, they were simply disregarded. Thus, the purported partners were treated as directly engaging in the partnerships’ activities and directly owning the partnerships’ property. This meant that the supposedly separate long and short options that were the heart of the transaction were actually a single-option spread. Thus the options were part of one contract, and they could not be separated to produce artificial losses.

The IRS expects to issue guidance on the Code Sec. 199A passthrough deduction in July, Acting IRS Commissioner David Kautter has said. Kautter outlined the timeline of various guidance proposals at the American Bar Association (ABA) Section of Taxation May Meeting in Washington, D.C.

The IRS expects to issue guidance on the Code Sec. 199A passthrough deduction in July, Acting IRS Commissioner David Kautter has said. Kautter outlined the timeline of various guidance proposals at the American Bar Association (ABA) Section of Taxation May Meeting in Washington, D.C.

Proposed Guidance
More specifically, the proposed guidance on the passthrough deduction is expected to be released by the end of July, an IRS spokesperson told Wolters Kluwer on May 15. "The goal of the guidance is to get things out that are complete," the IRS spokesperson said, reiterating Kautter. "But, it will not cover every question that taxpayers have," the spokesperson added.

Passthrough Deduction
The new passthrough deduction was enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) last December. The new law provides a 20-percent deduction for income from passthrough entities. The deduction is limited by certain controversial factors including business activities, wages paid by the business, and property values.

Questions Expected
Generally, Kautter anticipates initial follow-up questions from taxpayers and practitioners after the proposed guidance is released, the IRS spokesperson told Wolters Kluwer. Kautter has said that it would be better to get the guidance out in "fairly good shape," to allow for public comment and input, rather than taking more time to draft the guidance internally, according to several reports. Kautter has reportedly said that not everyone may agree with that approach, but that a "better product" will likely be created because of it.

The IRS has issued a new five-year strategic plan to guide its programs and operations and to help meet the changing needs of taxpayers and members of the tax community. "Providing service to taxpayers is a vital part of the IRS mission and the new Strategic Plan lays out a vision of ways to help improve our tax system," remarked IRS Acting Commissioner David Kautter.

The IRS has issued a new five-year strategic plan to guide its programs and operations and to help meet the changing needs of taxpayers and members of the tax community. "Providing service to taxpayers is a vital part of the IRS mission and the new Strategic Plan lays out a vision of ways to help improve our tax system," remarked IRS Acting Commissioner David Kautter.

The Fiscal Year 2018-2022 IRS Strategic Plan focuses on six goals aimed at improving customer service:

• empowering and enabling all taxpayers to meet their tax obligations;
• protecting the integrity of the tax system by encouraging compliance through administering and enforcing the tax code;
• proactively collaborating with external partners to improve tax administration;
• cultivating a well-equipped, diverse, flexible and engaged workforce;
• advancing data access, usability and analytics to inform decision-making and improve operational outcomes; and
• driving increased agility, efficiency, effectiveness and security in IRS operations.

The Service further urged taxpayers to be aware of their fundamental rights under the Taxpayer Bill of Rights when dealing with the IRS.

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

New Deduction
The Tax Cuts and Jobs Act created Code Sec. 199A. The deduction is temporary and begins this year.

Generally, qualified taxpayers may deduct up to 20 percent of domestic QBI from a partnership, S corporation or sole proprietorship. Congress put in place a limitation based on wages paid, or on wages paid plus a capital element, among other requirements. Certain service trades or businesses generally may not take advantage of the deduction but there are exceptions.

Almost immediately after passage of the new tax law, the AICPA and other tax professional groups urged on the IRS to move quickly on guidance. Recently, the National Society of Accountants (NSA) reported that the IRS would issue guidance on Code Sec. 199A this summer.

Immediate Concern
The AICPA identified several areas of immediate concern. They are:

• Definition of Code Sec. 199A qualified business income.
• Aggregation method for calculation of QBI of pass-through businesses.
• Deductible amount of QBI for a pass-through entity with business in net loss.
• Qualification of wages paid by an employee leasing company.
• Application of Code Sec. 199A to an owner of a fiscal year pass-through entity ending in 2018.
• Availability of deduction for Electing Small Business Trusts (ESBTs).

Services
The AICPA asked the IRS to describe what activities are included in the definition of a services trade or business. "The guidance should clarify that the definition of the term ‘accounting services’ includes any services associated with the determination of tax liabilities including preparation, tax planning, cost segregation services, services rendered with respect to tax credits and deductions, and similar consultative services,"the AICPA told the Service.

A top House tax writer has confirmed that House Republicans and the Trump administration are working on a second phase of tax reform this year. House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an interview that the Trump administration and House Republicans "think more can be done."

A top House tax writer has confirmed that House Republicans and the Trump administration are working on a second phase of tax reform this year. House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an interview that the Trump administration and House Republicans "think more can be done."

A Ways and Means spokesperson told Wolters Kluwer on March 15 that "there are opportunities in making individual tax cuts permanent, increasing innovation, [and] encouraging household savings."Confirmation that House GOP tax writers are mulling additional tax changes to the tax code comes just days after President Trump announced that he and House Republicans are very serious about working on a “phase-two” of tax reform. Trump quipped that Brady is the "king of tax cuts."

Individual Tax Cuts
Among expected changes, in particular, the temporary individual tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) could be made permanent, a Ways and Means spokesperson told Wolters Kluwer. For budgetary reasons, the cuts to individual tax rates and benefits were not made permanent under the new law. "While the tax cuts for families were long-term, they are not yet permanent, so we’re going to address issues like that," Brady said.

Criticism
Democratic lawmakers remain largely united in their criticisms of the TCJA. House Minority Leader Nancy Pelosi, D-Calif., criticized the new tax law in a March 15 news conference for "giving 83 percent of the benefits to the top 1 percent, ultimately raising taxes for 86 million middle-class families while contending that it's a middle-class tax cut."

To that end, across the U.S. Capitol, Senate Minority Leader Charles E. Schumer has said Democrats would be reluctant to work with Republicans in making any fixes to the new tax law unless Republicans would be willing to address Democrats’ concerns with the law, as well. "We don't have much of an inclination, unless they want to open up other parts of the tax bill that we think need changes, to just help them clean up the mess they made," Schumer said.

Looking Forward
"Mainstream optimism is at record levels, our economy is really gaining momentum and booming in a big way," Brady said. "We’re always looking to improve the tax code," he said, adding that lawmakers are currently considering new ideas for tax reform. "We think there are some good ones." Lawmakers will not combine additional tax reform measures with technical corrections to the existing TCJA, according to Brady, emphasizing that any significant changes to come will be new ideas.