Pres. Trump’s “Massive” Tax Cut Proposal

On April 26^th, the Administration proposed the “biggest tax cut and reform in U.S. history” as part of a drive to spur economic growth.  Some estimates have put the loss in tax revenues at $6.2 trillion over 10 years!  There is an obvious clash in priorities between the Administration and the Republican House of Representatives who are concerned about the Federal deficit.  Some pundits see the proposal as an “opening gambit” or bargaining position to cut a tax-reform deal with Congress.  Complicating matters is that unless the Senate passes tax-reform with at least 60 votes, then the new law will need to “sunset” in 10 years.  The 10-year sunset rule is termed the “Byrd rule” named after the long-time senator and applies to legislation that increases the deficit for longer than 10 years.  What will businesses and individuals do if the new tax law is only temporary?  This country dealt with a similar issue with the 2001 tax cuts under Pres. George W. Bush.  The temporary nature of the 2001 tax cuts created large uncertainties and caused regret among some taxpayers who engaged in protective tax planning strategies that ultimately proved to be unnecessary.  Some commentators have said that the loss in tax revenue might only be sustainable for two to three years!  In that case, the tax cuts won’t drive a change in business strategy or structure, it will just be a tax give away.

Let’s look at some of the major proposals.  These are generalized comments as there are no details yet.  The effective date is also unknown but might reasonably be assumed to be January 1, 2018.

Cut the Corporate Tax Rate from 35% to 15%

Corporations taxed as “C” corporations pay income tax.  The top tax rate is 35%.  The proposal drops the rate to 15%.  There will likely be a trade-off in the loss of certain deductions such as interest expense.  But these details are yet to be worked out.  C corporations will want to defer income into the next tax year and accelerate deductions into the current year.

Cut the “Pass-Through” Business Tax Rate from 39.6% to 15%

Business that are conducted through partnerships, limited liability companies taxed as partnerships, and Subchapter S corporations are considered “pass-through” entities.  Pass-through means that the requirement to pay income tax on the business profit is passed through to the owners of the business.  Individual owners include the business profit in their personal income tax returns.  This change is a necessary coordination with the C corporation tax rate cut; otherwise, pass-through entities would be incented to become C corporations for the tax savings.  It is uncertain whether businesses operated as a sole proprietorship would also benefit from the 15% rate.  It is also somewhat uncertain whether the net profit would have to be left in the business to benefit from the lower rate or if there would be a special carve-out of the lower rate in the individual income tax return for the pass-through business income.  An interesting issue concerns whether post-reform depreciation recapture upon the sale of a business asset will benefit from the 15% tax rate when depreciation deductions received a much higher tax rate benefit.

Cut the Top Individual Tax Rate from 39.6% to 35% and Reduce the Number of Rate Brackets

Currently the top individual income tax rate is 39.6% which was originally set under Pres. Bill Clinton, then reduced to 35% by Pres. George W. Bush, and then reinstated to 39.6% under Pres. Barrack Obama.  Now the see-saw drops back to 35%.  The trade-off is the loss of certain tax deductions.  The strategy for 2017 would be to defer income into 2018 and to accelerate deductions into 2017.  With the dramatic difference between the proposed business tax rate and the individual tax rate, there will be some incentive to convert personal income (such as compensation) into business income.

Currently there are seven tax rate brackets and the proposal reduces the number of brackets to only three:  10%, 25%, and 35%.  The income level for these brackets has not yet been determined.

Eliminate All Itemized Deductions Except Home Mortgage Interest and Charitable Contributions

Currently, itemized deductions include medical expenses, state and local income taxes, sales tax, real and personal property tax, home mortgage interest, investment interest, charitable donations, casualty and theft losses, unreimbursed employee expenses, accounting and legal advice for tax planning or compliance, investment expenses, gambling losses, and estate tax on income with respect to a decedent.  The loss of all but the home mortgage interest and charitable contribution deduction will have a large impact on some taxpayers.  As an example, those living in states that impose high income tax or property tax will be adversely affected.  However, in many instances, such taxpayers are subject to the alternative minimum tax (see below) and do not actually benefit from many of these itemized deductions.  The loss of these deductions coupled with the repeal of the AMT could leave some of these taxpayers better off.  Assuming a January 1, 2018 effective date, taxpayers should consider prepaying their 2017 state income tax to get the deduction before its repeal.

Importantly, there is no mention of Pres. Trump’s campaign promise to limit total itemized deductions to $100,000 for single filers or $200,000 for joint filers.

Double the Standard Deduction

The 2017 standard deduction is $6,350 for single; $9,350 for head of household; and $12,700 for joint filers.  Doubling the standard deduction will simplify tax returns for many moderate-income taxpayers by eliminating the need to itemize deductions.  Furthermore, there will be some impact from the loss of itemized deductions other than home mortgage interest and charitable contributions.  Itemizing will be beneficial only when those two types of deductions exceed the higher standard deduction.  No information was provided regarding the personal exemption.

Repeal the Alternative Minimum Tax (AMT)

The AMT is a bad tax.  Enacted many years ago to prevent a limited number of high-income taxpayers from avoiding income taxes all together, the AMT has morphed into a tax that is paid by over 33 million moderately high income taxpayers.  The AMT applies even if a taxpayer’s only deductions are the personal exemption and state and local income and property tax!  Repealing the AMT will go a long way toward simplifying the tax law, but it will cost the government a lot of tax revenue.

One specific problem that may be addressed in the legislative details is what happens to taxpayers with an AMT credit carryover.  For example, some taxpayers have exercised compensatory incentive stock options (ISOs) to purchase employer stock.  When an ISO is exercised and the stock is held for investment, there is no regular tax but there is AMT.  When the stock is later sold, there will be regular tax but that tax will be reduced by the AMT paid earlier (the AMT credit) when the ISO was exercised.  If there is no transition rule to preserve the AMT credit, then such taxpayers may wish to sell their ISO stock before the effective date of the repeal in order to avoid a double tax.

Repeal the Net Investment Income Tax (NIIT)

The NIIT was enacted under the Affordable Care Act (Obamacare) in 2013.  For the first time a payroll-type (Medicare) tax was applied to interest, dividends, capital gains, rents, etc.  This 3.8% tax is proposed to be repealed.  The rationale given for this repeal is to “restore” the top long-term capital gain tax rate back to 20% from 23.8%, inferring that there is no proposal to change the top capital gain tax rate.  Repealing the NIIT suggests that those contemplating a sale of a capital asset may want to defer the sale until after the repeal in order to benefit from the lower tax rate, assuming investment considerations don’t dictate an earlier sale.  Capital loss harvesting this year will be important in order to offset realized capital gains that otherwise would be taxed at the higher 2017 tax rate.

It is uncertain whether the additional 0.9% Medicare tax rate on earned income, enacted as part of the ACA, is also proposed to be repealed.

Eliminate the Estate Tax

Many conservatives have longed for the repeal of the “death tax.”  Eliminating the estate tax will have complicated interactions with the gift tax and the “step-up in basis” for the income tax.  It is uncertain whether the generation skipping transfer tax is also proposed to be repealed.  These details are yet to be worked out.  Taxpayers should not take permanent steps, such as canceling life insurance policies earmarked for the payment of estate tax, until there is some certainty in the law.  But the problem is that the tax law is never certain.  A future administration and Congress could simply re-enact the estate tax, and it could be difficult for taxpayers who canceled their life insurance, for example, to gain new coverage.  In addition, if tax reform is enacted with a 10-year sunset provision, the estate tax will reappear at that time.  The temporary estate tax repeal will benefit the estates of those likely to die during that time frame, but for the younger and healthier taxpayers, estate tax repeal will literally mean nothing as they will outlive the ten-year time frame!

Importantly, there was no mention of Pres. Trump’s campaign proposal to impose capital gain taxes on estates with assets over $10 million.

Review of Recent Tax Regulations

In addition to tax legislative proposals, Pres. Trump issued an executive order on April 21^st directing Treasury Secretary Mnuchin to review all “significant tax regulations” issued on or after January 1, 2016.  The objective of the review is to increase simplicity, fairness, and pro-growth regulations.

Two major regulations in the estate tax area could be in for review:  1) the complex “basis consistency” regulations (issued March 3, 2016) and 2) the controversial and pro-IRS valuation discount regulations (issued August 2, 2016).  Identification of the tax regulations to be reviewed is to be made by the third week in June with specific recommendations due by the middle of September to mitigate the burden imposed by such regulations.

IRA Tax Tips for the 2016 Tax Year

The IRS recently issued IRS Tax Tip 2017-29 for Individual Retirement Accounts (IRA) for the 2016 tax year.  This post reviews some of the tips and offers a few others.

1.      Age Rules.  Taxpayers must be under age 70½ at the end of the tax year to contribute to a traditional IRA.  There is no age limit to contribute to a Roth IRA (or to contribute to a SEP-IRA or a SIMPLE-IRA).

2.      Compensation Rules.  A taxpayer must have taxable compensation to contribute to an IRA. This includes income from wages and salaries and net self-employment income.  It also includes tips, commissions, bonuses and alimony.  If a taxpayer is married and files a joint tax return, only one spouse needs to have compensation.

3.      When to Contribute.  Taxpayers may contribute to an IRA at any time during the year.  To count for 2016, a person must contribute by the due date of their tax return, not including extensions.  This means you must contribute by April 18, 2017.  Taxpayers who contribute between January 1 and April 18 need to advise the plan sponsor of the year they wish to apply the contribution (2016 or 2017).  From a financial planning perspective, you should contribute at the start of each calendar year.  That way your contribution has a 15 ½ month head start in earning money before the contribution deadline.  For example, contributing $5,500 over 30 years at a 6% rate of return at the beginning of the year (instead of at the end of the year) will result in a $31,000 higher IRA balance.

4.      Contribution Limits.  Generally, the most a taxpayer can contribute to their IRA for 2016 is the smaller of either their taxable compensation for the year or $5,500.  If the taxpayer is 50 or older at the end of 2016, the maximum amount they may contribute increases to $6,500.  However, the ability to contribute to a Roth IRA phases out at certain AGI levels.  If a person contributes more than these limits, a 6% annual penalty will apply to the excess until corrected.

5.      Deductibility Rules.  Taxpayers may be able to deduct some or all of their contributions to their traditional IRA.  These rules are complex and will depend upon your personal tax situation.  See IRS Information Release IR-2017-60 for more details.

6.      Taxability Rules.  Normally taxpayers don’t pay income tax on funds in a traditional IRA until they start taking distributions from it.  Qualified distributions from a Roth IRA are tax-free.  Unless an exception applies, distributions prior to age 59 ½ will incur a 10% penalty.

7.      Required Minimum Distributions (RMD).  Individuals who are age 70 ½ or older must take a RMD from their traditional IRA (but not from a Roth IRA) by December 31^st of each calendar year to avoid a 50% penalty on any required amount that was not received.  For the calendar a person turns age 70 ½, they may defer the first RMD to April 1^st of the following year.  For those turning age 70 ½ in 2016, the RMD must be received by April 1, 2017, even though that date falls on a Saturday.  There is no weekend rule that would enable receipt on Monday, April 3, 2017, to be considered timely.  If you chose to delay your 2016 RMD until April 1, 2017, your 2017 RMD must be received by December 31, 2017, which results in the doubling up of distributions.  For guidance on calculating the RMD see IRS Information Release IR-2017-63.  For charitably minded individuals, a qualified charitable distribution from a traditional IRA will count towards satisfying your RMD.

IRS Notes that Students May Be Foregoing Tax Benefits by Mistake

Last year the IRS published a Fact Sheet explaining that the complex interaction of scholarships and Pell Grants with the American Opportunity Tax Credit (AOTC) may be causing students to miss out on refundable tax credits.  The AOTC is available for qualified tuition, fees, and course materials (qualified expenses or QE’s) of the first four years of higher education.  The AOTC is equal to 100% of the first $2,000 of QE’s paid plus 25% of the next $2,000 of QE’s, for a total maximum credit of $2,500.  The main point to note is that 40% of the AOTC ($1,000 maximum) is a refundable credit, meaning that the IRS will pay you this portion of the credit even if you have no income tax to offset the credit against.

The Pell grant permits a student to choose whether to allocate the grant to QE’s or to living expenses when filing an income tax return.  Many scholarships also permit this flexibility.  But if the terms of the scholarship restrict it to the payment of QE’s only, then an allocation cannot be made.  Making the proper choice is key to unlocking hundreds of dollars in refunds that might otherwise go unclaimed.

·        If the grant or scholarship is allocated to QE’s, it makes the financial assistance nontaxable, but it also reduces the amount of eligible college expenses available for the AOTC.

·        Allocating the grant or scholarship to living expenses such as room and board causes the financial assistance to become taxable income, but it no longer reduces the amount of QE’s necessary for the AOTC.  The student can make this allocation on his or her tax return even if the educational institution applies the funds against tuition and fees.  Most students are low income taxpayers, and causing some of the grant or scholarship to become taxable often will not increase the student’s income tax.  If tax is increased, the higher AOTC most often will more than cover the increased tax.

Who should consider this strategy?  If the total amount of your QE’s minus your grant and scholarship is less than $4,000; then you will not generate the maximum AOTC without allocating a portion (it is not an all or nothing allocation choice) to taxable living expenses.  On the other hand, if QE’s exceed total grants and scholarships by $4,000 or more, you will generate the maximum AOTC without the need to allocate a portion of the grant and scholarship to taxable living expenses.

Each person’s situation is unique and this strategy should be carefully considered to determine whether it is beneficial.

A Few Reminders Regarding the Tangible Property Regulations

Two years ago, taxpayers and preparers had to deal with the implementation of the Treasury Department’s final regulations regarding deducting repairs, capitalizing improvements, and depreciating and disposing of tangible property.  The regulations were and remain complex and in many instances, go contrary to the natural inclinations of accountants.  Some of the pro-taxpayer provisions of the regulations require an annual election and should be considered each year for tax planning purposes.  Here is a checklist of some of these provisions:

1.      De Minimis Safe Harbor.  This annual election statement must be made in a statement attached to a timely filed (including extensions) income tax return.  The election enables a taxpayer to deduct the purchase of any unit of property costing $2,500 or less pursuant to the taxpayer’s accounting policy.  The accounting policy should be in writing (although not technically required at the $2,500 level) by the start of the tax year.  For the election to be effective, purchases covered by the policy must also be expensed in the financial accounting records and statements (book conformity).

a.      The policy doesn’t need to be set as high as $2,500, it just can’t exceed this amount and remain in the “safe harbor.”  Because of the impact on book income, some businesses choose to set the policy at a lower amount, such as $1,000 for example.

b.     For taxpayers having an “applicable financial statement (AFS),” the threshold is $5,000.  The accounting policy for an AFS must be written.  An AFS is a financial statement that is provided to the SEC, or has been audited by an independent CPA, or is otherwise required to be provided to the government (excluding tax returns).

2.      Partial Asset Disposition.  This annual election must be made in a timely filed (including extensions) income tax return.  The election enables a taxpayer to deduct the adjusted tax basis (net tax book value) on the disposition of a portion of an asset.  The election is not made with a statement, rather it is made by deducting the adjusted basis.  In addition, the replacement asset must be classified in the same depreciable asset class as the disposed portion of the underlying asset.  Examples of partial dispositions for a building include replacing a roof and removing old tenant improvements to accommodate a new tenant.

a.      When it is impractical to determine the cost of the disposed portion of an asset, a reasonable method may be used to estimate the cost.  The regulations give three examples of reasonable methods:

                                                              i.      If the replacement asset is part of an overall “restoration” (and isn’t a “betterment” or an “adaptation”) of the underlying asset, the cost of the partial disposition may be estimated by deflating the cost of the replacement asset by the producer price index back to the year the disposed portion of the asset was originally placed in service.

                                                            ii.      The cost of the partial disposition may be estimated by prorating the cost of the underlying asset by dividing the cost of the replacement asset by the total estimated replacement cost of the entire underlying asset.

                                                          iii.      The cost of the partial disposition may be estimated by means of a cost segregation study.

3.      Capitalize and Depreciate Repairs and Maintenance Costs.  This annual election statement must be made in a timely filed (including extensions) income tax return.  This election appears to be applicable only to “trade or business” assets and not to property held for the production of income (e.g. real estate rental).  A taxpayer might consider this election if they have expiring tax loss carryovers or if the taxpayer does not want to deal with potential IRS audits over the subjective nature of whether an expenditure qualifies as a deductible repair or should be capitalized as an improvement.  A “book conformity” rule requires the costs be capitalized in the taxpayer’s financial books and records.  This requirement can be problematic for taxpayers using generally accepted accounting principles which require expensing of repairs.

4.      Routine Maintenance Safe Harbor.  Although not an election statement to be included with the tax return, a taxpayer should create a written maintenance plan for each significant asset acquired during the year.  If the plan indicates that the taxpayer reasonably expects to perform repairs and maintenance more than once during the asset’s depreciable life (as determined under the alternate depreciation system), then the IRS should accept the deduction of routine maintenance and repair expenses.  For real property, the time frame for conducting repairs and maintenance more than once in the written maintenance plan is 10 years.  The election to capitalize and depreciate repairs and maintenance costs will override the routine maintenance safe harbor.

5.      Small Taxpayer Safe Harbor for Real Estate.  This annual election statement must be made in a timely filed (including extensions) income tax return.  The election permits qualifying small taxpayers to deduct repairs, maintenance, and improvements without having to separately analyze the eight different building systems for purposes of deciding whether an expenditure must be capitalized or deducted.

a.      A small taxpayer has average annual gross receipts of $10 million or less for the three preceding tax years and

b.     Total repairs, maintenance, and improvement costs do not exceed the lesser of $10,000 or 2% of the unadjusted cost of the building.

                                                              i.      This limit applies to each building separately.

                                                            ii.      The building’s cost must be $1 million or less.  If the taxpayer leases the building, then the total undiscounted lease payments for the entire term of the lease, including renewals, are summed for this purpose.

                                                          iii.      Counted against the $10,000/2% limit are costs expensed under the de minimis safe harbor and the routine maintenance safe harbor.

                                                          iv.      If costs exceed the $10,000/2% threshold for a building, then the election is unavailable and regular rules apply to all the building’s repairs, maintenance, or improvements.

6.      Capitalize and Depreciate Rotable Spare Parts.  The taxpayer may elect in a timely filed (including extensions) income tax return to treat any rotable, temporary, and standby emergency spare parts acquired during the year as depreciable property rather than treating the parts as materials and supplies (M&S).  If spare parts are treated as M&S, their cost generally cannot be deducted until disposition.  The election is made on an asset-by-asset basis and once made, may not be revoked without IRS permission.  The election is made by depreciating the spare parts, there is no election statement.

R&D Tax Credit Changes to 2016 Tax Returns May Benefit Small Businesses

The tax code provides a research and development (R&D) tax credit to spur invention and innovation in the United States.  However, the structure of the R&D credit rendered it useless to many small businesses that did not have regular income tax liability.  New tax law enacted at the end of 2015 made three significant changes to the R&D credit allowing the credit to benefit many more small businesses.

1.      The R&D tax credit was made a permanent feature of the tax code (no more waiting for Congress to extend the credit every one to two years), being retroactively extended to qualifying research expenses paid or incurred after 2014.

2.      For tax years beginning after 2015, eligible small businesses (ESBs) having $50 million or less in gross receipts may claim the R&D credit against their alternative minimum tax (AMT) liability (previously the credit could not reduce AMT).

a.      An ESB is defined as a sole proprietorship, partnership (including an LLC), or non-publicly traded corporation having average annual gross receipts for the three prior tax years of $50 million or less.

                                                              i.      Partners (including LLC members) and S corporation shareholders must also separately meet the gross receipts test since the credit is claimed against their individual income tax liability.

b.     It appears that an unused ESB 2016 R&D tax credit may be carried back one taxable year and be claimed against 2015 AMT for a refund.

3.      For tax years beginning after 2015, qualified small (start-up) businesses (QSB) having less than $5 million of gross receipts for the current year may elect (by the due date of the tax return including extensions) to claim up to $250,000 per year of the R&D credit against their employer FICA tax liability.  The election is made by completing new Section D on revised Form 6765 (Credit for Increasing Research Activities).  New Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities) will be filed with a revised Form 941 (Employers Federal Quarterly Tax Return) to claim the elected R&D credit against the employer’s FICA tax liability on line 11 of revised Form 941.

a.      A QSB is defined as a sole proprietorship, partnership (including an LLC), or a corporation having gross receipts for the tax year of the election of less than $5 million

b.     A QSB must not have had any gross receipts for any tax year preceding the five-taxable-year period ending with the current tax year.

                                                              i.      For the 2016 tax year, any gross receipts in 2011 or earlier disqualifies the business.

c.      The election may only be claimed for five taxable years.

d.     The credit can only offset the employer’s FICA tax liability for the first calendar quarter beginning after the date on which the QSB files its income tax return claiming the R&D credit and making the election.

                                                              i.      For example, if a C corporation files its 2016 calendar year income tax return on April 15, 2017, the earliest payroll tax savings will be for the third calendar quarter payroll tax return beginning July 1, 2017 and ending September 30, 2017.  If the tax return is filed by March 15, 2017, then the credit be claimed against the second quarter payroll tax return.

e.      If the elected credit exceeds the quarter’s employer FICA liability, the excess credit carries over to the next quarterly payroll tax return.

f.       Special rules apply to determine who makes the election and for determining gross receipts of controlled groups of businesses.

New Legislation Overrides Draconian IRS Penalties on Small Employers that Reimburse or Pay for Employee Health Insurance Premiums

On December 13, 2016, Pres. Obama signed into law the “21^st Century Cares Act.”  Part of that legislation allows small employers to provide qualified health reimbursement arrangements (HRAs) for employees.  When the Affordable Care Act (ACA) was enacted, the long-time practice of allowing employers to pay for a limited amount of employee medical expenses, including health insurance premiums, on a tax-free basis was rendered non-compliant.  The ACA required these HRAs to be integrated with a group health insurance plan meeting the ACA mandate, such as no annual limit on the amount of benefits provided.  Large employers, meaning those with 50 or more full-time equivalent employees, are required by the ACA to offer minimum essential and affordable group health insurance to their full-time employees.  Small employers are not required to offer group health insurance, but many want to provide some financial assistance to their employees who want to select their own individual health insurance plans.  The financial assistance was provided under so-called “stand alone” HRAs which the ACA rendered non-compliant.  Small businesses that continued these stand-alone HRAs were threatened by the IRS with $100 per day per employee penalties ($36,500 a year per employee) under IRS Notice 2015-17.  Under the Notice, such small businesses had to stop the practice by June 30, 2015 (with a special rule for one-employee S corporations).  Thus, even though small employers aren’t subject to the mandate to offer group health insurance, they could be put out of business by the government for offering to help pay for the individual health insurance plans of their employees!  The penalty was a way of strong-arming small employers to enroll employees in the government run Small Business Health Options Program (SHOP) marketplace exchange.

This government nonsense is finally dealt with by the 21^st Century Cares Act which is applicable to HRA plan years beginning after 2016.  To avoid the $100 per day per employee penalty after 2016, small employers must now render any financial assistance through a qualified small employer HRA which meets these requirements:

1.      The employer must have less than 50 full-time equivalent employees.

2.      The employer must not offer group health insurance to any employee.

3.      All eligible employees must receive the same terms under the HRA, although variances based upon age or the number of family members is permitted (much like the pricing of a health insurance policy).  Excluded employees are those who haven’t completed 90 days of service, who haven’t attained age 25, who are part-time or seasonal workers, or who are part of a union.

4.      Only employer funds may be used to fund the HRA and no employee salary reduction contributions are permitted.

5.      The HRA either pays or reimburses the employee’s eligible medical expenses, and if health insurance premiums are paid or reimbursed, the employee must first submit proof of insurance coverage.  If the HRA permits, employee family member expenses can also be reimbursed.

6.      The maximum HRA benefit is limited to $4,950 for self-only plans, or to $10,000 for HRAs that also provide reimbursement for family members of the employee.  These amounts are adjusted for inflation after 2016.  If an employee isn’t covered for the full year, then these amounts must be prorated by the number of months covered.

7.      The amount of the benefit must be reported as information on the employee’s W-2.  Under a new provision, if the employee does not have minimum essential health insurance for the month in which the medical care is provided, then the HRA reimbursement is taxable compensation and is not tax-free.

8.      A written notice must be given to employees not later than 90 days before the beginning of the HRA plan year or else there is a $50 per employee per failure penalty (not to exceed a maximum $2,500 for a calendar year).  For the first HRA year beginning in 2017, the notice isn’t treated as late if given no later than 90 days after enactment, which is March 13, 2017.  The notice must state the amount of the employee’s permitted benefit, that the employee must inform any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit of the amount of HRA benefit, and that the employee may be subject to penalty if he or she does not comply with the mandate to purchase minimum essential health insurance coverage.
UPDATE:  IRS Notice 2017-20 suspends the March 13th notification date for 2017 plans until 90 days after further guidance has been issued by the IRS.

The new law removes the penalty for HRA plan years beginning before 2017 for any small employer that failed to stop providing the old style HRA as of June 30, 2015.  It appears that the penalty will apply after 2016 if small employers don’t follow the new qualified HRA rules.

A change is also made for purposes of the premium assistance tax credit for employees purchasing health insurance on an exchange when they also participate in a qualified HRA.  The premium assistance credit is reduced by the amount of HRA benefit.  This provision prevents double dipping where the employee receives both a government subsidy and an employer subsidy for purchasing health insurance on the government exchange.

Interesting 2016 Tax Return Due Dates

While we wait for our elected national leaders to do something responsible with our tax laws, let's look ahead to some interesting 2016 tax return due dates.

·        The tax filing season will officially begin on January 23, 2017.  That is when the IRS will officially begin accepting electronic and paper tax returns.

·        A new tax law requires the IRS to hold tax refunds arising from the earned income tax credit or from the additional child tax credit until at least February 15, 2017, in an attempt to cut down on tax fraud.  Practically, the tax refunds will not be available until the week of February 27th.

·        The April 15, 2017 due date falls on Saturday this year.  Normally, the due date would be the Monday following, but that Monday is a Federal holiday for the District of Columbia (Emancipation Day) so the actual due date is Tuesday, April 18, 2017 for filing 2016 federal individual, trust, and C corporation income tax returns.  The various states will have their own due dates.  Utah’s due date will follow the federal due date.  The April 18th due date is also effective for filing Form 4868 for an automatic six-month extension.  The extended due date is October 16, 2017, because October 15th falls on Sunday.

·        As noted above, the C corporation 2016 tax return due date has been changed to April 18, 2017 from the normal March 15, 2017 due date.  However, the six-month extension period has been shortened to five months, leaving the normal extended due date at September 15, 2017.  UPDATE:  For 2016 C corporation tax returns, the IRS has used its regulatory authority to grant a 6-month filing extension period despite the statute's 5-month limit.  S corporation tax returns are still due March 15, 2017 and the S corporation extension period remains six months.

·        A very important change affects 2016 partnership tax returns.  The due date is now March 15, 2017 instead of April 18, 2017.  In addition, the normal five-month extension period has been lengthened to six months.  But with the shortened original due date, the extended partnership due date remains September 15, 2017.  The Utah 2016 partnership tax return due date stays on April 18, 2017 under HB39.

·        Another change affects the federal trust tax return extension period.  The extension period for 2016 trust income tax returns is lengthened to five and a half months from five months, making the extended due date October 2, 2017 (since September 30^th falls on a Saturday) instead of September 15, 2017.

·        Still another very important change affects the Foreign Bank Account Report (FBAR, FinCen 114) 2016 due date.  The FBAR is now due at the same time the individual income tax return is due.  In a news release dated December 16, 2016, FINCEN announced that the 2016 FBAR is due April 18, 2017 instead of June 30th.  In addition, unlike past years, the FBAR may now be extended to the individual income tax return extended due date.  In the announcement, FINCEN stated that automatic extensions to October 15th would be granted for those failing to meet the April deadline without the filing of any forms or extension requests.  The announcement indicated that the extended due date is October 15, 2017.  Since the FBAR due date is tracking the individual income tax return due date, it is possible that the automatic extended due date will actually be October 16, 2017, and indeed the IRS confirms the October 16th extension date on its website.

·        Forms 1099 and W-2 have typically been due to payees by January 31^st and remain so for the 2016 forms.  However, the due date for submitting the forms to the government has changed to January 31, 2017 from the normal due date of February 28^th (for paper-filed forms) or March 31^st (for electronically-filed forms).