Most of the buzz surrounding the 2018 tax year centered on the overhaul of the U.S. tax code and how individuals and businesses can comply with the provisions of the Tax Cut and Jobs Act (TCJA). Consequently, taxpayers may have forgotten the new centralized partnership audit regime, established by the Bipartisan Budget Act of 2015 (BBA), which went into effect for tax years after Dec. 31, 2017.
The new law shifts the responsibility for correcting a partnership’s tax underpayments away from its individual partners/members to the partnership entity (at the highest individual rate of 37 percent, rather than 29 percent). Moreover, it requires each partnership and LLC treated as a partnership for tax purposes to designate on its 2018 tax returns one person or entity to serve as its partnership representatives (PR) who has the sole authority to act on the partnership’s behalf before the IRS. One challenge faced by many entities has been understanding who or what qualifies as a PR.
In August 2018, the IRS issued the following regulations regarding the designation and authority of a PR under the new federal partnership audit rules:
- A partnership must designate a partnership representative on its federal partnership income tax returns (Form 1063) for each applicable tax year. The designation must be made prior to the start of any IRS administrative proceedings. If the partnership does not appoint a PR, the IRS may appoint one for the partnership.
- A PR must have a substantial presence in the U.S., which the law defines as someone who has a U.S. street address, telephone number and taxpayer identification number, and who is able to meet with the IRS at a “reasonable” time and place.
- A PR may be a person or an entity, including the partnership itself and/or a disregarded entity.
- A partnership named as a PR must have a substantial presence in the U.S., and it must appoint a designated individual (DI) to act on the entity’s behalf in the partnership’s role as a PR.
- An individual named as a PR or DI need not be an employee of the partnership.
- A partnership/LLC and each of its partners/members have the unilateral power to revoke a PR designation, including those made by the IRS, as long as the partnership receives IRS consent to do so.
- A partnership may change its designated PR through revocation without IRS consent only when it receives notification that its tax return has been selected for IRS examination/audit.
- Certain small partnerships may qualify to annually elect out of the PR designation requirement when they have 100 or less direct or indirect partners, who are either individuals, C Corporations, foreign entities treated as U.S. C Corporations, S Corporations, or estates of deceased partners. If an entity fails to elect out of the law, it must designate a PR.
With enactment of the partnership audit rules taking effect in 2018, parties to a partnership should meet with experienced advisors and accountants to review their operating agreements and take steps, as needed, to make changes to protect themselves from personal liabilities that may result from any decisions the PR makes on the partnership’s behalf. Under certain circumstances, it may be beneficial to specify in partnership/LLC agreements that any IRS audit decisions require a vote of the partners/members. In addition, meeting with professional advisors can help ensure that all partners/members understand their responsibilities to correct underpayments and remit taxes at the highest individual rate plus penalties and interest in effect during the adjustment year, rather than the audit year, regardless of whether or not they were in fact partners during the audit year.
About the Author: Dustin Grizzle is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides tax-planning and compliance services to high-net-worth individuals and businesses in the manufacturing, real estate management and property investment industries. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
The IRS is providing penalty relief to the millions of taxpayers it says may have fallen short of their total tax liabilities for 2018 due to the revamp of the U.S. tax code under the Tax Cuts and Jobs Act (TCJA).
Thanks, in part, to the efforts of the accounting profession, including of the American Institute of CPAs (AICPA), the IRS recognizes that many individual taxpayers may not have properly adjusted their withholding and estimated tax payments to reflect the provisions of the new law. As a result, taxpayers who paid at least 85 percent of their total tax liabilities for last year through withholding and/or estimated tax payments can avoid underpayment penalties. Typically, a penalty waiver requires taxpayers to have paid 90 percent of their tax liabilities during the tax year.
U.S. taxes are based on a pay-as-you-go system for which individual taxpayers are required by law to pay most of their tax obligations during the year, either by having federal taxes withheld from their paychecks or by making quarterly estimated tax payments directly to the IRS. While the federal tax withholding tables released by the IRS in early 2018 reflected the lower tax rates and higher standard deductions under the TCJA law, they did not consider all of the changes brought about the new law. Despite efforts by the IRS and CPAs to encourage taxpayers to get a paycheck checkup and confirm that they had enough taxes withheld from their paychecks, many taxpayers did not submit revised W-4 withholding forms to their employers or increase their estimated tax payments.
According to the IRS, many taxpayers filing their 2018 will be surprised to learn they owe additional taxes to the federal government. To avoid an unexpected tax bill in future years, taxpayers should meet with their advisors and accountants during the first half of 2019 to confirm the accuracy of their estimated tax payments and to check the withholding on their most recent paychecks to ensure they are having enough tax withheld from their wages based on their filing status, number of dependents and other factors.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at info@bpbcpa.com.
On Jan. 15, 2019, the New York Department of Taxation and Finance finally issued its response to the Supreme Court’s June 2018 decision in South Dakota v. Wayfair, which expands states’ abilities to impose sale tax reporting and collection responsibilities on out-of-state vendors regardless of whether or not the sellers have a substantial physical presence in their jurisdiction.
The court’s decision in Wayfair represents a significant shift in state sales tax administration, moving from a purely physical presence test to one that considers the number of transactions and sales volume that a vendor makes in a particular state. While most states were quick to enact economic nexus legislation based on South Dakota’s 200 transactions or $100,000 in sales threshold as established in Wayfair, a handful, including New York, took their time.
According to New York’s recent guidance, businesses without a physical presence in the state are required to register as New York sales tax vendors and collect and remit sales tax when they met the following criteria during the immediately preceding four sale quarters:
- the vendor conducted more than 100 sales of tangible personal property for delivery, and
- the vendor made more than $300,000 of tangible personal property sales into the state.
New York’s imposition of economic nexus is effective immediately. Businesses that meet the law’s sales threshold tests should register with the state if they have not done so already.
It is important for businesses to recognize that New York’s sales tax economic nexus law differs in many ways from the standard established by Wayfair. For example, New York’s test considers both the number of sales into the state and the dollar value of those transactions. Therefore, an out-of-state vendor that makes a mere 15 sales totaling more than $1 million during the year to customers in the state may not be required to collect and remit state sales tax. Even though sales volume exceeds the $300,000 threshold, the vendor does not meet the number of transactions test.
In addition, although the language of New York’s tax law refers specifically to sales of tangible personal property, businesses that sell services to customers in the state may not be entirely free from state sales tax administration responsibilities. For example, because New York considers software to be taxable tangible property, sales of services that are tied to the use of that software may also be subject to sales tax but the vendor may not be required to register with the states.
Finally, sellers should recognize that New York’s economic nexus test is not based on a calendar year. Rather, sellers must measure their sales during the state’s sales specific tax quarters, which are March 1 through May 31, June 1 through August 31, September 1 through November 30, and December 1 through February 29.
The advisors and accountants with Berkowitz Pollack Brant’s State and Local Tax (SALT) practice help with individuals and businesses across the globe maintain tax efficiency while complying with often conflicting federal, state and local tax laws.
About the Author: Michael Hirsch, JD, LLM, is a senior manager of Tax Services with Berkowitz Pollack Brant’s state and local tax (SALT) practice, where he helps individual and business to meet their corporate, state and local tax reporting requirements. He can be reached at the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
Companies must be prepared for how the new tax law affects their bottom lines and the tax liabilities of their businesses and their employees. For example, tax reform changed the treatment of many of the benefits that businesses extend to their workers. As a result, businesses should evaluate whether or not the value of providing these fringe benefits to employees outweigh the costs they incur for doing so, especially when it could result in the loss of a tax deduction and/or the addition of a new tax liability.
Meals and Entertainment
While the new tax law eliminated the availability of deductions for entertaining clients and employees, businesses can continue to deduct 50 percent of the costs they incur for meals they enjoy with current or potential clients, consultants or other business contacts at entertainment events, as long as those meals are not lavish, and they are considered ordinary and necessary for the active conduct of the taxpayer’s trade or business. Doing so requires businesses to retain receipts demonstrating that the food costs were separate from and independent of any amounts they paid for “entertainment,” such as tickets to a sporting event.
Reimbursements for Employees’ Qualified Moving Expenses
Under prior law, payments businesses made to reimburse their employees for qualified moving expenses were provided to those workers tax-free. With the new tax laws, however, businesses must generally treat those payments as employee wages subject to federal income and employment taxes unless they qualify for one of the following exceptions:
- The employee is an active duty member of the U.S. Armed Forces whose move is a result of a military order and he or she would have qualified to treat moving expenses as a tax deduction had he or she not received reimbursements from his or her employer;
- The reimbursement paid in 2018 is for costs related to a move that an employee made in 2017 or prior years; and
- The employer paid a moving company directly in 2018 for qualified moving services provided to an employee before 2018.
These are the only situations in which workers may exclude from their taxable income the amounts they received as employer reimbursements of moving expenses beginning in tax year 2018. In addition, employees must not have deducted those expenses on the tax returns they filed for 2017. If an employer mistakenly treated reimbursed moving expenses covered by these exceptions as taxable employee income in 2018, it must take steps to correct those employee’ taxable wages and employment taxes.
Reimbursements for Employees’ Bicycle Commuting
While businesses may continue to deduct as business expense the amounts they reimburse workers for qualified bicycle commuting, they must now include all of those amounts as taxable wages to employees for tax years 2018 through 2025. In other words, employees will no longer receive the same tax-free benefits for commuting to work on bicycle as they did in prior years.
Deductions for Qualified Commuter Transportation
Beginning in 2018, businesses and non-profit organizations may no longer deduct the expenses they incur for providing workers with transportation fringe benefits, including employee parking and the costs associated with transporting workers for commuting purposes. The one exception to this rule applies to transportation that is necessary for employee safety, such as a car service to take the employee home after a late night meeting or event.
Employee Awards
Businesses may claim deductions for plaques, watches and other awards of tangible personal property that they award to employees, subject to annual deduction limits; awards of cash, gift certificates, vacations or event tickets are not deductible business expenses. Similarly, employees may exclude from their taxable income the value of awards that are considered tangible personal property.
The new tax law made a number of changes to how employers and employees may treat certain work-related benefits in 2018 through 2025. Businesses should meet with experienced advisors and accountants to navigate the new law and implement smart strategies that may help them use fringe benefits to attract and retain workers without incurring additional costs.
About the Author: Dustin Grizzle is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides tax-planning and compliance services to high-net-worth individuals and businesses in the manufacturing, real estate management and property investment industries. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
Eligible employees who enrolled to participate in their employers’ health care flexible spending arrangements (FSAs) for 2019 will be able to contribute and use up to a maximum of $2,700 tax-free dollars to pay for certain medical expenses not covered by their health insurance plans this year. That’s a $50 increase from the 2018 FSA contribution limits.
FSA contributions are typically made via payroll deductions and are not subject to federal income tax, Social Security tax or Medicare tax. Throughout the year, employees can use these funds to pay for qualified medical expenses, including certain prescription and over-the-counter medications, co-pays for doctor visits and out-of-pocket costs that go toward their health insurance deductibles. In addition, participants may use FSA money to pay for a broad range of medical, dental and vision products and services, including eyeglasses, hearing aids, first-aid kits, weight-loss and smoking-cessation programs and even child care, some of which may not be covered by workers’ health insurance plans.
FSAs generally operate under the principle of use-it-or-lose-it, meaning that workers risk losing any amounts of money they failed to use by the end of the last day of the calendar year. However, many employers choose to offer their employees the flexibility of either carrying over up to $500 of unused funds into the following year or granting employees a grace period of up to two-and-a-half months into the following year (until March 15) to spend FSA savings left over from the prior year. By law, employers may offer one or none of these options, but not both. Therefore, it is critical for workers to check with their employers to determine if either of these options are available to them and act accordingly. Every year, more than $400 million of earned money is forfeited because employees either miss or forget the FSA spending deadline.
About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via e-mail at info@bpbcpa.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.
