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Treasury, IRS issue final regulations, other guidance on new qualified business income deduction; Safe harbor enables many rental real estate owners to claim deduction
WASHINGTON — Today the Treasury Department and the Internal Revenue Service issued final regulations and three related pieces of guidance, implementing the new qualified business income (QBI) deduction (section 199A deduction).
The new QBI deduction, created by the 2017 Tax Cuts and Jobs Act (TCJA) allows many owners of sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Eligible taxpayers can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income.
The QBI deduction is available in tax years beginning after Dec. 31, 2017, meaning eligible taxpayers will be able to claim it for the first time on their 2018 Form 1040.
The guidance, released today includes:
• A set of regulations, finalizing proposed regulations issued last summer, A new set of proposed regulations providing guidance on several aspects of the QBI deduction, including qualified REIT dividends received by regulated investment companies
• A revenue procedure providing guidance on determining W-2 wages for QBI deduction purposes,
• A notice on a proposed revenue procedure providing a safe harbor for certain real estate enterprises that may be treated as a trade or business for purposes of the QBI deduction
The proposed revenue procedure, included in Notice 2019-07, allows individuals and entities who own rental real estate directly or through a disregarded entity to treat a rental real estate enterprise as a trade or business for purposes of the QBI deduction if certain requirements are met. Taxpayers can rely on this safe harbor until a final revenue procedure is issued.
The QBI deduction is generally available to eligible taxpayers with 2018 taxable income at or below $315,000 for joint returns and $157,500 for other filers. Those with incomes above these levels, are still eligible for the deduction but are subject to limitations, such as the type of trade or business, the amount of W-2 wages paid in the trade or business and the unadjusted basis immediately after acquisition of qualified property. These limitations are fully described in the final regulations.
The QBI deduction is not available for wage income or for business income earned by a C corporation.
For details on this deduction, including answers to frequently-asked questions, as well as information on other TCJA provisions, visit IRS.gov/taxreform.
IRS.GOV
Tax Reform | Internal Revenue Service
Tax Relief for Victims of Hurricane Florence
Extended filing and payment deadlines
Source: NATP Special Alert
Hurricane Florence victims in parts of North Carolina and elsewhere have until Jan. 31, 2019, to file certain individual and business tax returns and make certain tax payments. The tax relief postpones various tax filing and payment deadlines that occurred starting on Sept. 7, 2018 in North Carolina. As a result, affected individuals and businesses will have until Jan. 31, 2019, to file returns and pay any taxes that were originally due during this period.
This includes quarterly estimated income tax payments due on Sept. 17, 2018, and the quarterly payroll and excise tax returns normally due on Sept. 30, 2018. Businesses with extensions also have the additional time including, among others, calendar-year partnerships whose 2017 extensions run out on Sept. 17, 2018. Taxpayers who had a valid extension to file their 2017 return due to run out on Oct. 15, 2018, will also have more time to file.
The IRS is offering this relief to any area designated by FEMA, as qualifying for individual assistance. Currently, this only includes parts of North Carolina, but taxpayers in localities added later to the disaster area, including those in other states, will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the IRS disaster relief page.
The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.
In addition,the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.
IRS reminder: Third estimated tax payment due Sept. 17;
Tools are available to help people pay right amount following law changes
WASHINGTON – With tax reform bringing major changes for the current tax year, the Internal Revenue Service today reminded small businesses, self-employed individuals, retirees, investors and others who need to pay their taxes quarterly that the third estimated tax payment for 2018 is due on Monday, Sept. 17, 2018.
This is the fourth in a series of news releases aimed at helping taxpayers pay the right amount of tax, avoid an estimated tax penalty and encourage them to check their withholding now. This is part of the wider Paycheck Checkup campaign to help taxpayers, including those paying estimated taxes, avoid an unwelcome surprise at tax time.
The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. Among other reforms, the new law changed the tax rates and brackets, revised business expense deductions, increased the standard deduction, removed personal exemptions, increased the child tax credit and limited or discontinued certain deductions. As a result, many taxpayers may need to raise or lower the amount of tax they pay each quarter through the estimated tax system.
Form 1040-ES, available on IRS.gov, is designed to help taxpayers figure these payments simply and accurately. The estimated tax package includes a quick rundown of key tax changes, income tax rate schedules for 2018 and a useful worksheet for figuring the right amount to pay. The IRS also mailed 1 million Form 1040-ES vouchers with instructions in late March to taxpayers who used this form last year.
A companion publication, Publication 505, Tax Withholding and Estimated Tax, has additional details, including worksheets and examples, which can help taxpayers determine whether they should pay estimated tax, such as those who have dividend or capital gains income, owe alternative minimum tax or have other special situations.
Who needs to pay quarterly?
Most often, self-employed people, including some individuals involved in the sharing economy, need to pay quarterly installments of estimated tax. Similarly, investors, retirees and others – a substantial portion of whose income is not subject to withholding – often need to make these payments as well. Other income generally not subject to withholding includes interest, dividends, capital gains, alimony and rental income.
Because the U.S. tax system operates on a pay-as-you-go basis, taxpayers are required, by law, to pay most of their tax liability during the year. For 2018, this means that an estimated tax penalty will normally apply to any party that pays too little tax -- generally less than 90 percent of the tax shown on the return for the current tax year or 100 percent of the tax shown on the return for the preceding tax year -- during the year through withholding, estimated tax payments or a combination of the two.
Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled, recent retirees, and those who receive income unevenly during the year. In addition, you may avoid a penalty for underpayment of estimated taxes if you owe less than $1,000 in tax after subtracting your withholding and estimated tax payments and credits or if you did not have any tax liability for the preceding taxable year (subject to certain conditions). Generally, for the 2018 tax year, taxpayers will not have an estimated tax penalty if they make payments equal to the lesser of 90 percent of the tax to be shown on their 2018 return or 100 percent of the tax shown on their 2017 return (110 percent if their income was more than $150,000). See Form 2210 and its instructions for more information.
Employees have a choice
Many employees who also receive income from other sources may be able to forgo making estimated tax payments and instead increase the amount of income tax withheld from their pay. They can do this by claiming fewer withholding allowances on their Form W-4, based on completing the Deductions, Adjustments, and Additional Income Worksheet in the instructions section. If that’s not sufficient, on the Form W-4 they can ask their employer to withhold an additional flat-dollar amount each pay period.
Perform a ‘Paycheck Checkup’
Because of the far-reaching tax changes taking effect this year, the IRS urges all employees, including those with other sources of income, to perform a Paycheck Checkup now. Doing so now will help avoid an unexpected year-end tax bill and possibly a penalty. The easiest way to do this is to use the Withholding Calculator available on IRS.gov.
To use the Withholding Calculator most effectively, users should have a copy of last year’s tax return and recent paystub. After filling out the Withholding Calculator, the tool will recommend the number of allowances the employee should claim on their Form W-4. Though primarily designed for employees who receive wages, the Withholding Calculator can also be helpful to some recipients of pension and annuity income.
If the Withholding Calculator suggests a change, the employee should fill out a new Form W-4 and submit it to their employer as soon as possible. Similarly, recipients of pensions and annuities can make a change by filling out Form W-4P and giving it to their payer.
Employees who expect to receive long term capital gains or qualified dividends, or employees who owe self-employment tax, alternative minimum tax, or tax on unearned income of minors should use the instructions in Publication 505 to check whether they should change their withholding or pay estimated tax.
How and when to pay
For tax-year 2018, estimated tax payment due dates are April 18, June 15, Sept. 17 and Jan. 15, 2019. Taxpayers still due a refund on their 2017 federal income tax return may be able to reduce or even skip one or more of these payments by choosing to apply their 2017 refund to their 2018 estimated tax. See Form 1040 and its instructions for more information.
Taxpayers in presidentially-declared disaster areas may have more time to make these payments without penalty. Visit the Tax Relief in Disaster Situations page for details.
The fastest and easiest way to make estimated tax payments is to do so electronically using IRS Direct Pay or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). For information on other payment options, visit IRS.gov/payments. For filers paying by check, the check must be made payable to the “United States Treasury.”
More information about tax withholding and estimated tax can be found on the agency’s Pay As You Go web page as well as in Publication 505, Tax Withholding and Estimated Tax.
IRS.GOV
Payments | Internal Revenue Service
IRS: Offshore Voluntary Compliance Program to end Sept. 28
WASHINGTON – The Internal Revenue Service today reminded taxpayers they have until Sept. 28 to apply for the Offshore Voluntary Disclosure Program (OVDP).
Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used the various terms of the program to comply voluntarily with U.S. tax laws. These taxpayers with undisclosed offshore accounts have paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations.
In March, the IRS announced the program would end on Sept. 28, 2018. The IRS will continue to hold taxpayers with undisclosed offshore accounts accountable after the program closes.
The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017.
Since the announcement, the IRS has not received any public comments addressing a continued need for the OVDP. The IRS will maintain a pathway for taxpayers who may have committed criminal acts to voluntarily disclose their past actions and come into compliance with the tax system. Updated procedures will be announced soon.
Separately, the IRS continues to combat offshore tax avoidance and evasion using whistleblower leads, civil examination and criminal prosecution. Since 2009, 1,545 taxpayers have been indicted related to international activities through the work of IRS Criminal Investigation.
A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who may have been unaware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. These streamlined procedures will continue to be available for now, but as with OVDP, the IRS has said it may end this program too at some point.
The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations related to undisclosed foreign financial assets. Taxpayers who made non-willful mistakes or omissions on their tax returns should file amended returns or delinquent returns as soon as possible.
