As we look back on the first filing season of one of the most monumental revisions of the Internal Revenue Code (IRC) in more than 30 years, all U.S. taxpayers—including individuals, businesses, exempt organizations and trusts—can reflect on how they were affected by the Tax Cuts and Jobs Act (TCJA), the legislation enacted by President Donald Trump. As the business environment continues to change, business owners should evaluate how the tax law changes may affect them going into 2020. Here’s a summary of some recent tax developments businesses should consider for the upcoming filing season.
Qualified Business Income (QBI) Deduction
Earlier this year, the IRS and U.S. Department of the Treasury (Treasury) released final regulations under IRC Section 199A, i.e., the QBI deduction, which provides noncorporate taxpayers with a 20 percent deduction on qualified domestic income. See BKD’s QBI deduction assessment to learn more about this deduction, including limitations that apply once a taxpayer’s 2019 taxable income exceeds $160,700 for single filers ($321,400 for married filing jointly).
While the IRS and Treasury declined to provide specific guidelines to help determine whether an activity rises to the level of a trade or business for purposes of the deduction, the final regulations did reiterate that this determination is inherently a factual question and depends on the specific circumstances of each business. Notice 2019-07, which was concurrently released with the final regulations, provides a proposed safe harbor under which a rental real estate enterprise may be treated as a trade or business for purposes of IRC §199A. See this prior BKD Thoughtware® article for a recap of some of the other key provisions from the final regulations.
Large Business & International Compliance Campaigns
The IRS Large Business and International (LB&I) Division has announced the approval of numerous compliance campaigns since the rollout of its first 13 campaigns in January 2017. The IRS has issued a total of 59 LB&I campaigns aimed “to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.” The IRS continues to evaluate tax returns and other information to identify future campaigns—and taxpayers should consider developing strategies for successfully responding to a potential issue-based examination or soft-letter correspondence from the IRS. Here are a few campaigns that were recently announced.
Captive Services Provider Campaign
This campaign assesses transfer prices between U.S. multinational companies and their foreign captive service providers to determine whether transactions between the controlled parties are at arm’s length. This is determined using data available on uncontrolled companies performing functions, employing assets and assuming risks comparable to their foreign captive service provider counterpart. The IRS expects to govern this campaign using issue-based examinations and soft letters. Read more about this campaign in our April 2019 Thoughtware alert.
Offshore Private Banking Campaign
This campaign keys in on tax noncompliance and the information reporting requirements for private offshore bank accounts. The IRS possesses records identifying taxpayers with transactions or accounts at offshore private banks. While it’s not illegal or inappropriate for a U.S. taxpayer to own offshore assets, the IRS requires the taxpayer to comply by filing income tax and information reporting associated with the offshore activities. The IRS will begin using examination and soft-letter treatment streams, but the campaign may develop additional treatment streams depending on the feedback received.
Loose Filed Forms 5471
This campaign focuses on getting taxpayers to correctly file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, by attaching the form to their income tax, partnership or exempt organization return and filing it by the return’s due date. Some taxpayers are incorrectly filing Form 5471 by sending the form to the IRS without attaching it to a tax return. If a Form 5471 must be filed and was not attached to an original return, the taxpayer should file an amended return with Form 5471 attached.
S Corporations Built-In Gains Tax
The IRS added a third S corp-focused campaign during 2019, this time focusing on increasing awareness and compliance with the law as it relates to the built-in gains tax assessed to S corps that convert from C corps and sell assets within five years of that conversion. LB&I has found this tax is not always recognized and paid when an S corp sells the C corp assets during this built-in gains period. Treatment streams for this campaign include issue-based examinations, soft letters and practitioner outreach.
Guidance from the IRS and Treasury is still needed to implement several aspects of the TCJA. Stay up to date and learn more about the TCJA with BKD’s Tax Reform Resource Center. Despite the need for guidance, now’s still a good time for tax planning.
Reach out to your BKD trusted advisor or complete the Contact Us form below for more information as we close out 2019.